Peruvian economic authorities are two as in many countries, one in charge of fiscal policy and other in charge of monetary policy. As in many countries too, fiscal policy is in charge of a Minister, who is an appointee of the President; and monetary policy is in charge of the head of the Central Bank, who in Peru is choose by the Congress. Until May 2008, both authorities had a point of agreement in economic policy and macroeconomic forecast, in a document called Multi-annual Macroeconomic Framework (Marco Macroeconómico Multianual), which is prepared by the Ministry of Economy and subscribed by the Central Bank, through an attached letter of acceptance.
Actual Peruvian president, hold the dubious record of producing the most lasting hyperinflation (Cagan definition) in Latin America, in his first tenure between 1985 and 1990, and this legacy hunts him. At the beginning of the present economic crisis in 2008 he declared “Peru is insulated”, now he declares that Peru will be in top 5 world wide highest GDP growth for 2009, in an optimism that exudes maniac behavior. But the world economic crisis has produced a hidden divorce in Peru economic authorities, in the process of trying to satisfy a President who believes that economic panic could be cured by hypnosis, the Ministry of Economy and the Central Bank have build macroeconomic forecast based on presidential needs and not on technical criteria. In the table below, is possible to see how the public documents from both institutions, available through Internet, document two different ways to fulfill a GDP growth rate out of reality. ME stands for Ministry of Economy and CB stands for Central Bank.
Even today is March 16th, Central Bank web site link to its March document is dated March 21st, who know why. Going to substance, the column for GDP growth rate shows a reduction from 6.5% to 5.0% from May ’08 to Mar ’09; which looks as a shy reduction to many analysts but maybe Peru has a secret formula for growth. The column for Import growth rate shows substantial differences between the Ministry of Economy and the Central Bank, which is more evident in the column Elasticity Import – GDP. The Ministry of Economy has elasticity value that varies between 1.9 and 2.7, which fits with my own econometric estimations for this coefficient. But the Central Bank has an elasticity value that varies between 1.4 and 0.4 which is unrealistic from an econometric point of view, as well with historical data. Unless the Central Bank is planning a drastic change in its actual monetary policy, therefore the Peruvian currency will have a free fall enough large to reduce imports. Finally, the last column shows the ratio for foreign trade and GDP, if May 2008 is taken as base line with financial markets willing to lend to emerging economies, actual circumstances imply a smaller gap since financial availability is lower than before for emerging markets. Also if terms of trade are constant, the baseline gap remains constant; but if there is deterioration of term of trade for Peru, then we have large gap; and today all analysis assumes deterioration for Peruvian terms of trade. Assuming the Ministry of Economy export – GDP elasticity and the Central Bank export growth forecast, it is possible to simulate several scenarios. In order to reach the ratio for foreign trade and GDP of the base line, which is 4.8%, the maximum GDP growth rate feasible is 2.5%. If foreign influx of capital is less than baseline scenario May 2008, and terms of trade deteriorated relative of baseline scenario May 2008, then GDP growth rate will be below 2.5%. From other analysis (in Spanish) made with short-term and medium-term real-sector economic cycle, the outcome is more grim with a GDP growth rate negative in 2010-Q1 of -1% (see “Fundiendo Motor” and “Compulsion a la Repeticion“).
Originally published at Farid Matuk weblog and reproduced here with the author’s permission.