In the late eighties and early nineties , I traveled often to Peru to analyze the macroeconomic situation of the country. Most Peruvians I interacted with were negative about the prospects of the country .After decades of economic decline and years of rising terrorism, they had very good reasons to be negative .At the time, “a pessimist was indeed a well informed optimist”. The most eloquent expression of Peru’s decadence was Mario Vargas Llosa‘s fatalist quote: “when did Peru get screwed up?” .These were the words of a central character in his 1969 masterpiece “Conversations in the Cathedral.” The mood has improved markedly since the nineties – along with successful economic reform – but at any hint of crisis, local or international, pessimism looms again high in the horizon.
In fact, there is very little to feel optimistic about nowadays anywhere .The shock-waves of the meltdown at the epicenter of the world’s finances, alas, have touched all countries and all pockets. Although we may have already seen the worst in financial markets, the effects on falling production and unemployment lay ahead. For 2009, the IMF now projects recession in the US, the European Union, and Japan and drastic deceleration in developing countries. For the world economy as a whole, the IMF sets growth at 3% but with risks the downside. Investment banks forecast world growth at between 1% and 2 %.
However, not every country has fared equally .Some have shown resilience and others vulnerability. Peru ranks high among the former .The stability of the exchange and interest rates has not required much central bank intervention and banks and corporates have stayed afloat. The yields on Peruvian bonds bought and sold by international investors –a gauge of country risk – have stayed close those of Mexico and Brazil, and at times even below ; by and large yields have kept below 10 %. Not bad at all in markets where heightened apprehension and risk-aversion are kings.
Furthermore , international agencies forecast that Peru will continue to grow at a fast pace in 2009 .As can be seen in the table below, the IMF recently increased the growth estimate for Peru in 2009 from 6% in April to 7% in October . Last week, Morgan Stanley (MS) published a less rosy picture, and in my view a more realistic one. MS estimates that Latin America would grow at half the rate estimated by the IMF: 1.5% versus 3.1 %. In what the IMF and MS agree is that in 2009, Peru will be the fastest growing economy in the region. In MS’s calculations, Peru would grow at 4%; still more than double the rate of growth of any of the other large economies of the region.
Several reasons weigh heavily in these projections. First, Peru’s resilience to the current meltdown. Second, Peru’s track record of economic reform. Third, the strong pipeline of FDI projects, totaling US$ 36 billion for 2009 -2011 – many of which under execution. And forth, budget slack for countercyclical policies in the form of supplemental public investment and social expenditures. That slack owes to the sterilization of the commodity boom –Peru exports inter alia minerals – by the Central Bank and the Peruvian Treasury from 2005 to 2008 . In that period, the budget was brought into a surplus of 3% of GDP per year and the Central Bank accumulated a flow of US$ 16 billion (or 13% of GDP) of international reserves via open market purchases.
During the last two months, nevertheless, headline news and commentary in Lima have focused on two “negatives”: the crash of the Peruvian stock exchange and the related losses of the private administrators of pension funds (or AFPs as the acronym in Spanish goes ) .AFPs are allowed to invest about one third of total assets in equities, and these are now value impaired. As of late October, the loss had reached US$ 3.5 billion in a consolidated balance sheet of US$21 billion .Undoubtedly, if stock prices were not to recover in the coming months or couple of years, the loss could cause hardship for future pensioners and/or strain to the government purse. History tells us, however, that stocks eventually bounce back. The rebound of Peruvian stocks during the last week has been particularly strong: about 30%.
In assessing Peru’s performance on these two “negatives”, one has to gauge them against relevant international benchmarks . In September, the largest insurance and pension company in the world, AIG, collapsed and the US government had to come up with money to the rescue. Likewise, the Argentine authorities jumped to nationalize pension companies so as to forestall default on its sovereign bonds. In parallel, stock markets have fallen everywhere .And the list of external calamities goes on and on. In comparative terms, Peru’s downside has been relatively limited.
Press and pundits in Lima – with few exceptions here and there – have lost a once- in- a -lifetime opportunity: cheer up the relative strength of the Peruvian economy in the midst of unprecedented global weakness.