Peru will host, this coming weekend, the annual summit of heads of state of the Asia Pacific Economic Cooperation (APEC), China’s President Hu Jintao included. The APEC forum was established in 1989 to enhance economic growth in the region and to strengthen links between both shores of Pacific .APEC has 21 member countries which account for approximately 41% of the world’s population ( 2.7 billion ) , 55% of world GDP, and about 49% of world trade. The timing of the summit could not be better for Peru. The reason is that it offers the ideal silver-lining to exhibit, to participating leaders and businessmen, the resilience and strength of Peru’s economy in the midst of the global crisis. The marketing pitch: Peru as a good place to invest even in bad times.
Following my article “Peru Unscathed”, posted here a month ago, some questioned my optimism on the grounds that a local financial crash was an accident waiting to happen .This is the reason why, since then, I have monitored regularly the financial headlines in Lima’s digital media. Other than accounts of dropping stock prices and pronouncements on the readiness to increase public spending to counteract the international downswing, one could hardly sense the scale of the global crisis. No major local bank, corporation , retailer , or insurance company has gone bust .The exchange rate of the sol – Peru’s currency – remains stable at 3.1 to the US$ and the inter-bank rate at 6.5% . Expectations for continued economic growth remain intact .And I am told that so far ten investment banks have already presented their bids for the placement of a US$ 600 million sovereign bond in the international capital market. The initiative to float the bond was originally announced by Minister of Finance Valdivieso in Washington DC at the time of the IMF –World Bank meetings last October.
Given that Peru is a commodity exporter, one would have expected a depreciation of the currency drifted by the wave of devaluations of other commodity exporters. The clue to understanding the puzzle is the central bank’s phenomenal international reserve position .It exceeds both total deposits of banks – in sol and in dollars – and total public debt – internal and external .This means that the central bank has full command on the path of the dollar value of the currency. In other words, it can afford to use the exchange rate as an instrument of economic policy, rather than as an imposition of the market.
It goes without saying that a protracted period of adverse “flows” of lower exports and tax revenues would overtime undermine the strength of “stocks”: i.e. of the public sector’s balance sheet. After all, only diamonds are for eternity! .But I am convinced that Peru will be able to muddle reasonably well through the international recession. My forecast is that – as long as the international recession does not stretch beyond 2010 – macroeconomic stability will hold and GDP will grow at 5% in both 2009 and 2010. Market consensus is that international recovery will rekindle in late 2009. The growth outlook for Latin American countries, as forecasted by the IMF and two investment banks, is provided in the table below. My forecast for Peru’s growth is consistent with those in the table.
A fair share of the burden to sustain real aggregate demand growth during the next two years will fall on infrastructure investments and public social spending. I estimate that public outlays will have to grow at no less than 12% in real terms. I am assuming that these countercyclical public monies will be pumped wisely into sound projects rather than wasted on run-of the mill opportunistic pet projects .The team at the Ministry of Economy – with ex-IMFer and veteran- of –many –wars Luis Valdivieso at the helm – backs my expectation.
Since the posting of my article “Peru Unscathed”, a batch of positive reviews provides reassurance that my original optimism was not only warranted but also well founded. Below is the roll call.
- Merrill Lynch .In its Emerging EMEA Macro Weekly of November 7th, Merrill ranks Peru among the ten countries with lowest country risk in the world. See table above. The report goes as far as including Peru along with the BRICs among the countries least vulnerable to the international meltdown. Further, Merrill sets a recommendation for investors: “overweight” Peru’s debt bonds. This timely “buy” advice bodes well for Peru’s new bond coming to the market .Only two other sovereign bonds are placed at overweight. Merrill projects growth at 5.8% in 2009.
2. Fitch Ratings. On November 10th, Fitch confirmed the investment grade rating of Peru and maintained its outlook at stable. The outlook of Brazil was also kept unchanged but those of Mexico and Chile were reduced a notch .Fitch was the first rating agency to bring Peru to investment grade in 2008. Its foresight contrasts with Moody’s hindsight which to date continues to be to only one of the four big agencies to maintain Peru at a notch below investment grade.
3. UBS. On November 3rd, a report by the Global Economics Research Department of UBS ranked financial risk for 45 emerging countries .The rank goes from least risk ( Singapore ) to highest risk ( Latvia ) . Peru comes out as the least risk in Latin America and the fifth least of the whole sample of 45 countries .See the Chart below.
4 .Goldman Sachs .In a report of November 13th , Goldman confirms that the exchange rate of the “sol” will stay at 3.1 to the US$ for the next 12 months .Also , Goldman projects GDP growth of Peru for 2009 at 5.3%.
Peru is a real success story of free markets and fiscal discipline. Free trade has delivered a nine- fold increase in exports in les than two decades. Following progressive unilateral tariff reduction under the WTO, Peru recently signed a free trade agreement with the US and is now negotiating agreements with the European Union and China. Also, Peru is a textbook case of successful economic turnaround.
The two decades of sustained and broadly-based economic reform have attracted rising interest by local and international investor’s .In this weekend’s APEC summit, the Peruvian authorities hold deeds to show that Peru’s currency, “el sol” – that translates into English as “the sun” – is indeed a “rising sun”. The current international crisis has revealed Peru’s best investments: the first is the savings of one-quarter of GDP as international reserves; and the second, the payroll of the central bank.
Hats up to Governor Velarde and his team.