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Peru: on a steep growth curve

by Adrian Armas

Peru’s economic performance has improved greatly since the 21st century began, with average annual growth of 5.5% between 2001‒14, well above the Latin American average of 3.3%. Reversing policies of previous decades, since the 1990s Peru has implemented a solid macroeconomic framework and intro-duced market-orientated reforms.

These changes, together with favourable external conditions (a commodity price boom and low international interest rates), explain the impressive growth of the past 15 years. Poverty decreased considerably in urban and rural areas, and the middle class expanded significantly.

Living conditions and productivity in rural areas, where Peru’s poorest population lives, have improved considerably. For example, average travel times from rural district towns to nearby cities decreased by 50% as a result of better transport links. Further, in 2001–11, average farm wages grew 73%; the price of a hectare of agricultural land increased by 88%; and average home prices in rural downtown areas increased by 166%.
The economy grew only 2.4% in 2014, following a 5.8% increase in 2013. The slowdown has been due to deteriorating terms of trade (an aggregate negative shock for the region), as well as temporary supply shocks affecting key sectors such as mining, fishing and agriculture.

The economy is expected to rebound in 2016, as short-lived factors affecting the primary sectors dissipate and new copper mines, such as the Las Bambas project in the Apurimac region, begin operation. Copper production is expected to increase 95% over the next three years.

Prudent monetary and fiscal policies have created substantial buffers to limit repercussions from the terms of trade deterioration and tightened international credit conditions.

Faced with uncertainties over commodity prices and international capital flows, the central bank has taken countervailing monetary action to absorb negative shocks.

In the years of high capital inflows and high commodity prices (in particular, for mining products), the central bank has been ‘leaning against the wind’ by raising interest rates and reserve requirements, and has increased inter-national reserves (now around $60bn, 30% of GDP). These measures prevented credit booms or asset bubbles that typically burst when international conditions change.

Infrastructure and TPP
Under the central bank’s inflation-targeting policy adopted in 2002, Peru has achieved Latin America’s lowest inflation rate since the beginning of the century – an annual average of 2.6% against a continent-wide average of 6.8%. The central bank has adopted a managed float for the sol to take account of financial dollarisation stemming from poor macroeconomic policies during the so-called lost decade of the 1980s.

Peru ran fiscal surpluses between 2006 and 2013 (except for 2009–10), which helped build a buffer for countering turbulent times and contributed to declining gross public debt, from 47% of GDP in 2001 to 20% in 2014. Net public debt fell from 38% to 4% over this period.

In addition to maintaining sound macroeconomic policies to sustain high potential growth, Peru needs to increase its investment in human capital and infrastructure. Several large-scale projects, such as Line 2 of Lima’s metro system, are expected to reshape Peru’s economy in coming years. Commitments of $14.5bn have been made for private infrastructure initiatives including highways, airports, electric transmission lines, broadband connectivity and natural gas pipelines.

Peru is part of the Trans-Pacific Partnership announced on 5 October with 12 Pacific sea-board countries including the US and Japan, as well as countries with which it did not formerly have free-trade agreements, such as Australia, Brunei, Malaysia, New Zealand and Vietnam.

The TPP will provide Peruvian firms with access to new technologies to enhance their productivity. In addition to current agreements, the Peruvian government has begun negotiations on new FTAs with Turkey and El Salvador and is planning to open more trade offices around the globe to increase opportunities for Peruvian entrepreneurs.

■ Adrian Armas Rivas is Chief Economist at the Central Reserve Bank of Peru. He was a panellist at the OMFIF meeting in Lima.