LIMA, (Reuters) – Less than a year ago, Peruvian elites smugly began calling their country a “Latin tiger” and predicted that it had entered a magical phase of constant economic growth that would outshine the rest of Latin America.
A leading minerals exporter, it grew every year for the past decade and capped off the heady days of 2008 with a 10 percent surge as China bid up global metals prices.
But this year, Peru will be lucky to expand at all. The slowdown has been sharper than forecast and exposed the country’s overreliance on raw materials exports, with minerals making up 60 percent of all overseas sales.
Unlike “Asian tigers” such as South Korea and Taiwan, which boomed as they became manufacturers of everything from cars to microchips between the 1960s and 1990s, Peru’s economy still largely depends on the cyclical whims of commodities prices and exports have plunged 30 percent since December.
Most economists say Peru will grow less than 1.0 percent this year, and the government appears to be backing away from its downwardly revised forecast of 3.0 percent as fallout from the global crisis intensifies and domestic demand slips.
“Our job is to save Peru from this crisis … we are working so that at the end this year we can have positive growth,” President Alan Garcia said last week.
He shied away from giving a specific forecast for this year, but promised “growth of at least 6 percent in 2010 and 2011” as the global economy recovers.
A free-trade deal with the United States that took effect in January was expected to boost Peru’s annual growth rates, but the global slowdown has mostly delayed its benefits.
And Garcia’s goal of turning Peru into the next Chile, long-considered the region’s model economy, may have to wait.
For the political legacy of Garcia, whose approval rating is at 27 percent, 2011 will be a crucial year. His first term in the 1980s ended in economic chaos.
Now a fervent supporter of free markets, he has gone so far as to tell investors he will try to prevent a leftist from winning the election in 2011, when he cannot run.
LACK OF GROWTH HEIGHTENS
ELECTION RISKS
But prolonged economic weakness could play into the hands of an emboldened opposition, which has stepped up protests and says Garcia hasn’t done enough to fight poverty that afflicts more than a third of the population.
Ollanta Humala, a left-wing nationalist and ally of Venezuelan President Hugo Chavez, spooked financial markets when he nearly won the 2006 race against Garcia, and he is planning to run again.
“A failure to recover growth could result in heightened political risk,” BofA Merrill Lynch’s Alejandro Cuadrado said in a note to investors. “While the distance to the elections still neutralizes the scene, the latter creates a significant risk in the medium run.”
To improve Peru’s growth outlook, Garcia unveiled a $3.2 billion stimulus package. So far, only a third of the money has been spent and getting dozens of infrastructure projects built will depend on provincial governments, which often move slowly and are plagued with structural inefficiencies.
Copper prices have risen more than 50 percent since December lows to improve the outlook for exports, but prices are still well below the record highs hit in mid-2008 before the global economy started to sputter.
The central bank has also slashed interest rates to 2.0 percent to keep credit flowing, though it remains to be seen if the private sector will pour money into new investments.
BOLIVIA SEEN BEATING PERU
The U.N. Economic Commission for Latin America and the Caribbean (ECLAC) says Peru, after expanding just 0.83 percent between January and May, will grow 2.0 percent this year.
That would be faster than giants like Mexico and Brazil, whose economies are respectively expected to shrink 7.0 percent and 0.8 percent respectively, but slower than Panama and Bolivia, which are seen growing 2.5 percent — the fastest pace in the region.
The government of Bolivian President Evo Morales, a free-trade skeptic who has nationalized the energy sector, is forecasting growth of about 4 percent this year while Peru struggles to stay in positive territory.
“Growth will have to pick up strongly to even yield a positive result for 2009,” according to Fritz Du Bois and Roberto Abusada of the LatinSource consultancy. “Clearly, the 3 percent growth forecasted by the official authorities will be virtually impossible” for Peru.
