Peru: Attention K-Mart Shoppers

Less than a decade ago, Peru was a dusty backwater of extreme poverty. The scars from the bloody civil war and hyperinflation were evident on the downcast faces of the general population. The only arrivals at the airport were backpackers, eager to hike the Inca Trail, NGO representatives and immigrant workers returning to visit loved ones. The center of Lima was almost inaccessible, due to the legions of street vendors packing the narrow lanes. The reforms of the 1990s were beginning to produce results, but there was very little investment flowing into the country. Today, Peru is a different place. Capital is pouring in to take advantage of the country’s vast mineral resources, favourable growing climate and deep Pacific ports. The refurbished international airport brims with Asian, Chilean and European businessmen and bankers eager to print new transactions and deals. A consumer boom, thanks to the heady rise of commodity prices, is filling the landscape with sleek apartment buildings and shopping centers. Fleets of new cars choke the streets, and the government is rushing to complete a series of modern highways and rail systems to facilitate public transformation. The dark melancholy has been replaced with a boisterous self confidence that is inducing many people to take great pride in their Peruvian heritage. As a result, Peru is morphing into a prosperous consumer society that promises to become one of the more affluent of Latin America.

This is not the first time that Peru was showered with fortune. The Viceroyalty of Peru was the crown jewel of the Spanish Empire. As the gateway to the silver mines of Potosi, it was the richest of the colonies. A few hours strolling through the squares of old Lima confirms the conspicuous wealth of centuries ago. The palaces, cathedrals and monasteries that fill the city eclipsed those on the Iberian Peninsula. Likewise, on the eve of the Pacific War, Peru had the strongest fleet in Latin America, with European-made weaponry and well-defended forts. Finally, the post-World War II period left Peru a legacy of heavy industry and manufacturing, along with deep ties with the U.S. However, each boom ended in tears. The wealth was always concentrated among the Creole elite, creating resentment among members of the indigenous class. This is the reason why so many Peruvian peasants joined the ranks of Argentine General San Martin, as he fought to liberate Peru from Spanish control. It is the same reason why the indigenous troops did not rally against the Chilean invaders during the War of the Pacific, until they reached the foothills of the Andes, and it was the reason why many of the rural poor joined the Shining Path movement during the 1980s. This time, the economic boom is taking a different shape. Although many members of the upper class made fortunes selling their companies and mines, much of the benefits are filtering down. The construction boom is creating an army of labourers and service providers. The proliferation of new retailing venues imbued the economy with a dynamism that allowed it to skirt the calamity of 2008/9. Peru has one of the youngest populations in the world, with a median age of 26. Japan and Germany’s median ages are 44 years old. It is 37 in the U.S. This gives Peru a vibrant work force, in their peak years of consumer spending and ready to contribute to the tax base.

With the wind at its back, Peru is on the verge of a prolonged expansion. The pace of economic activity grew 10.1% y/y during the second quarter of 2010, up from 6.3% y/y during the first quarter. Local analysts expect the country to expand more than 8% y/y during the whole year. The torrid pace of economic activity put upward pressure on consumer prices. The annual inflation rate in July was 1.8% y/y, but it is expected to approach 3% y/y by year end—which marks the upper end of the central bank’s targeted inflation band. Fortunately, the steady appreciation of the sol helped keep consumer prices in check. However, the central bank recently took new measures to keep the currency from appreciating too much, by raising the reserve requirement for foreign banks to 120% and thus stemming speculative activity. The strong appreciation of the currency, along with massive imports of capital and consumer goods, is the reason why Peru’s current account deficit widened. It is expected to reach 1.8% of GDP in 2010. To say the least, an air of change is blowing throughout Peru, and the upcoming municipal elections are promising to be a non-event. Forgotten secondary and tertiary cities, such as Ica, Arequipa and Trujillo are becoming major urban centers graced with all of the creature comforts of modern city life. A wave of consumerism is washing over Peru, thus helping to create a strong base of domestic demand that will help the economy avoid much of the volatility that is raging abroad.

One Response to "Peru: Attention K-Mart Shoppers"

  1. Juan-Antonio Morales   September 9, 2010 at 6:32 pm

    Peru is one of the best performing economies of the world. The management of monetary policy has been superb and the Reserve Bank of Peru deserves high credits. Yet, Peru has much vulnerability. First, the economy is too dependent on exports of primary commodities. Second, construction booms usually come in the trail of commodity booms and this is no wonder. A bubble in the construction sector may be in the making that can burst unexpectedly. Third, Peru like most of its Latin American neighbors has a very bad income distribution that gives rise to recurrent political instability. Political instability, in turn, may hurt the economy.