Peru: Country Risk Is Not Just An EMBI+ Number

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

(Bill Gates)

Last week in my adopted home town of Arequipa, Peru, there was a 24 hour strike by transport workers. You probably didn’t hear much about it, but all the same it happened. The modus operandi of strikers was a tried and tested one; roadblocks cut main roads inside cities as well as all major routes between towns and cities. No buses, no taxis, no interprovincial travel, schools closed for the day (with the side-effect of one happy daughter). The whole of the southern region of Peru was for all intents and purposes paralyzed. This strike action is set to be repeated with a 48 hour strike slated for July 11th and 12th, which might make a couple of headlines as Arequipa and the neighbouring Puno region form a critical part of the expanding and highly lucrative Peruvian tourist industry. With the August high season just around the corner, further strikes fuelled by local grievances could eventually affect the national GDP and may dampen enthusiasm amongst tourists for Peru in years to come. Nobody wants to spend 3 nights of a 14 night tour stuck in the same place, possibly missing out on their booked visit to Machu Picchu or Lake Titicaca.

Ostensibly, the reason for last week’s strike was the sudden hike in the price of fuel. World barrel prices combined with certain Peruvian governmental policies (that can wait for another day for a fuller explanation) made prices jump an average of 15% in one day at the beginning of June. Looking round town this morning, the lowest price I saw for 84 octane fuel (the most popular seller) was S/.11.20 (with the exchange rate currently at U$1=S/.3.16, that’s U$3.54 per US gallon). And although Peru is a net importer of petroleum, the near 50% rise in pump prices in recent years doesn’t seem to show itself in the inflation figures published by Peru’s official statistics department, the INEI.


Source: INEI Peru

However behind the headline reason for the strike is something far more disconcerting. In innumerable conversations with locals of all walks of life, this analyst has heard variations of “I’m worse off now than 5 years ago” these last few months. Again, anecdotals can be supplied. Yesterday, chicken was 10% more per kilo than just a week ago in the local market. The reason; “feed prices”. Mangos this year (which are magnificent by the way) cost 60% more per kilo, as “China bought them all”. Bus fares have just gone up from S/.0.60 to S/.0.70 (“fuel costs”, one hardly needs point out). While paying U$0.30 for a long ride into the centre of town may still seem cheap to the reader, a 16.7% hike such as this makes a big difference to household budgets that often have both adult members travelling into and out of town every working day. All in all, Peruvian inflation figures are as (un)reliable as those in Argentina, and seem to balance the price of beer (down 10% since Brahma introduced much needed competition into the sector) with milk (up 10% in the same period. Source: my wife, so don’t argue). Of the two, I know which one is more fundamental to the wellbeing of society.

It’s not all bad, of course. For example, those invested in the Lima bourse have had a wonderful 18 months financially, but local investors are almost to a person the comfortable ABC1s, that small percentage controlling a disproportionately large amount of the wealth (a Latin American classic, no?). During the Toledo mandate, economic policy was called “el goteo” (translate as “the drip”, but read as our old friend “trickledown economics”). Since Alan Garcia took over, the word “goteo” might have disappeared from the political dictionary but economic policy has basically remained unaltered.


Source: INEI Peru

Exports, of course, have been the key to the well-publicized economic success story. There’s little need to ram down the throats of an RGE Monitor audience detailed figures explaining the rise of metals commodity prices over the last 5 years, but suffice to say that according to latest World Bank figures, 58% of Peruvian exports are made up of mining products.


So despite the clear and undisputed economic boom going on in today’s Peru, the complaint from average working Peruvians is that the rich are richer and the poor are poorer. Not a new message by any means, but what may be changing is the populace’s patience.

Another strike action (that has even made a few English-speaking headlines) started this weekend. Workers at Southern Copper (PCU) have gone on indefinite strike to demand a U$4.70 per day increase. PCU has offered them U$1 per day. The strike (declared “illegal” by the government, for what it’s worth) has shut down operations at the two main pits and coastal smelter complex.

At a pinch, the strike at PCU can be taken as a microcosm for the macro situation as a whole. Without going into micro-analytic details and speaking of the sector in general terms, mining companies are making a lot of money thanks to the commodities price boom, but even though they have benefited from wage rises in recent times workers feel they deserve a larger slice of pie.

But how much truth is there behind workers’ claims? The following chart would seem to back up the case that trickledown is not raising the general standard of living.

Since 2004, average salaries in Peru have basically remained static. If we go back further, from the year 2000 to date, average monthly wages have risen from around S/.2300 to S/.2600, a rise of approximately 13% which has only managed to discount same period inflation. Put simply, ordinary people are not getting richer. It would seem that official government statistics back up those anecdotals.


Source: INEI Perú

So where has all the money gone? If average salaries have not outstripped inflation and led to a better standard of living for the average Peruvian, the wealth that has undoubtedly been created inside the state recently must be hiding somewhere else.

At least part of the answer is “it’s gone abroad”. In the final chart, we see remittances of profits by international companies in Peru compared to overseas investment in the area. My thanks to Jürgen Schuldt, economics professor, Vice Rector of Universitad del Pacífico Lima and all-round good egg for this chart. The red line represents remittances while the blue line represents foreign investment in the same period, the scale being in millions of US dollars.

When compared to annual exports in the previous chart, we see that over 30% of all export revenues collected by Peru in 2006 went abroad as net profits for the multinational companies involved in their production.


Source: BCRP

I submit there is juxtaposition between the glowing economic reviews enjoyed by Peru in 2007 and the reality of life in the country. While the world queues up to praise Peruvian macro, its own people are turning their backs on the government they elected only last year. When a population is told year after year that their country is growing at a record-beating pace that bears little relation to their own personal financial stagnation, those that proclaim would do well to remember what sometimes happened to messengers in ancient Sparta. Meanwhile those that praise Peru today could quickly change tune if the majority moved towards more the more populist policies currently found in other parts of Latin America.

In June 2006, the more establishment policies proposed by Alan Garcia beat out the more reactionary nationalist candidacy of Ollanta Humala. Contrary to most people’s impression the election was quite a close run thing, Garcia winning the runoff by 53% to 47%. 12 months on opinion polls show that Garcia’s honeymoon period is well and truly over, with presidential approval ratings down from as high as 75% to today’s 42% and dropping. With the grassroots discontent of watching pump prices rocket the same week as hearing the government plan to pre-pay Paris Club debt, cries of “Why can’t they subsidize fuel instead of paying off the rich bankers?” are common, and all the technical debate amongst economists merely obfuscates and irritates. Patience is beginning to wear thin where it matters most.

Nationalist, populist policies and leaders do not just spring from nowhere. If the present economic expansion benefits only the small minority and does not bring tangible benefits to the general population, only the ignorant amongst today’s winners in Peru would be able to throw up their hands and wail tomorrow if the country decided to elect a new figure on a different platform. Democracy is alive and well in Peru, and those in power today would do well to remember that fact.

11 Responses to "Peru: Country Risk Is Not Just An EMBI+ Number"

  1. Vitoria Saddi   June 25, 2007 at 12:29 pm

    Mark, Great piece. Agreed on the rating agencies complete disregard on inequality and poverty.  Do you think that Peru will be worse off (in terms of inequality and poverty) at the end of Alan Garcia’s term? I don’t have a clear view of the overall situation, but it seems that poverty in Peru has not decreased in the last couple of years, right?

  2. mark turner   June 25, 2007 at 2:32 pm

    Vitoria,  find below two blogs by Farid Matuk from the excellent ‘actualidad economica del Peru’ blog.  The topline figure is that poverty (measured by the term ‘calorific deficiency’ in Peru, or more simply ‘hunger’) is still running at 30%, with rural poverty a rather shameful 44% (official govt figures). I will leave the reader with the Spanish original, as Farid does a much better job than I of explaining things:  Pobreza Rural Incrementa martes 19 de junio de 2007  Escribe Farid Matuk  El día de hoy el INEI ha publicado los resultados de la ENAHO (Encuesta Nacional de Hogares) correspondientes al primer trimestre de 2007, y en cierta manera es una evaluación de la actual gestión en su tercer trimestre de los veinte que tendrá.   Para el trimestre Mayo-Junio-Julio 2006 (el último de la administración Toledo) los resultados del déficit calórico (que coloquialmente se denomina “hambre”) fueron de 29.3% a nivel nacional, y de 19.9%, 28.1%, y 38.2% a nivel de Lima y Callao, Provincia Urbana, y Provincia Rural respectivamente.   Para el trimestre Enero-Febrero-Marzo 2007 (el último publicado) tenemos que las cifras son 30.4% a nivel nacional, es decir sin variación alguna para el análisis estadístico; y de 18.6%, 26.7%, y 44.0% a nivel de Lima y Callao, Provincia Urbana, y Provincia Rural respectivamente.   Lo mas saltante es que mientras en la parte urbana del país la pobreza se encuentra estancada, tanto en Lima cono en provincia, en el área rural la pobreza medida por hambre se incrementa en 6 puntos con significancia estadística.   Lamentablemente, la información completa de la ENAHO no se encuentra disponible en Internet, y por ello no se puede encontrar una razón a este incremento de seis puntos de la pobreza rural.   xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx  martes 19 de junio de 2007 Datos de Pobreza Listos en Setiembre   Escribe Farid Matuk  El día de hoy el diario Gestión, informa que el INEI tendrá las nuevas cifras de pobreza para Setiembre, previamente la agencia Andina el 7 de Junio informó que las cifras de pobreza estarían listas para Julio, e inicialmente el diario El Comercio el 26 de Febrero comunicó que las cifras de pobreza estarían para Marzo. En los discursos presidenciales del 28 de Julio de 2004 y 2005, el Presidente Toledo anunció los resultados de la evolución de la pobreza por gasto (cuantos hogares gastan menos de lo necesario para vivir). El pasado 28 de Julio de 2006, el Presidente García prefirió el 48% de pobreza por NBI (necesidades básicas insatisfechas del hogar en materia de calidad de vivienda, servicios públicos, acceso a educación, y hacinamiento en el hogar) que se obtuvo con el Censo Continuo para el primer trimestre de 2006. El INEI ha venido postergando los resultados de pobreza por gasto correspondientes a 2005 y 2006, y ademas ocultando las bases de datos que permiten un cálculo independiente de la pobreza por analistas, universidades u ONGs. Esta postergación sistemática es ya sospechosa porque no solo muestra impericia, sino tambien malevolencia al impedir el acceso a la información. Pero el hecho mas grave, es que en el próximo 28 de Julio no habrá anuncio alguno en materia de pobreza, porque ni los resultados de la ENAHO se tendrán, ni los del Censo Continuo porque este se suspendió. en el mejor de los casos será mostrar la pobreza por gasto del 48.9% para 2005 “estimado preliminar” del Ministerio de Economía e incluido en el último Marco Macroeconómico Multianual. Cabe recordar que para el Ministerio de Economía en el MMM (página 60) la pobreza por gasto fue 54.8% en 2001 y 48.9% en 2005, es decir 6 puntos menos en cuatro años de gestión, mientras que la meta actual es 8 puntos menos en cinco años de gestión.

  3. Anonymous   June 26, 2007 at 2:16 pm

    Peru and Latin America problem: they should specialize into commodities as their price is now high and will remain high in the medium long run. But since ownership of commodities is highly concentrated the benefits of this comparative advantage do not spill down or trickle down to average workers. So there is populist resentment…how to resolve this political economy dilemma? Not clear…maybe more progressive taxation and spending programs by the governments.

  4. Tom Trebat   June 26, 2007 at 9:12 pm

    Very good piece which helps us to understand why governments struggle to keep approval ratings up even as the macro indicators suggest that all is going well. Two questions: 1. Does the persistently high rate of economic growth and persistently low social indicators in Peru suggest that social policies need to be revamped, i.e., better targeting of social funding?  2. Any serious talk in Peru of taxing more of the windfall profits of the large mining companies, perhaps to set up some sort of stabilization fund a la Chile?

  5. mturner   June 27, 2007 at 6:31 am

    Tom,  1) Your question is the essence of the whole article. In my humble opinion the answer is a resounding ‘yes’, but the technical problems of a near-total reorganization in Peru’s social care structure would make the task far more difficult than simply opening purses and throwing money at poorer regions. That said, a responsible government, and one with a ‘founding charter’ (for want of a better phrase) such as that of APRA, should not shy away from it. Garcia is aware of the problems. If he chooses to ignore them my theory will unfortunately gain more momentum. It’s a big subject that could be picked up on in a future blog (if not too boring).  2) No serious talk. The present deal was struck mid 2006. Although a seemingly large absolute amount, it is very affordable by the miners and respresents a mere drop in the ocean of their revenues/profits.

  6. Elver Galagra   June 28, 2007 at 11:03 am

    ¿Quién es este charlatán inculto que pretende dilucidar la realidad peruana desde el banco de suplentes con su retórica seudo-marxista? Por qué será que la gente siempre quiere la “Otra cara de la realidad” vista desde un punto de vista polarizado de alguien que se las quiere dar de interesante para jalar noticias y que todos hablen de cuán brillante es su punto de vista que nadie esta considerando?  Primero: si, es verdad que vemos que muchas de las utilidades están siendo repatriadas. Perú tiene una balanza comercial en superavit por US$8,000 Millones (casi 9% del PIB) y una balanza de la renta negativa en US$7,000 Millones aprox. Lo cual indica que la cuenta corriente seria salvajemente mas positiva si no se diera esta repatriación de utilidades, pero veamos el contexto: las exportaciones totales suman mas de US$22,000M, si están repatriando US$7,000M quedan unos US$14,000M que crean un “wealth effect”. El trickle down no puede venir si eres un simple empleado asalariado porque tu sueldo NO DEBE CAMBIAR, la verdad del caso es que si quieres hacerte más rico tienes que tener cuatro dedos de frente y crear tu propia empresa y exportar algún producto para recibir algo del “export bonanza” o ser aún más inteligente y poner tu empresa de servicios para ofrecer servicios a la gente que se esta metiendo el billetazo por exportar, ya que naturalmente la propensidad a consumir va a ser mayor por lo que puedes encontrar un nicho. La otra opción es invertir en la bolsa y comprar una (pequeña) parte a una de estas empresas que están tapándose de billete.  Segundo: este señor con pretensiones de intelectual no se da cuenta que el effecto de los precios de combustible tiene que seguir el del mercado internacional, de lo contrario -y ésta se la dedico al pretencioso antropomorfo con computadora- caes en el PEOR mal de todos y ese es el de los subsidios. No me creen? Pregúntenle a los egipcios lo lindo que son los subsidios y cuan buen efecto tienen en la cuentas fiscales (Egipto tiene un deficit de 8% del PIB).  Tercero, porque la esposa del susodicho le preguntó a dos infelices trabajadores sin dientes si están mejor o peor que hace 5 años y ellos le dicen “peosh pes patroncita” ya tenemos todo un estudio estadístico válido y competente. Que bien. Ahora si vemos las encuestas de encuestadoras que siguen metodos estasdísticos competentes y científicos (Apoyo, CPN, etc.), solo el 5% de la población dice que se encuentra peor. Hasta el taxista que se muere de hambre, ve construccián financiada por, -horror- los ricos, dice que es buena porque no solo crea empleo directo, sino una cadena indirecta que hasta lo beneficia a él, ya que más gente necesita transporte (las palabras de él, no mías).  Osea que si vamos a glorificar lo que dice una persona que vive marginada de la verdadera realidad del Perú, por favor hagámoslo con cuidado y verdaderamente evaluemos los fundamentos lógicos de lo que dice y lo que sugiere. Yo también voy a publicar mi artículo de cómo en EEUU soy un pordiosero y que me está comiendo vivo la inflación porque mi sueldo no sube a la par de la inflación que el FED miente y dice es un magro 3% cuando la realidad es que se acerca más al 6%, y cómo yo no veo la bonanza del stock market y más aún la del real estate que por el contrario me está cagando porque los precios de alquileres siguen subiendo y vivo en condiciones sub-humanas vetadas por las naciones unidas. Estimado señor inculto que vive en Arequipa, yo soy su inversa siendo un latinoamericano que vive oprimido por el costo de vida en NY, llorando porque la bonanza y el crecimiento estadounidense no me llega a mi mientras que todo (incluyendo el costo de mi transporte) sube. Por favor deje de hablar huevadas y vayase a la con… de su mad…

  7. mturner   June 28, 2007 at 1:59 pm

    I’ll do you a deal, Elver. You repeat your post without the gratuitous insults and racist remarks and i’ll happily reply.

  8. Farid Matuk   June 28, 2007 at 5:23 pm

    ***** Some issues about poverty in Peru *****  A) There is four traditional ways to measure poverty: 1) Related to assets ownership, human capital or access to publics services, 2) Related a certain amount of money know as “poverty line” as US$ 2 a day, 3) Related a certain caloric intake per day as 2,200 calories as minimum amount, 4) Related to minimum height / weight for population in a specific age group.  B) Related to 1) we have a in Peru a strong reduction in function of what set of indicators are taken, as example when we compare Census 1993 to Census 2005, for one set of indicators we have a reduction of 20 points and for other set of indicators we have a reduction of 11 points (for detailed info I may mail a table on this measurement)  C) Related to 2) we have a reduction of 6 points between 2001 and 2006 (Toledo’s period), but with US$ 2 per day criteria Peru’s will have a larger reduction on poverty, President Garcia has a target of 8 points in 5 years.  D) Related to 3) we have a reduction of only 3 points for Toledo’s period but in my knowledge only Peru makes this measurement in all Latin America with 5,000 household interviews per year, so no comparisons are possible.  E) Related to 4) we have a reduction of only 1 point for Toledo’s period, similar amount of reduction was obtain between 1996 and 2000, but President Garcia has a target of 5 points in 5 years. In my knowledge, Peru is only Third World country that measures this in annual basis.  In short, poverty could be measured in different ways, from soft to hard, and each user has freedom to choose. Millennium Development Goals has these four criteria in their first goal, plus a fifth for inequality.

  9. mark turner   July 5, 2007 at 10:36 pm  Peru Central Bank Unexpectedly Raises Benchmark Rate (Update1)   By Bill Faries  July 5 (Bloomberg) — Peru’s central bank unexpectedly raised its benchmark interest rate to a six-year high as strong economic growth fueled by domestic demand and metal exports threatens quickening inflation.   Policy makers in Lima raised the country’s reference rate to 4.75 percent from 4.5 percent today. The bank described the move as “preventative,” citing “robust growth in domestic demand.” It was the first change in the reference rate, an average of lending and borrowing rates, since May 2006. All 11 economists in a Bloomberg survey predicted that rates would remain unchanged.   “The central bank has been sounding some warnings about the strength of domestic demand threatening inflation,” said Neil Dougall, an emerging market economist with Dresdner Kleinwort Wasserstein in London. Before the announcement, Dougall said a rate increase would be a “major surprise.”   Consumer prices in Peru rose 0.47 percent in June from May, and 0.49 percent in May from April, the two fastest increases since April 2006. That surge threatens to push annual inflation beyond the bank’s target range of 1 percent to 3 percent.   “The directors will continue to be vigilant in watching the evolution of inflation,” the bank said in a statement released on its Web site. “This adjustment of the reference rate doesn’t signify a series of increases,” the statement said.   Peru’s economy expanded 7.3 percent in April from the same period a year earlier, bolstered by demand for exports such as silver, copper and zinc. Peru is the world’s third-largest copper and zinc producer, No. 1 in silver and fifth in gold. The country’s main stock index is up more than 75 percent this year and almost 170 percent over the past year.   The Peruvian sol closed largely unchanged at 3.1655 soles per dollar.   To contact the reporter on this story: Bill Faries in Lima at .   Last Updated: July 5, 2007 20:43 EDT

  10. Guest   July 16, 2007 at 3:09 pm


  11. Guest 123   July 16, 2007 at 3:18 pm

    Mark,  I agree with a couple of points you make, specially the one that suggests (states) that a rising inflation is beginning to be a problem– one that INEI and BCR are massaging big time. Peru’s implicit price deflator shows an accumulated 12% for the past 24 months (taking into account the sol’s appreciation). An easy numerical exercise shows that if the favorable commodities’ terms of trade were to explain the whole discrepancy (with respect to INEI’s CPI) the mining sector weight in Peru’s GDP would have to be more than three time its current weight. I don’t see that. Maybe, like the Argentinians, they are beginning (once more) to loose sight of the North Star…