Living in Peru : your everyday companion

It appears that the world economy is bottoming out. Stock markets are recovering some of the ground they have lost in the past months, with the Dow Jones Industrial average almost reaching the 9,500 point mark. The last time it was at that level was the first week of November 2008.

The return of stronger commodities, especially with the mining group rallying, in particular gold passing the $1,000 per ounce mark is helping most Latin American countries rebound and begin showing signs of recovery, in particular Peru. For example, Peru improved its ranking in the Doing Business 2010 Report from #65 in the 2009 edition to #56 in the 2010 edition. The iShares MSCI All Peru Capped Index Fund traded in the New York Stock Exchange reached its highest point yesterday at 29.57 since its launch in June this year. Things are looking up for the Andean country.   Consequently, Peru has finally shown some negative affects to the global slowdown in the second quarter, but they still stand on top. 

It has been mentioned that the Peruvian economy is some kind of economic miracle compared to the dismal figures around the globe. The economic miracle maybe short winded, if you compare recent forecasts to be around the 1% range for 2009 with last year’s GDP growth being 10%. I am not trying to be pessimistic, but there is a substantial difference from 2008 and the expected performance for 2009.

Regardless of the second quarter contraction of 1.1%, Peru’s economy has passed market expectations of a 1.2% contraction, compared to a 1.8% expansion in the first quarter.  Consumption slowed to 2.6% in the second quarter compared to 4.2% in the first quarter, while both exports and imports contracted.

On the other hand, investments turned sour in the second quarter with a contraction of 16.2% compared to a 3.9% expansion in the first. Investments are still waiting for the government stimulus package to take effect, something that has been delayed for bureaucratic reasons. In retrospect, Peru will benefit from that delay as soon as public spending really kicks in. 

On a positive note, according to the Peruvian Central Bank, consumer confidence rose above the 50% positive mark for the third consecutive month. More good news has come from the continuous decrease in inflation figures, which has finally dropped slightly below the Central Bank’s target range of 2%.

Moreover, the tide has turned for the current account balance. In the second quarter the current account balance incurred a surplus of $36 million, compared to a $1.6 billion deficit in the same quarter last year and a $410 million deficit in the first quarter.  

From a government perspective, President Garcia will be pleased to know that the tax authority, SUNAT, is launching a debt collection campaign this week, beginning with 3,000 citizens, of whom 600 are public functionaries, and focusing on the top 10 main reasons of unpaid business debts in the country. This is a clear sign of a healthy source of income for the central government amid a very high percentage of informality and large percentage of the population still not incorporated in the banking system.

Recent statistics have demonstrated that 64% of Peruvians still prefer to keep their savings ‘under the mattress.’ At first glance, this figure may seem very alarming; however it provides a very interesting banking potential among the population and inevitable growth for the banking sector.  

The slight contraction in the second quarter appeared to put some doubt in the Peruvian economic miracle; however monetary authorities and government officials believe that economic growth has hit bottom in the second quarter and are convinced, with some clear signs stated above, that things will turn around in the second half of the year.

The government expects the economy to expand 2.6% this year and 5% in the next, especially with the rise of metal prices and increase in public spending. However, recovery from the worst financial crisis since the Great Depression (or even worse than that) will take more time to pick up than most expect. Not withstanding, Peru has shown signs of having a delayed effect from the global economy, which might imply a slower recovery than previously expected or what government officially estimate, but I am sure Peru will still lead Latin America.