Peru: Year in Review 2012
A recent increase in Peru’s GDP growth forecast for 2012 affirms the country’s more than decade-long trend of economic expansion. While commodity exports slowed over the year, increases in non-traditional exports and surging domestic demand served as new growth mechanisms. However, key challenges to economic expansion going forward are the appreciation of the sol and continued weakness in the export of raw materials.
In early December, the Ministry of Economy and Finance upgraded its outlook for 2012 GDP growth to 6.3%, marginally higher than the 6.2% projected by the Central Bank only the week before. Much of this growth can be attributed to strong domestic demand. According to a fourth-quarter research report from BBVA, one of Peru’s largest banks, sales of new, family-sized vehicles, together with imported consumer goods, have been growing at double-digit rates, while healthy investment was also witnessed in cement and imported capital goods.
Analysts noted that growing domestic demand was linked to falling unemployment and rising income levels in Peru. Unemployment in Lima dropped to 6.2% between August and October, down 1.1% year-on-year (y-o-y), with the construction sector playing a key role in creating new jobs.
The minimum wage was raised in June to PEN750 ($291.5) from PEN650 ($252.6). Between February and April, the average monthly salary in Lima rose 13.8% in a yearly comparison.
Supported by growth in the country’s middle class, an upward trend in consumer demand comes at the same time Peru’s staple mineral exports have suffered a small setback linked with declining metal prices. The country’s Association of Exporters predicted in December that traditional exports, meaning exports of raw materials, would fall 7.1% over the year. However, strong growth in non-traditional exports of 8.9% will help soften the blow, and overall exports for the year are expected to fall only 3.6%.
Peru is home to a diverse range of mineral deposits, led by copper and gold, which, together with silver, zinc, lead, iron and tin, make up 60% of current total exports. The country’s mineral exports have risen dramatically in recent years, from $3.2bn in 2000 to $21.7bn in 2010, as Peru’s mining projects gather pace.
The mining industry now stands poised for further expansion, with the Ministry of Energy and Mines (MEM) expecting around $23bn to be invested in the sector over the next three years. While the sector is bracing itself for heightened activity, questions still remain about how the country will address the problem of social conflicts and “wildcat”, illegal projects that continue to damage the industry’s image. These issues have in recent years sometimes led to isolated incidents of instability.
Illegal mining operations, which spell big business in Peru, also pose a major challenge for the government. Unsurprisingly, the government’s bid to impose crackdowns on illegal and informal wildcat mining activities has been met with huge resistance. Protests held in March, where campaigners were rallying in favour of activities in the southeastern Madre de Dios region, spilled over into violence that left three dead and more than 30 wounded. There are other, wider economic concerns as well: despite a generally positive outlook for 2013, the Central Bank expressed concern this year about the appreciation of Peru’s local currency. The sol gained 4.4% against the dollar between January and October, with economists expecting the trend to continue next year.
Appreciation comes despite frequent and aggressive efforts from the Central Bank to intervene in currency markets. According to the BBVA report, foreign exchange interventions over the last year totalled $12bn, or 25% of Peru’s international reserves in 2011.
The sol’s appreciation has served to encourage the taking out of loans in dollars, with borrowers hoping that the rising value of the sol will make repaying the debt more affordable in the long run. Additionally, lower interest rates on dollar-denominated loans are providing consumers with an added incentive for seeking out loans in the currency.
Consumer loans denominated in dollars were being offered at an average interest rate of 23.65% in early December, compared to 38.7% for those denominated in sols. Similarly, home mortgages denominated in dollars had an average interest rate of 8.04% while those denominated in sols were at 8.81%.
However, the rate of dollarisation of assets has slowed and reversed significantly over the last decade, dropping from 80% of savings and other deposits in 2002 to around 40% today. While savings and deposits in dollars could keep falling, demand for credit denominated in dollars is likely to remain high if interest rates stay low.
In light of the failure of interventionist policies to stem the sol’s appreciation, some public leaders have suggested allowing pension funds to invest more of their balance internationally. At present, pension funds can only invest up to 30% of their total holdings overseas. Discussion of increasing pension funds’ capacity to invest abroad, as well as a host of other pension fund-related reforms, has been a particularly hot topic in the country throughout 2012.
While weakness in raw materials exports may continue, pending the economic performance of China, Peru’s primary trading partner, the country is increasingly looking to surging demand from the middle class and non-traditional exports to push the economy forward. The 6.3% GDP growth predicted by the Ministry of Economy and Finance is not as high as the 6.9% seen in 2011, but it is likely to secure Peru’s spot as one of Latin America’s top economic performers for the year.