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07/20/2011

Peru: Inca Gold Still Powers a People


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PERU IN COMPARATIVE PERSPECTIVE | ECONOMIC GROWTH PATTERNS IN PERU | THE PERUVIAN POLITICAL-ECONOMIC SITUATION | 2011 ELECTIONS CONCERNS | PERU’S MACRO SUMMARY

While its neighbors Brazil and Chile capture much of the world’s attention, Peru has quietly grown into a star performer among emerging markets. Whether this continues as its newly elected leftist president Ollanta Humala takes the helm remains to be seen, but preliminary signs are hopeful, even if growth becomes more muted than in the recent past.

Peru has been known as a commodity exporter for much of its history, and this has been both a blessing and a curse. Properly managed, Peru’s resource wealth presents great opportunities, but countries whose economies are based on extractive industries tend to be wealth concentrators. The profits from concentrating industries are not always reinvested optimally and can become the enabler of corruption networks. Peru has struggled with this dynamic through much of the last century and even before, at times rising above it, and at other times becoming overwhelmed. Its most recent track record has been positive, however, and there are reasons to hope that it will continue.

PERU IN COMPARATIVE PERSPECTIVE

Peru is one of the poorer of the major economies in the region: it is large enough to be considered a regional and influential economic power, but has a per capita GDP lower than that of most of its neighbors, excepting Ecuador and Bolivia. Peru’s real GDP in 2010 was similar in size to that of Vietnam, Bangladesh, and the Czech Republic; its per capita GDP was comparable to Thailand’s and Tunisia’s. In the Index of Economic Freedom, the Heritage Foundation (2011) ranks Peru close to Israel, South Korea, and Botswana. Transparency International (2010) gives Peru a 3.5 rating in its 1–10 point Corruption Perceptions Index. This places Peru above average for South America, but on par with China, Thailand, and Greece globally.

Table 1: Comparative Statistics on Peru and Other Countries

Table 1: Comparative Statistics on Peru and Other Countries

Sources: Corruption Perceptions from Transparency International; Economic Freedom Index from The Heritage Foundation; Stock market capitalization and growth figures from World Federation of Exchanges; Five-year annualized GDP growth figures from Economist Intelligence Unit; all others from CIA World Fact Book. Access date for all sources June 16, 2011.

Recent inflation has been substantially lower than in most other emerging markets. In 2010, Peru’s CPI index registered 1.5% in year-on-year growth. As of mid-2011, this has crept up further to perhaps as much as 3%, which is still well below Brazil’s inflation rates of 6% or more. Peru’s five-year cumulative economic growth rate of 7.2% has also surpassed Brazil’s 4.4%. The combination of emerging-market growth rates and developed-market inflation rates paints an attractive macroeconomic picture.

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ECONOMIC GROWTH PATTERNS IN PERU

Figure 1 shows the overall growth of real Peruvian GDP from 1980 to the end of 2010. The economy has almost doubled in the last 10 years, even with the global contraction of 2008–09. This in itself is a remarkable achievement for nearly any country.

The export sector drove much of Peru’s expansion from 1996 to 2005. The three largest exports are gold, copper, and fishmeal, which together made up more than half of total exports in 2010, according to the Economist Intelligence Unit (2011). Of these, the metals are by far the dominant portion. These sectors have obviously gained substantially from the appreciation of gold prices, the increasing demand for copper in China and elsewhere, and the growing demand for food products generally.

The popular conception that Peru is prospering because of export linkages to China may be overstated, however, because growth since 2005 has been driven more by fixed investment than by exports. Peru’s import growth closely tracks the growth in fixed investment, suggesting that Peru is importing substantial physical capital from abroad. These are positive signs, because they suggest that export earnings are being channeled into economic reinvestment rather than increased consumption. Peru’s consumption is presently growing at a slightly slower pace than the economy as a whole, and is in fact a shrinking percentage of the total economy.

Figure 1: Evolution of Peru’s Real GDP in 2005 dollars, 1980–2010

Figure 1: Evolution of Peru’s Real GDP in 2005 dollars, 1980–2010

Source: Economist Intelligence Unit, accessed July 15, 2011.

As long as reinvestments are productively applied, these are all optimistic signals for Peru’s productive base. At the same time, domestic sources of growth are sufficient to cushion the economy in the event of a global slowdown.

Figure 2 shows the recent history of Peruvian interest rates compared to CPI inflation and economic growth. Peru faced hyperinflation in the early 1990s, exceeding 4500% annually at its peak and sending rates off the top of the graph. Since then, however, the overall story is one of declining long-term interest rates. Current lending rates are still high, at nearly 20% annual interest, but—unlike rates in the U.S. and many developed countries—these rates still have plenty of room to decline over the long term. If this trend continues in Peru, one should expect both assets and economic activity to continuously increase over time.

Figure 2: Inflation, Interest Rates, and Economic Growth

Figure 2: Inflation, Interest Rates, and Economic Growth

Source: Economist Intelligence Unit, accessed July 15, 2011.

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–Bruce P. Chadwick, PhD, CFA, is principal at Chadwick Consulting, an independent consulting firm specializing in quantitative, emerging-market, and SRI research and strategy.


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