Peru's economic and political outlook looks bright despite the recent global crisis.
BY WALTER T. MOLANO
As one of the centers that controlled Spanish America during the 16th century, the Viceroyalty of Peru was one of the most prosperous regions of the Western Hemisphere. Lima, which was founded in 1535 by the victorious conquistador Francisco Pizarro, flourished as an oasis of commerce, culture and higher education. All of the silver from Potosi flowed through the city center and into the port of the Callao. Lima soon boasted the first university and printing press of the America’s. Architectural evidence of the city’s wealth is still littered throughout the old city. Unfortunately, the Viceroyalty’s prestige began to wane at the end of the 17th century, when the silver began to transit down the River Plate and through Buenos Aires.
By the start of the 18th century, the Spanish crown decided to create two new Viceroyalties, New Granada and River Plate, thus encroaching Lima’s economic base. The legacy of wealth and power endowed by three centuries of regional domain converted Lima into a royalist stronghold during the wars of independence, and it was the last Spanish colony to fall.
For the next 50 years, Peru developed as a prosperous country, but its defeat during the War of the Pacific and the sacking of Lima in 1881, put it on a trajectory of decline for the next century. Fortunately, the economic reforms of the 1990s and the rise of commodity prices during the past few years allowed Peru to reassume the grandeur of its colonial past. Today, Peru is re-emerging as one of the most promising countries in Latin America, with a young population, a diversified economy and rapidly improving infrastructure.
This is not to say that Peru did not suffer at the hands of the global credit crunch. Economic activity contracted 2.1 percent y/y in June, marking the sharpest decline in 8 years. Manufacturing output plunged 12.2 percent, as households retrenched in the face of rising risk aversion. Exports dropped 24 percent y/y in June, due to the decline in metal and commodity prices. However, imports fell even more, sinking 39.6% y/y, thus pushing Peru’s trade surplus to $415 million. This was almost three times the size of the trade surplus a year earlier. The drop in exports and the weakening of economic activity had an adverse impact on the fiscal accounts. The government expects the fiscal deficit to end the year at 2 percent of GDP, with a shortfall of 1.6 percent in 2010.
Despite the erosion of the fiscal accounts, the government is using the crisis as an opportunity to increase infrastructure spending by 14 percent y/y in 2010. The expansion in government spending is part of a $3 billion stimulus plan that Lima hopes will jump-start the economy. Among the various projects, the government intends to invest $4 billion in new roads. This is in addition to the transportation network that is connecting the Andean nation with Brazil. As a result, Peru will soon emerge with one of the best infrastructures in the region. Chile leads Latin America by far, but the capital that is pouring into highways, ports and airports is slowly modernizing the Peruvian landscape.
Peru’s economy may be in sound shape, but some people are concerned about the country’s political outlook. The general elections are about two years away, and the memories of former presidential candidate Ollanta Humala still haunt investors. The Chavez-backed politician made it to the final round in 2006. Fortunately, his popularity is evaporating. A recent survey, conducted by Datum International, found that the Bolivarian candidate ranked fifth in the polls, with only 10 percent of the vote.
The list of leading contenders was led by Lima Mayor Luis Castaneda and Congresswoman Keiko Fujimori, each with 23 percent of the vote. Castaneda, a lawyer and senior member of the Fujimori administration, is known for the public work programs he instituted, particularly in the slums of Lima. Keiko Fujimori is the outspoken daughter of former president Alberto Fujimori, who is currently jailed for more than 32 years on charges of misconduct, corruption and violation of human rights. Nevertheless, he remains highly popular. Keiko’s main political platform appears to be the commutation of her father’s jail sentence. Therefore, the fears that Peru will fall into the arms of the Bolivarian movement are quickly slipping away.
This means that, armed with good government, ample natural resources and a more optimistic population, Peru can return to the vanguard of the western hemisphere.
Walter Molano is head of research at BCP Securities.