Living in Peru : your everyday companion

By Luis Davelouis/Christian Navarro
For El Comercio

Felipe Ortiz de Zevallos’ (FOZ) opinions about the future and the situations that could be triggered by the past and actual happenings are probably the most respected in Peru. We discussed with him the international crisis, its impact on Peru and how stable our economic growth model is.

It is said that the international crisis has hit rock bottom and that what is left to do it to climb out of the pit. What do you think?
I think that is right. The worst is over but I also think that the recovery will be slow and fragmented; there will be continuous advances and setbacks that will make for a changing and uncertain atmosphere. There will be much more volatility and it will be a lot harder to make predictions. 

Isn’t it hasty to say that the crisis has hit bottom if its causes have not been yet tackled?
The necessary measures are being taken to correct those problems but it seems that an agreement cannot be reached. In Europe, they want to redesign the world financial system’s regulations and make them tougher, while in the USA, it is not very clear. Some things are going to change, like the leverage on the patrimony that made banks go bankrupt and the almost absolute trust that used to be placed in mathematical models that predicted market prices and tendencies. Additionally, it s very difficult to understand what may happen to consumption in the USA in the next months or years.

Is the impact on Peru going to be what we have already seen or is there more to come?
I think it is. I think that Peru, amongst the small group of countries that will grow, is the one that will grow the most. But there is something else; since this crisis has affected mainly the property sector and the patrimony, it has been felt the most in the socioeconomic sectors A and B.

Since we are a country that grows because of its exports, we depend on external consumption and other countries’ growth. How long is it going to take the USA to overcome the crisis?
I think that the economic growth in the USA will be very low and will stay that way for the next 3 or 4 years.

Shouldn’t we try to change our export model and try to concentrate in developing stronger products with a greater added value?
Efforts are being made to diversify the export offer. For example, when I was in Washington as an ambassador, I tried to find a way to import Peruvian avocados, which we haven’t been able to do yet. The agro-export sector is looking to diversify its offer and, despite how primary it may sound, it isn’t.

Shouldn’t we change that to avoid depending too much on selling minerals?
We cannot waste the fact that China’s growth is boosting the prices of the minerals that we sell. Also, if I’m not mistaken, Peru is the sixth or seventh country with the most mineral diversity in the world, and that benefits us.

China is emerging like the new leader of global economy…
We still don’t know how important the USA’s economy will be in the world in 20 years, but for now, it is still an important player because, amongst other things, its GDP per capita is much greater than China’s. We cannot be certain that China will continue to grow at its current rate because its economy is not very transparent. For example, there is not a lot of available information about the leverage level of its financial system. But as long as it keeps growing, we have to take advantage of it and redirect some of our exports that are currently going to Europe and the USA.  

Some exporters say that the FTA with USA has not been of much help, and now we are signing one with China…
The old regime was a benefit that the USA gave to countries that they considered “friends;” it was renewed each year and could be withdrawn at any given time. An agreement like the FTA is different. It represents stability for investors and provides us with a network of security and certainty supported by a contract between countries.

We mention this because Colombia and Ecuador do not have a FTA and their contract was renewed with temporary benefits…
Sure, but they are temporary. What we have is something that is permanent and that attracts investors because it is less uncertain.

And with China? Would that FTA be convenient? Is it not going to destroy our textile industry, for example?
As I said, the FTA must be understood beyond its commercial nature. It has to do with its capacity to generate bonds and stability and to attract investment from other countries that do not have those benefits. Regarding the textile sector, I am not a specialist, but that can also be controlled with a commercial agreement. It is all about creating stability.

Speaking of stability, what has to happen so that we do not find ourselves in front of the disjunctive of continuing with the economic model or going back and choosing the lesser evil every five years? When will this stop?
When one out of every two Peruvians stops being poor. When poverty is reduced to less than 30%, it will not be that big of a problem. That is the problem right now; a lot of poor people are easily persuaded by propositions that have no foundation. That is where our instability lays.

Is that why we signed the FTS? To reach stability, little by little…
Yes.

When will we reach that stability?
I think that in four or five years we will reach that place where there is no danger of falling back. I think that, despite who wins the next elections, there is a consensus in the economy. Any candidate, except for Humala, maybe, will follow the basic line of our actual economy.

Do you think we are buying time with social programs until the critical point of inflection arrives?
I think we are, in some way, but it depends on many things, from the central government to the regional and local ones.

With problems with the capacity of executive positions, there is no one who is qualified…
It is very complicated because in Peru there are over 1,800 municipalities and the decentralization process, which is very important, has suffered greatly. There is a lot of distrust in our country, but we finally see that the second generation of regional presidents was better than the first one and we hope that the third one is better than the one that steps down this 2010. It is something that is gradually done.

Isn’t it a bit slow and inefficient? Can’t something different be done?
This is a complex social and political environment we’re dealing with and yes, it’s a gradual learning process but we’re moving forward.

The Government and the Exchange Rate

In your opinion, what was it that the government did wrong?
I think the president has been a bit timorous when facing some problems like the State reform, although, I do understand that there have also been other kinds of pressure that are hard to avoid. I also understand that the public manager’s scheme is an effort in that sense but we should have looked from the beginning to modernize the State and to build a dedicated technocracy with a conscience of the State apparatus as a whole.

There is no short term exit, then.
The solution for the country’s structural problems will not come from a big light in the sky, but from thousands of small candles.

How is that progress monitored?
Unfortunately, we can only see some indicators that we are moving in the right direction.

To finish, what do you think will happen to the exchange rate?
Well, on one hand, the USA finds it convenient to have a weak dollar, so that its exports will be more competitive, that is, with a commercial interest. On the other hand, it could use a strong dollar to keep financing itself like it has been doing for years. I think they will let their currency lose some more strength still, they won’t say, but I think it’s what they will do. In Peru, I think the exchange rate will fluctuate around the current numbers until the next presidential elections are close and then, the dollar will rise in relation to the sol. That happens all the time.

Translated by Diana Schwalb