Mining To Recovery

LIMA, Peru — Strong gold exports offered Peru a needed lifeline during the global financial turmoil of the past year. Now, copper, silver, zinc and lead could help lead the economic recovery in the resource-rich nation.

Still, analysts agree, some $3 billion in government stimulus funds underpinned the country’s ability to stabilize the economy during the crisis that has battered most of the region.

As the fastest-growing economy in Latin America in 2008, Peru had farther to fall than most of the countries as the severe recession gripped most of the region. Peru’s rate of growth of the gross domestic product plunged from 10 percent in 2008 to –1.1 percent in the first quarter of 2009. But modest improvements in export prices and government spending helped the economy eke out positive economic growth of just a fraction of a percent.

In a region where countries have been struggling to contain the steep decline in investment, trade, tourism and remittances, Peru’s economic performance was sufficiently strong to warrant a decision by Standard & Poor’s to retain the investment grade rating on the country’s foreign currency debt.

S&P credit analyst Richard Francis, in a recent report, said that despite the sharp slowdown in 2009, he expected solid economic growth starting in 2010 through 2012, “supported by the government’s commitment to economic stability and a positive investment climate.”

The National Statistics Institute, the INEI, blamed the economic downturn on “a contraction in external demand of 6.3 percent and a decline in investments of 24.6 percent.” Foreign direct investment in Peru ballooned by 60 percent in 2008, reaching a high of $8.4 billion, much of it from $2.2 billion foreign financing for the Peru LNG Project, a $3.8 billion natural gas liquefaction plant that will export natural gas from the Camisea field.

From Lima to other cities in the nation, construction and commerce, which had been the fastest-growing sectors of the economy, ground to a standstill with the financial crisis.

The government of President Alan García moved to counteract the recession with a $3.3 billion stimulus package. The Economy and Finance Ministry announced that government spending would rise to $28 billion in 2010, 13 percent more than federal outlays in 2009.

Yet the government’s ability to bolster economic activity is constrained by falling tax revenue. Even though total tax revenue fell just half a percent in the first half of 2009, revenue from import duties plunged by nearly 28 percent in the same period.

The key to the country’s financial situation is mining. The Andean nation is the world’s No. 1 silver producer, No. 2 copper producer and No. 5 gold producer. Almost two-thirds of Peru’s export revenue is derived from copper, zinc, lead and silver.
Plummeting prices for copper and other metals have cut the country’s export earnings. The mining sector rapidly reacted to the diminishing demand for copper from fast-growing Asian countries, like China, postponing projects and furloughing thousands of miners.

But the robust market for gold remained a bright spot. Between April and June of this year, Peru’s gold production increased by nearly 5 percent over the previous year as Peruvian gold producer, Minera Yanacocha, jointly owned by Newmont Mining of the United States and Compañía de Minas Buenaventura in Peru, hiked its output by 17 percent, according to the INEI.

The prospect of a faster-than-expected recovery in China is starting to revive the industry, which supplies copper for construction and industry. The Southern Peru Copper Corp., a U.S.-based company, boosted its copper production by 3.2 percent.

Southern Copper, which had delayed construction of its Tía María copper mine, announced work on the $950 million project would begin in 2010. Southern Copper is Peru’s largest mining company and is controlled by the mining giant Grupo Mexico.

The García government has also grappled with political turmoil. In June a clash between indigenous protesters and police in the northern jungle led to at least 34 fatalities among officers and protesters. The immediate cause of the violence was a series of laws implemented under the U.S.-Peru Free Trade Agreement, which people in the Amazonian region claimed made it easier for outsiders to take control of the land. Although the National Congress repealed two of the controversial laws, the violence raised questions about the government’s ability to deal with growing resentment over economic inequalities in the country – especially one that posted the region’s highest economic performance in 2008.