Latin America: Peru prospers by playing the long game

Rob Dwyer
Published on:

Peru’s strong fundamentals protected the country from the harsh economic conditions in the region. But as solid commodity-led growth returns, will the chance to diversify into a broader economic model be lost?

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Peru’s finance minister Alonso Segura says the current government has made
strides towards the goal of administrative simplification

Alonso Segura became Peru’s finance minister as the deteriorating global economic environment bit Latin America hardest in September 2014: growth registered 1.1% quarter-on-quarter in Q4 2014, the lowest level since the financial crisis in 2008. It was still positive, but for an economy that had enjoyed average per capita GDP growth rates of 2.9% since 2000 and had been around 6% for the previous couple of years, it was a slump. 

Falling demand for commodities hit export revenues, while currency depreciation, in an economy with high levels of dollarization, played havoc with internal demand and debt dynamics. Global liquidity was drying up, removing the cheap financing options of the last decade. There were fears that Peru’s growth rate was returning to the inertia of the period between 1961 and 1990, when annual growth barely nudged positive in a region that averaged 2%.

Segura, though, was confident of the country’s ability to respond. First, he was fully aware of the situation, having been an adviser to his predecessor, Luis Miguel Castilla. Second, as part of Castilla’s team, he had already begun to apply fiscal countercyclical stimuli. Third and most important, he was inheriting a country that over the last 15 years had wisely used the benefits of the commodity cycle, building reserves during the boom years that remained strong even after the 2009 financial crisis.

'Counter external shock'

In 2014 gross public debt as a proportion of GDP was 20.1%, the second best in the region after Chile (15.1%) and far better than its commodity-exporting peers (Colombia at 44.3% in 2014 and Brazil 65.2%). Peru’s fiscal balance was -0.3% in 2014 versus an average of -2% for all countries rated A3 by Moody's and better than Chile’s -1.5% (Brazil’s was -6.2%). Total investment as a percentage of GDP was at 26.2% – up from 13.9% in 1990. The country’s average inflation between 2005 and 2014 was the lowest in the region, at just 2.9%. Peru was also the second highest-rated Latin American economy.

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"We began implementing countercyclical fiscal policies in the formation of the 2014 budget," says Segura. "After I was sworn in in September, I launched other measures to boost the size of the fiscal impulse to try to counter the external shock. But the key point is that we had reacted before that, and I think we have had better results than most countries in the region – at least the countries that depend on commodities like Peru. 

"The economy has been accelerating quarter on quarter. The economy grew by almost one percentage point more in 2015 than in 2014 and, at 3.3%, grew the most in the Pacific Alliance. This year, it is looking even better. Our medium-term framework, which has just been released, says there is a target of 3.8%, but goes up to 4%. I think we are going to be in the upper end of that range for 2016."

Peru’s strong fiscal position and strong reserves (at over 30% of GDP it has the highest proportion in the region) give the country the space to respond to the crisis without materially damaging its position. This comes from a mix of natural wealth in commodities and a sound policy framework.

A 1999 fiscal law laid the foundations for fiscal discipline and the low-debt economy. The independent bank built up reserves and kept inflation low. An investor-friendly law gives international capital equal status with local investors and there are no restrictions on profit remittances and dividends, which has meant strong investment inflows. 

As Peru goes to the polls to elect a new president on June 5, the market seems unconcerned about the outcome. The strength of the country’s framework has been accepted. No one expects current discipline to give way, especially now Segura has steered growth rates back towards a 4% target.

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"Of course there is no elected government yet," says Segura in response to his views on what comes next. "[The next president] will be inheriting a very stable economy with a better perspective than most in the region, but it is still a very complex scenario for Latin America in general. The capacity to grow is less and so you have to steer and continue reforming. I’m optimistic that the next government will do so. I can’t tell you if it will, I can just tell you that I hope so for the good of my country."

Peru’s resurgent growth looks set to give the next president a positive inheritance. Investments in new copper mines will come on stream in the next couple of years. Projects, such as increases to existing mines Toromocho and Constancia and new production from Cerro Verde and Las Bamabas, should expand Peru’s total copper production by 76% by 2018 over 2014’s output.