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Analysis
The host can boast, maybe

The host can boast, maybe

Peru welcomes the world of finance

by David Smith in Buenos Aires

Thu 8 Oct 2015

This weekend the world’s finance ministers and central banks gather in Lima for the autumn meetings of the World Bank and IMF, the first time since Rio de Janeiro in 1967 that they have chosen Latin America for this showpiece.

Given the latest forecasts of slower global recovery, and contraction in Brazil in 2015–16, the host Peru offers a relatively successful economic narrative, demonstrating a blend of fiscal prudence and forward-looking investment long espoused by the Bank and the Fund.

‘We’re not a model for others, and I don’t believe in a one-size-fits-all prescription,’ says Peruvian Finance Minister Alonso Segura Vasi. ‘But Peru does reflect years of transformation in economic thinking, and transition to a higher-level economy.’

The key, the government suggests, lay in budget surpluses in recent years – and sound public investment with the proceeds.

‘We have invested ambitiously, and aggressively, everything from a second metro line in Lima, to a new gas pipeline in the south of our country, to prioritising the education of our children,’ the minister adds, noting that 6% of GDP is devoted to infrastructure, double the level of a decade ago.

The economy is slowing like others, and will grow by only around 3% this year, but shows some positive elements compared to the rest of the region. The government wishes to prevent further economic slowdown by continuing public spending and capital investment, hence a 2016 budget of $43bn, 6% higher than this year.

The contrast is stark with other regional players. Venezuela, with an economy now expected to contract by 10% this year, may be viewed as an aberration, given its virtual dictatorship, but elsewhere Latin America’s kingpins stare into their own abyss.

Only this week, the IMF forecast 3% shrinkage in the economy of Latin America’s giant, Brazil, where a combination of inflation, unemployment, and a corruption scandal has reduced the country to junk-bond status, and driven the currency, the real, to a record low against the dollar, down 45% this year.

Over in Argentina, where the country chooses a new president later this month, the tell-tale signs of crisis are writ large: inflation running at 25%, budget deficit skyrocketing, parallel markets for the dollar, and the next government bound to face tough choices over devaluation, welfare cuts, and some kind of settlement with creditors insisting on full payment of past debts.

‘In the circumstances, Peru looks like a standout case of real progress in hard times,’ according to one World Bank specialist on the region. ‘One of Latin America’s traditional economies moving with the times.’

What is noticeable in Lima, and the provinces, is the shift to the service economy, especially in telecommunications and financial services. Today those two sectors account for nearly 60% of GDP.

At a time of falling prices for Peru’s traditional exports – copper, silver, natural gas – the government has steered a careful course to solid growth fundamentals, with inflation very low by regional standards, and the sol, Peru’s currency, appreciating steadily in recent years.

No wonder Peru’s government could not conceal its delight this week, in the countdown to this weekend’s global gathering in Lima, at being invited to join the Trans-Pacific Partnership (TPP) that brings together 12 economies, from Peru to the US to Japan and Singapore, that handle 40% of the world’s GDP.

‘We are now an integral part of the global economy, in a way we have never been before,’ said one presidential adviser. ‘And from this point on, Peru has a seat at the table, unthinkable just a decade ago.’

David Smith, OMFIF Advisory Board Member, represented the United Nations in the Americas 2004-14.

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