Peru's Economy 4th Quarter 2009

Peru: Can Private Sector Growth Be Achieved Without Relying on Fiscal Stimulus and Monetary Easing? – Taking the Fat Out
Pros:
• Stable, flexible monetary policy
Cons:
• Over reliance on fiscal stimuli and near zero real interest rates
• External Trade strongly dependent on world mineral demand
• Bank lending outside of larger corporate credits has not manifested itself
• Electric power generation is flat
• Stagnating manufacturing sector
• Delays in government sponsored infrastructure investment hampering growth prospects
Peru’s economy is showing signs of a tepid, uneven recovery. Economic activity (January – September) is being lead by a combination of government stimulus expenditures and monetary easing. Government related expenditures are up 16.8% in the 3rd Quarter (y-o-y) followed by Financial Sector gains of 10.89%, according to recent INEI data (October 2009). The Central Bank has cut reference interest rates from 6.5% at the beginning of the year to the present level of 1.25%, a 525 basis points change. The Board of the Central Bank has held the current reference rate since its August 6th meeting. Bank Reserve Requirements have been loosened Annualized inflation has declined sharply from 6.53% (January 2009) to 0.71% (October 2009). The current inflation rate is well below the 2% target (1% flex either side) set by the Central Bank in March (Inflation Report 2009). Despite these observations Peru’s annualized 3rd Quarter GDP fell a further 0.4 compared to 3rd Quarter 2008. The 3rd Quarter 2009 follows a lackluster 2nd Quarter annualized fall of 1.1%. The Central Bank (Weekly Report #47 – November 27 209) reported that 3rd Quarter domestic demand fell an annualized 4.8% following a 2nd Quarter fall of 5.1%. Public consumption continued to be the strongest 3rd Quarter category performer, rising to 9.8% following a similar 2nd Quarter annualized performance of 7.8%. Public consumption’s contribution to GDP is weighted (2008) only 3.8%. Private sector consumption continued to be a pale ghost of its former self rising only an annualized 1.5% during the 3rd Quarter. In 2008 private consumption along with export trade were the two engines of Peru’s growth, respectively growing 5.9% and 1.6%.

Looking beyond the horizon and into the first two quarters of 2010, Peru’s economy presents a mixed bag. Peru’s next general elections are scheduled for April 2011. The anticipated political jockeying may restrict the effectiveness of fiscal policy measures as political parties dilute targeted expenditures. Looking at the current high rate of government participation in the economy, one can likely extrapolate.
Proinversion Peru, the government’s infrastructure and investment promotion agency, is tasked with overseeing privatizations and concession awards for transportation, ports, airports, communications, sanitation, and eight to ten other public-private categories (www.provinversion.gob.pe). In 2009, over forty projects have been identified for a public-private partnership. As of October 1, fifteen projects have been awarded with definitive investment contributions from the government and the private sector. The largest among these ($650MM) has been a concession to provide hydro-electric power plants and distribute electricity at fixed tariffs.
The construction, generation and delivery of electricity are critical to Peru’s private sector development. The latest report (October 2009) from the Department of Energy and Mines (Estadistica_Octubre-2009_Actualizando- Peru.pdf) indicate that production levels of 2783 Gwh just barely cleared the required 2307Gwh sold to the private sector. Highest daily demand figure was 4088 Mwh which is virtually unchanged from the previous year October 2008 ( 0.01%). Strikingly, the Peruvian economy including its manufacturing sector was in a better condition than current figures (down 9.07% y-o-y)

Peru’s exports are concentrated in its mineral sector. Fortunately world prices for gold, silver, copper, zinc and lead have been rising. What is not widely watched is that the value and volume of non-commodity related exports have dropped. According to ENAPU , export related container traffic measured in TEUs (Twenty-foot Equivalent Units) is down nearly 16% out of Peru’s principal port of Callao. In addition, import related traffic is down nearly 13% using the same measurement.
Since the beginning of 2009, Peru’s equity market (Lima General Index, heavily weighted in favor of metals and mining firms) has risen 104.6%; EMBIG risk factor has narrowed from 215 basis points to 183 basis points (November 27th) and lastly the sol has appreciated to PEN 2.88 ( PEN 3.13 at the beginning of the year). One can only conclude that the market and Peru’s macro-economics have reached a stage of disconnect.



John T. Sullivan

December 6, 2009