Celtic Tiger and the Andean Lhama: Peru’s commodity-based boom hits the accelerator
By Naomi Mapstone in Lima
Published: November 19 2010 22:29 | Last updated: November 19 2010 22:29
Someone in Peru paid $265,000 for a Maserati this week. What was most surprising about the purchase was not so much the price, given Peru’s continuing economic boom, but that the new owner plans to drive the Italian sports car around Lima.
A supercharged run of economic growth has put more cars than ever on the streets of Peru’s capital, making its daily rat-race of informal taxis and ageing minivans all the more perilous.
EDITOR’S CHOICE
beyondbrics: Latin America - Aug-31Special report: Peru - Sep-21Former Peru president to run for top job again - Nov-11Peru sells long-dated bonds in $2.5bn deal - Nov-11Peruvian president denies slap accusation - Oct-15FT interview transcript: Alan García - Sep-21The country’s $140bn economy may be only three-quarters the size of recession-racked Ireland’s, but if it carries on growing at September’s 10.4 per cent annualised rate, it will match Ireland’s in just four years.
“There is no overheating,” Ismael Benavides, Peru’s finance minister, said this week when he announced the latest growth figures, which make the country one of the world’s fastest expanding. “Peru is growing in a balanced way and there’s no indication that that will change.”
Like Brazil, its far larger eastern neighbour, investment-grade Peru has benefited from the past decade’s commodity boom, which has boosted the prices of its mineral exports, principally silver, copper and gold.
Unlike Brazil, however, the main driver of growth has not been consumption, although that is rising at about 9 per cent a year, but investment, which expanded at 23 per cent in the first half of the year. Mining alone has attracted $41bn in investment over the next decade. As for public finances, unlike Ireland, Peru has a negligible fiscal deficit. Inflation, meanwhile, is a manageable 2.5 per cent a year.
“A supportive external environment, favourable terms of trade and a rapid increase in private investment . . . continue to support [Peru’s] medium-term growth prospects,” says Patrick Esteruelas, vice-president of sovereign risk analysis at Moody’s.
Still, the recent shake-out of commodity markets and worries about Chinese monetary tightening inevitably raise questions about how long Peru’s breakneck commodity-based expansion can last.
“Peru is one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers,” Michael Porter, Harvard professor and management guru, told a recent meeting of Peruvian business leaders.
“However, a lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility.”
Nonetheless, Peruvian officials remain optimistic. A flood of free trade deals has opened up Asian, European and American markets for Peru’s growing agricultural and maritime exports, including asparagus, avocado, coffee and fishmeal. Gold, which makes up a quarter of exports, also serves as a natural hedge in the event of another global financial disaster.
Renzo Rossini, a central bank director, estimates the economy will grow by 8.7 per cent this year and 6.5 per cent in 2011.
Still, in spite of a capitalist revolution fomented by two decades of free market reforms that has eroded old caste structures and turned thousands of small-scale farmers and businessmen into global exporters, some local habits die hard.
For one, larger family-owned companies are proving reluctant to list on the local stock market to fund expansion, in spite of abundant international capital that has boosted the trade-weighted local nuevo sol currency by 7.5 per cent since the start of 2008.
“They do not want to [meet listing requirements] . . . they still want to have their sons as CFOs,” says Pablo Secada, chief economist at the Peruvian Institute of Economics, a Lima-based think tank.
Peru’s old and inefficient state bureaucracy has also stymied efforts to transfer resources to the country’s poorer mountain and Amazonian regions from the faster growing narrow coastal strip, where the bulk of Peru’s 29m people live.
“There is a political agenda that needs to be addressed, especially in relation to the people in southern and Amazonian parts of Peru,” says Mr Secada. “Their income has been going up – between 2003 and 2009 the lowest quintile of income went up 44 per cent and in the coming year 54 per cent in real terms – but they are still very poor.”
Despite sizzling economic growth, then, that new Maserati owner may still look a little out of place the next time he or she gets stuck at the lights in Lima.
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