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Peru: Apex during APEC

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Peru’s hosting of the APEC meetings occurred at its cyclical apex, but serious economic and political challenges lie ahead.

BY WALTER T. MOLANO

As the 21 member nations of the Pacific Rim descended on Lima for 2008 APEC, the city was a shining oasis of prosperity. The dusty port of Callao was a hotbed of activity, as vessels discharged containers full of consumer goods while loading commodity-related products destined for foreign destinations.

Peru’s unwavering commitment to structural reforms and macroeconomic discipline put it at the apex of Latin America and the emerging markets. This is one of the reasons why the leadership of the Asia-Pacific Economic Cooperation (APEC) decided to hold its annual summit in Peru. A fleet of presidential 747s adorned the runways of Jorge Chavez international airport, as entourages brought forth a slew of new trade agreements.

CHINA, JAPAN, USA

Chinese President Hu Jintao announced the culmination of a new trade pact, which will allow 4,700 Peruvian products to enter China free of tariffs. Peruvian exports to China surged 32.8 percent y/y during the first nine months of the year, and they are expected to triple over the course of the next three years. The new products that will enter China go way beyond minerals and energy. They include the tidal wave of agricultural products and processed foods that are flowing out of the northern parts of the country. This will convert Peru into a global food processor. Not to be left behind, the Japanese delegation announced that it was working on a new bilateral trade pact, and the American entourage reminded the participants that the free trade agreement with Peru would go into effect on January 15, 2009.

Peru is at the zenith of the region, but the economic and political cycles of the Andean nation reached the point of apogee and the downward phase lies ahead.

An open economy that embraced the tenets of globalization, Peru is highly exposed to changes in the external environment. The collapse in industrial metal prices is straining exports. At the same time, massive inflows of capital equipment and a growing influx of consumer imports will reduce Peru’s trade surplus to $2.7 billion in 2008. Unfortunately, the ongoing collapse of commodity prices will convert the trade surplus into a deficit in 2009. Moreover, the current account shortfall could exceed 5 percent of GDP next year.

SLOWDOWN

Peru has ample resources to meet the shortfall. Nevertheless, the economic authorities need to put the economy on a more sustainable path. The delay in doing so was the reason why we missed our GDP growth forecast by such a large margin. We were expecting that the economy would grow 4.7 percent y/y in 2008. However, that was nothing more than wishful thinking since the economy will grow twice as much. Next year, local analysts expect the pace of economic growth to ease to 5.3 percent y/y, but we believe that the government will have to overcompensate for the excesses of 2008. Therefore, the level of expansion could fall to 4 percent y/y. The market clearly has a negative view of what lies ahead. The Peruvian equity market lost more than 55 percent of its value, about twice the amount of its neighbors—despite that it may be one of the strongest economies in the region.

The start of the downward phase of the economic cycle coincides with declining support for President Alan Garcia. The latest opinion polls put his support at 19 percent, less than half of what it was when he took office in July 2006. His numbers are worse in the interior parts of the country, which have not enjoyed the economic prosperity of Lima. A series of gaffs and corruption scandals tarnish the Garcia Administration.

OLLANTA FACTOR

This is troublesome, given that the presidential elections are only 18 months away. Ollanta Humala is sitting on the sidelines, building up his war chest and getting ready for the social discontent that will build once the economy slows. He railed against the new trade pact with China, and said that it would have a devastating effect on Peru’s textile industry. At the same time, his nexus with the Bolivarian leaders of the region, such as Chavez, Correa and Morales, remains tight. This means that, should he win in 2010, Humala will hijack Peru’s political institutions in order to remain indefinitely in power, even if it means destroying the country’s economic base. Fortunately, Humala is not polling well in Lima, which is the key to winning Peru’s presidential elections.

Peru’s hosting of the APEC meetings occurred at its cyclical apex, but serious economic and political challenges lie ahead.

Walter Molano is head of research at BCP Securities. 

 


 

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