Guest column: 'A surprising and much welcome turnround'
By Felipe Ortiz de Zevallos
Twenty years ago, the global economy was booming while Peru was merely trying to survive, fighting hyperinflation and Maoist Shining Path terrorists. Now, most analysts look rather pessimistically at the prospects for world growth, but feel quite optimistic about Peru. This year, its economy is likely to grow by 7 per cent, with less than 3 per cent inflation. How did this amazing turnround occur?
It is mostly thanks to sound macroeconomic policies, which have been sustained in a previously unpredictable country. The past three governments have all belonged to different political parties. Yet their ministers of finance have followed similarly prudent, open, pro-market and pro private-sector policies.
The central bank has also maintained sufficient autonomy from the treasury, even though its board is renewed every five years, with each new government. Put together, the results have been very fruitful. Between 1992 and 2010, economic growth exceeded world growth by about 40 per cent. During the 1970s and 80s, Peru grew at only 60 per cent of the global average.
Booming commodity prices have helped. Peru has a diversified export economy but is still mainly a competitive mining country. Among many other metals, its main export at present is gold. Logically, trade surpluses in recent years have contributed to a significant accumulation of international reserves.
At a time when much of the world is over-leveraged, the current level of indebtedness in Peru – of families, companies, banks and public sector institutions – is low. Public debt is only 25 per cent of gross domestic product. Peruvian consumer credit and mortgages are only equivalent to 8 per cent of GDP. The domestic financial sector, therefore, is at an emerging stage and has significant potential to grow.
Peru's biggest local companies are expanding operations abroad, having suffered little from the global financial crisis. The Brescia Group, for instance, has bought Chile's largest cement plant. Peru's Ajegroup, meanwhile, has taken its popular Big Cola beverage around Latin America, and as far away as to Thailand. In January, the government issued bonds in domestic currency at 32 years with a 6.85 per cent yield. Both Banco de Crédito and Interbank, leading Peruvian banks, have issued 60-year bonds. Such opportunities were simply unavailable in the past. Furthermore, an expansion of micro financing is stimulating entrepreneurship among the very poor.
As in other Latin American countries, demographics have lent a helping hand.
Population growth has fallen. This has lessened social pressures by opening greater space for higher standards of living for the population. Some social analysts have also talked about a subtle change in values. In the past, they were more static, colonial and top-down; now they appear to be more dynamic and plural.
The self-esteem of ordinary Peruvians – expressed in matters such as their views of the quality of national gastronomy and culture – has improved significantly. Ninety-five per cent of Peruvians are proud of being so, and the percentage of its youth that would prefer to emigrate has fallen significantly.
Politics in Peru, however, is not as rosy as the country's economics. First, it suffers from a rather baroque administrative structure. It is divided into too many regions (25), provinces (195) and districts (1,838). The city of Lima alone has 42 districts. To complicate this further, as many as 25 groups call themselves national political parties, although probably only the ruling Apra party (the American Revolutionary Popular Alliance) deserves to be called "national".
During regional elections on October 3, as many as 90,000 candidates will run for office. Optimists talk of an ebullient civic awakening. Others fear Balkanisation.
Compared with Colombia and Chile, two neighbours of comparable size, Peru has two main weaknesses: an overcrowded and inefficient political system, and the lack of a strong and capable civil service. This includes the police and the judiciary, a complicated and important matter in a country that needs strong law and order to fight against drug trafficking.
Probably most of the benefits that can be reaped by first-generation reforms – those that can be adequately managed by competent teams at the ministry of finance and the central bank – are over by now. Second-generation reforms will require a better-managed public sector and a more stable national political life.
Nevertheless, Peruvians feel surprisingly optimistic about their future. In a recent survey, top business executives projected 6 per cent annual average economic growth over the coming years, and foresaw a more stable political situation.
For a country that two decades ago looked hopeless – in 1990, domestic petrol prices had to be increased 30 times to help balance a gaping fiscal deficit – it is a surprising and much welcome turnround.
Felipe Ortiz de Zevallos, is founder and chairman of Grupo APOYO, a consultancy, and former Peruvian ambassador to the US.