NS4540 Winter Term 2018 Peru’s Economy

1. NS4540 Winter Term 2018Peru’s Economy

2. Overview I • Peru has a turbulent macroeconomic and political history • In the late 1980s, Peru suffered a deep economic crisis and experienced hyperinflation • Also there was a guerrilla war between the government and the Maoist Shining Path in the 1980s and 1990s • However in the past decade Peru has become one of the fastest growing economies in Latin America • Both investment and consumption have grown rapidly • Driven by strong commodity exports and • Appropriate economic policies. • Despite a recent slump in GDP growth, investment in new mining projects is likely to continue supporting growth in the coming years

3. Overview II • However some mining projects remain highly controversial and face public opposition • Partly related to Peru’s high level of (income) inequality which has both geographic and ethnic aspects • The number of people that have an income below the national poverty line remains substantial in spite of rapid improvement realized in recent years. • Macroeconomic economic position relatively strong • Public debt is very low and • Fiscal deficit is manageable • Balance of payments risk is limited despite large current account deficit • Deficit filled almost fully by FDI inflows

4. Outlook III • Country has a large stock of foreign exchange reserves • Peru primarily exports commodities wich makes country vulnerable to exteral price shocks • More diversification of the economy is needed to allow economic and social developemt of the country to continue in long term

5. Growth Trends

6. Governance Trends

7. Trends in Economic Freedom

8. Trends in Trade Freedom

9. Recent Developments III • Economic growth continues to slow down • Economy of Peru seems struggling to get back on track with sustaining GDP growth levels • Country had been growing in excess of 5% until 2014 • Drop in growth rate has been caused by • Declining commodity prices • Disappointing production levels of the main export commodities (copper and gold) due to production disruptions • Manufacturing and construction sectors continued to be depressed • Fishing industry expected to be adversely impacted by El Nino effects and • Weaker private investment

10. Recent Developments IV • Government has responded to lower growth in an unfavorable external environment by • Introducing (April 2015) a new stimulus package equal to 0.8% of GDP • Hopes to boost consumer expenditure and stimulate the economy from within. • National government continues increasing public spending to finance major infrastructure projects • Central Bank of Peru has keep interest rates low and lowered reserve requirements to make more money available for investment

11. Possible Problems I • Lower revenues from commodity exports and USD strength are weighing heavily on the Peruvian currency • Depreciating last several years • Problem because of the still high dollarization of the economy • At the end of July 2015 39% of credit was USD denominated • An improvement from 70% in 2005 • As dollarization is also present on the deposit side at 43% at end of 2014 does not pose a direct risk to banks • However currency mismatches with debtors could lead to higher delinquency rates

12. Possible Problems II

13. Possible Problems III

14. Challenges Ahead • Center-left party whose term ended in mid-2016 was very unpopular • Reforms have not met the population's expectations • The current center-right party is dogged with corruption charges – Brazil construction company • Guerrillas still active in mountains with their coca production • With glaciers melting, agriculture coming under water stress. • Business climate improving due to reduction in bureaucratic procedures and the upswing in privatization that the government is pursuing • Peru will continue to strengthen its links with members of the Pacific Alliance while trying to extend its relationships in Asia beyond China