Peru: Best in the Class

The heady consumerism in Lima is a sharp contrast from the gloom that is spreading across the planet. The streets of Miraflores are chocked with brand new imported cars. World class restaurants are booked to capacity, and tony shops populate the upscale neighborhood of San Isidro. Peru was one of the main beneficiaries of the commodity boom. The country was transformed from a backwater of poverty and violence into one of the leading economies of Latin America. Peru’s poverty rate was cut in half since the start of the decade—falling to less than 30%. The improvement in living standards was most notable in urban and coastal regions, which saw the poverty rate fall to only 20%. Child malnutrition plunged by half during the same period, easing the country’s burgeoning social problems. Of course, the commodity boom was the main driver for the improvements. Exports surged four-fold since the start of the decade, while imports jumped more than 350%. This allowed the Peruvian central bank to accumulate an unprecedented level of international reserves—representing almost 30% of GDP. The accumulation of foreign assets allowed Peru to reduce its stock of external debt, bolster its pension funds and create a thick cushion of savings to withstand the external turmoil. This makes Peru one of the most resilient economies in Latin America, and the star of the emerging markets class.

Unwilling to sit on the sideline, the Peruvian government is taking measures to prepare for the external onslaught. A tightening of fiscal policy reduced government spending significantly. Capital spending will increase only 5% y/y in 2008—versus an expansion of 35.5% y/y in 2007. The collapse in commodity prices is eroding Peru’s balance of payments, and the country will post its first current account deficit in more than four years. Nevertheless, the slowdown in domestic demand will reduce imports and help stabilize the external accounts. Large investments in the export sector will also allow the embarkation of new products and boost export volumes. Peru is experiencing an agricultural revolution, transforming thousands of hectares of desert wasteland into productive farms—thanks to the implementation of new irrigation systems and technology. Peru is the world leader in the production of asparagus, and it is becoming a major exporter of grapes. In many ways, Peru is following the trail that was blazed by Chile more than two decades ago as it mobilized its vast natural resources for the export market. This is one of the reasons why Chilean investors are pervasive throughout Peru, investing heavily in infrastructure, retailing, mining and agro-products.

Although Peru is the shining star of Latin America, many people are concerned about the political situation. Peru’s political party system is weak. President Alan Garcia hails from APRA, the country’s traditional political machine, but the party is a shadow of its former glory. Moreover, it is rife with corruption. With a support rate of only 19%, President Garcia’s popularity is one of the lowest among Latin American presidents, even though his economy is one of the most resilient. At the same time, the populist leader, Ollanta Humala, is building a grass roots movement in the Andean sierra. His Peruvian Nationalist Party has close ties with Venezuelan President Hugo Chavez, and he advocates increasing the royalties and taxes on mining companies. Humala is the leading contender for the presidential elections in 2010. The deceleration of the Peruvian economy may play well into his hands. Industrial production is starting to sour. The production of capital goods fell 5.7% y/y in August. Political analysts hope that the improvement in living conditions will sap some of the support for Humala, but the country is running against the clock. Lima is the key to winning Peru’s presidential election, and a lingering prosperity should help. This is why the government and the central bank are so committed to preserving economic stability in the face of a severe global downturn. The star student of Latin America is about to face one of the biggest tests of its modern history, let’s hope it passes with flying colors.

6 Responses to "Peru: Best in the Class"

  1. Paul   October 14, 2008 at 11:12 pm

    Poverty less than 30 and 20 percent respectively? By what standards does the author judge poverty? More appropriately, What planet does the author live on?

  2. Anonymous   October 15, 2008 at 2:52 pm

    What source does the author use for his “30%” figure for poverty in Peru? That would represent a signficant decrease in poverty in this Andean country, but I have not seen that figure anywhere.Alan Garcia announced several months ago that Peru’s poverty rate had fallen to 39% (estimated for 2008), down from 45% in 2007. Many people are skeptical of his figures.The author is correct that Peru’s rising GDP is reflected in a growing middle class, esp. in Lima. Half of Peru’s population, however, lives in the remote rural areas of the Andes, and people are desperately poor there. Climate change is causing the mountaintop glaciers to recede, which is a terrible problem for the entire country since 80% of Peru’s water supply comes from glacier meltwater. The people in the high Andes are experiencing the water scarcity first hand, before its worst effects are felt in Lima, and they have smaller and smaller crop yields and their animals are dying. With conditions like these accelerating, people in the high Andes are desperate for help and Garcia’s government has done little to intervene on their behalf.So much assistance is needed.Since the government is not lending a hand, rural Peruvians will embrace help from any corner that offers it — be it Chavez, Morales or whomever.If Peru wants to avert a populist uprising, it cannot afford to ignore the needs of its enormous rural population.

  3. Mangy Cat   October 17, 2008 at 1:37 am

    “Exports surged four-fold since the start of the decade, while imports jumped more than 350%”X : 4 M : 1 + 3.5 : 4.5By my count, a 50 p.p. difference means a massive trade deficitand as yr para 2, after the commodity boom, what?

  4. ANDEAN MAN   February 17, 2009 at 11:49 am

    NEVER BEFORE ANDEAN PEOPLE HAVE THIS GIANT OPPORTUNITY ACCESS TO EDUCATION IN AGROBUSSINESS AND EXPORT THIS GOVERMENT IS NOT THE UNIQUE WHIT THIS POLITICAL DECITION ALEJANDRO TOLEDO AND FUJIMORI OPEN MARKETS AND OPPORTUNTYS SINCE 1990YOUR HISTORY, TALE IS ABSOLUTELY FAKE PERU IS BETTER WHIT POVERTY OK BUT IS BETTER AND EVERY DAY ONE ANDEAN CITIZEN CAN SAY PERU IS BETTER

  5. MAMANI   February 17, 2009 at 12:00 pm

    MINCETUR IS WATCH FOR THE SMALL ANDEAN FARMS MAKE THIS LITTLE BUSSINESS IN A BIG OPPORTUNITTY TO GROW YOU LIVE IN PERU IS FAKE YOUR HISTORY

  6. Anonymous   February 21, 2009 at 10:53 am

    Peru is getting better every day and our people can see that happening. There are still challenges to face but we are on the right track to development and progress diversifying our exports, where the manufacturing and software sectors are getting a bigger stake.The country has enormous natural resources, its strategically located at the center of South America and its Pacific coast making it the ideal hub for air, maritime and land communications and the work force is constantly improving his skill sets. The economy of the country overall is doing better than any other country in Latin America. In summary, the perspectives are promissory.