BY CLAUDIO LOSER
Latin America Advisor
WASHINGTON, DC—Peru, the seventh-largest economy in Latin America, was recently granted investment-grade status by Fitch Ratings. This action can be expected to be followed by the other two international rating agencies. Peru thus joins a very exclusive regional club, up to now only consisting of Chile and Mexico. Peru will be able to place its bonds with a wide variety of "high quality" investors, like pension plans and insurance companies. This is noteworthy, particularly at this time of market turbulence, when most financial asset categories are being downgraded, including the rating agencies themselves, ironically.
The underlying economic performance of Peru may be somewhat surprising for the uninitiated. Memories linger of the downward drift of Peru in the 1970s and 1980s; the economic collapse during the first government of Alan Garcia; President Fujimori's the successful struggle with a tough guerrilla movement and eventual demise resulting from his autocratic tendencies; the tentative nature of the subsequent governments; and the political problems of the last campaign, when born-again President Garcia was an unlikely moderate winner.
PERU ABOVE AVERAGE
In fact, Peru has been performing consistently at the top of the charts and well above the averages for the region. As seen in the chart to the right, Peru has been above or at the same level of economic growth as the region so far this decade. With an average rate of growth of almost 5 percent, it has only been surpassed in the region by the Dominican Republic. In the last few years, it has been behind Argentina, Uruguay, and Venezuela, but all of them were recovering from painful recessions that Peru has not experienced for at least a decade. Peru's economy is expected to grow by 8 percent this year. The inflation record is equally striking, with prices increasing at an annual rate of a little more than 2 percent so far this decade, well below other major economies. The favorable track record started during Fujimori's controversial reign, and has continued through all sorts of vicissitudes ever since.
International conditions have been favorable to Peru, including the approval of the free trade agreement with the United States. However, Finance Minister Luis Carranza, and other finance ministers before him, have chosen to preserve fiscal sanity and monetary prudence, while accumulating a nice chunk of reserves on the way—with higher levels than Chile and Colombia, and close to those of Venezuela.
Peru has done a few more things: it preserved policy prudence after being hit by a major earthquake; it reduced poverty and inequality significantly without squandering resources; and distinguished itself from the poor track record of some of its close neighbors. In these circumstances, Peruvians (a stingy lot when praising their country) and others should celebrate these achievements and wish President Garcia and his team the best of luck and a steadfast course in their efforts to consolidate this impressive performance.
Claudio Loser is a Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund. Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.