Country Report Peru
The popularity of Peru’s President Ollanta Humala has fallen strongly in the past year, though he remains more popular than his predecessors three years into their presidency. Meanwhile, Congress has recently implemented an important fiscal reform.
Strenghts (+) and weaknesses (-)
(+) Sound fiscal position and economic management
Public debt is low and the government has a fiscal surplus. Both are partially thanks to the establishment of the Fiscal Responsibility and Transparency Law. A recent fiscal reform will help to further underpin Peru’s good macroeconomic management.
(+) High structural growth rate in the medium term
The economy has grown rapidly and is likely to continue to do so, as investment is expected to remain high.
(-) Relatively high level of poverty and inequality
Despite a strong decline in the number of poor in recent years. In 2012, 25.8% of the population lived below the national poverty line. Partially as a result, social tensions are high.
(-) Partially dollarized economy
The financial sector is partially dollarized, which makes the economy vulnerable to exchange rate shocks. Furthermore, a substantial part of government in denominated in USD.
1. Popularity of Humala falls strongly
The popularity of President Humala has sunk this year. His approval rating fell from 54% in February to 26% in October. Humala’s popularity has been hit by the perception among voters that he has not delivered on his campaign promises. Furthermore, his popularity also suffered from concerns about corruption among the political class, which has become an increasingly pressing concern for voters. Voters are also worried about security issues. However, it is not unusual for a Peruvian president to become rather unpopular in the course of his presidency. In fact, Humala’s predecessors Alejandro Toledo (2001-2006) and Alan García (2006-11) saw their approval rating even fall to respectively 14% and 19% in their third year in office. Furthermore, García and Toledo, who are now important opposition politicians, are nowadays again losing popularity because they are facing congressional investigations into their affairs. Besides, the approval rating of Humala’s wife, Nadine Heredia, who fulfills a prominent role in public affairs, has increased from 37% in September to 40% in October. Although some left-leaning factions have withdrawn their support to Humala’s coalition, the government has been able to make ad hoc coalitions when necessary, as is usual in Peru.
2. Fiscal responsibility reform approved
In October, Peru’s Congress approved an important fiscal reform that should help to increase fiscal responsibility and transparency. From now on, the Ministry of Finance will look at historical commodity prices and the business cycle to project a structural fiscal result for three years in advance. This fiscal result will be used to set a cap on non-financial national government spending at the end of the prior fiscal year. Debt and spending of subnational governments will also be capped. A fiscal rule was drafted in 1994 and implemented in 1999, but between 2000 and 2012 changes and waivers had somewhat weakened this rule. Nevertheless, Peru’s macroeconomic policies have been relatively good, with the country posting fiscal surpluses and further lowering its relatively small public debt in recent years. The new fiscal reform should help to underpin macroeconomic stability.
3. Growth slowed down in 13H1, but may now recover
In the first part of 2013, economic growth decelerated. In the first and second quarter, growth fell to respectively 4.5% and 5.6% year-on-year (yoy), after the economy had grown by 6.9% in 2011 and 6.3% in 2012 (see figure 1). This was due to a number of factors. First, business sentiment was hit by falling metal prices. Second, business confidence was also affected by the announcement by the government that it intended to buy a stake in the Peruvian assets of Spanish oil company Repsol. Later on, following a wave of criticism, the government backed down on this plan. According to surveys by the Banco Central de Reserva del Perú (the Central Bank) and Apoyo Consultoria, a leading polling firm, business confidence has started to recover in recent months. According to the Central Bank, expectations of the performance of the economy reached 53.2 (values above 50 indicate a positive sentiment) in September, after they had fallen to 47.6 in August. As business sentiment seems to be improving, investment is likely to strengthen. Furthermore, large scale infrastructure projects with a total size of USD 15bn will start at the end of this year, which should also boost both public and private investment. Looking further ahead, Peru’s growth projections remain good. Mining exports are expected to increase in the coming years as new mining projects will come into production. However, due to its dependence on mining exports the country remains vulnerable to a strong fall of commodity prices.
Peru has a turbulent macroeconomic and political history. In the late 1980s, Peru suffered a deep economic crisis and suffered from hyperinflation. Furthermore, there was a guerrilla war between the government and the Maoist Shining Path in the 1980s and 1990s. In recent years, Peru has become one of the fastest growing economies in Latin America. Both investment and consumption have grown rapidly and strong investment in new metals mining projects is likely to continue to support growth in the years ahead. However, some mining projects remain highly controversial and face public opposition. This is partially related to Peru’s high level of (income) inequality, which has both a geographical and an ethnic character. The number of people that have an income below the national poverty line remains substantial, in spite of a rapid improvement in recent years. The macroeconomic position of Peru is relatively strong. Public debt is very low and the government posts a fiscal surplus, partially thanks to the Fiscal Responsibility and Transparency Law, which sets a deficit target of 1% of GDP and put constraints on increases of real expenditure and debt for the non-financial public sector. Balance of payments risk is limited in spite of a sizeable current account deficit, as this deficit is more than covered by FDI inflows. The country has a large stock of foreign reserves. However, the level of dollarization of the economy remains substantial (44% of bank deposits in 2012), even as it has declined in recent years. Also, Peru primarily exports primary products. This makes the economy vulnerable to commodity price shocks. More diversification of the economy is needed to allow the economic and social development of the country to continue.