Peru's stellar economic performance over the past decade hit a bump in 2013 as a result of the US quantitative easing programme. However, the country's central bank governor sees this as a temporary setback, and reports that the Peruvian economy is back on the track towards long-term growth.

After a decade of hectic growth, the Peruvian economy was hit hard by 2013’s “tapering tantrum” – as Julio Verlarde, the country's central bank governor, describes the impact of the US Federal Reserve tapering its quantitative easing programme – but it is now back on course and predicted to grow by 6% in 2015.

This year growth is likely to be about 4%, says Mr Verlarde, who argues that Peru's past decade has been about much more than a typical Latin American commodities boom. While Peru's economy was certainly boosted by high gold and copper prices over this period – and has been impacted by recent price reversals – it has an investment rate of 28% of gross domestic product (GDP), which is translating into both expanded commodity production but also increased exports in other sectors such as agriculture.

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The IMF reports that Peru has posted the fastest growth and slowest inflation in Latin America over the past decade, with GDP growth averaging 6.6% and inflation 2.93%.

But last year’s announcement by then chairman of the Federal Reserve Ben Bernanke that the US would start pulling back on its bond buying programme caused panic in global markets, and Peru was badly affected with its currency falling by 10% as foreign investors sold Peruvian assets. On top of this, Peru which is the world’s third biggest copper producer and fifth largest gold producer, had to contend with falling commodity prices.

Mr Verlarde says that this “tapering tantrum” was not really based on fundamentals, and he has managed the situation through a combination of interest rate movements and changes to reserve requirements, as well as selling of foreign exchange reserves to strengthen the country's currency, the sol.

“We don’t want the exchange rate to be too far from fundamentals; we only intervene when we believe it is going beyond fundamentals,” he says. “In this case we are talking [about] a tapering tantrum. It overshot [the sol depreciated too much against the dollar], it was unsustainable and it was going to be reversed.”

More than half of Peruvian government local currency debt is held by foreigners, but Mr Verlarde says: “The market is currently underestimating the prospects of a US rate rise and it may come sooner than expected. But the fickle investors have already left so those remaining are more professional long-term investors and I don’t expect the same kind of sell off as last time.”

The market reaction in Peru to a falling dollar was also greater because 40% of loans are in dollars. Mr Verlarde would like to see this proportion reduced, but says that historically low US interest rates since the 2009 financial crisis have made dollar borrowing superficially attractive.

Overall bank loans to GDP in Peru are a low 40% and government debt to GDP is just 18%, meaning that the country has plenty of room to expand without becoming overburdened.

Heading upstream

When it comes to the current position of the Peruvian economy, Mr Verlarde says: “We had a good decade, helped by high commodity prices, but there is more to the story than that.

Indeed, the commodity prices boom has brought with it upstream improvements to Peru, and a sizeable chunk of the mining profits has been invested in other sectors, producing a big jump in agricultural exports and high-end textiles and clothing.

A huge fillip to the attractiveness of the domestic market has come with the advent of the Pacific Alliance trade agreement linking Peru, Chile Colombia and Mexico, as well as the Mercado Integrado Latinoamericano (MILA), which integrates the stock exchanges of Chile, Colombia and Peru.

Christian Laub is both president of the Lima Stock Exchange and CEO of the Peruvian investment banking franchise of Creditcorp Capital, which was formed through the integration of three banks: BCP Capital in Peru, Correval in Colombia and IM Trust in Chile. Mr Laub says that Peruvian companies and investors are now thinking on a regional rather than national scale, and that both the development of MILA and the creation of Creditcorp were designed to respond to this. Creditcorp also has an inter-dealer broker in the US. 

Mr Laub admits that the trading volumes on MILA are still small, but says they do not take account of all the regional business, such as that carried out by family offices. He is also arguing for lower trading costs to make Peru competitive with both the Chile and Colombia exchanges, as well as those in the US, where the majority of the liquidity in Peruvian stocks is held.

“Last year we reduced [trading] costs by 50% but they are still high and we are not competitive with Chile and Colombia. We need to aim higher. The liquidity exists but it is traded in other markets. We need to get that liquidity back to Peru," says Mr Laub.

He says that by the Peruvian, Colombian and Chilean exchanges, companies in these countries can serve an $800bn economy with 90 million people. Adding Mexico to this bloc would create an economy the same size as Brazil. “The growth rate is not what we are used to [in Peru], but we are not in a downward spiral and there will be a pick-up next year,” concludes Mr Laub.


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