Peru's Economy Downshifts, but Still Has Plenty of Gas
May 24, 2013 - Wall Street Journal

By Charles Roth
The best performing of Latin America's main economies in recent years is losing steam, but is very well prepared to keep chugging at a strong clip.

Peru, one of the top world's top sources for a host of precious and industrial metals, grew 4.8% in the first quarter from the year before, down sharply from the 5.9% pace of the previous quarter, not to speak of the 9% to 10% expansion rates of 2010. The latest quarter's data, out Thursday, were the worst since Peru pulled out of the global downturn in late 2009.

A clear part of the downshift from January through March was of course due to the Easter effect of fewer working days in March this year, and those will be regained in April.

"Nevertheless," Goldman Sachs says in a Friday note, the deceleration "reduces slightly the carry-over for growth for the remainder of the year," prompting the investment bank to cut its 2013 forecast to 5.9% from 6.2% previously.

The other factor that clearly weighed on Peru's growth is the decline in industrial metals prices. The mining sector, which accounts for some three quarters of Peru's exports, contracted 0.6% last quarter. Exports tumbled 10% from the year before.

The drop in exports was partially offset by a steep fall in the growth of imports, which rose 6.1% on the year, down more than half from previous quarter's 12.8% rise.

Peru's terms of trade are deteriorating with a China-led drop in metals prices.

That matters for the country's ability to manage its current account deficit, which is running at about 4% of gross domestic product. If metals prices continue to fall and squeeze miners' expected profit margins, a number of investment-heavy projects in the pipeline might be shelved. Growing opposition to new projects from local groups concerned about the environmental impact from mining is also a threat to miners' plans.

Mining investment inflows have largely covered the current account gap, so if they retreat markedly, domestic spending will have to moderate.  And it was robust domestic demand that offset much of the slack from queasy external demand, climbing 7.9% in the first quarter with construction and retail activity advancing a respective 12% and 5%.

Fortunately, Peru is well positioned to keep domestic consumption from collapsing if metals prices continue to go south and mining investment dwindles.

A budget surplus of 1.2% of GDP and about $7.17 billion in a macro-economic stabilization fund , according to the latest numbers, give Peru fiscal gas if it needs to step on the growth pedal. And with public debt amounting to just a fifth of GDP, investment grade Peru can easily sell bonds at favorable rates.

It can also turn to monetary policy. Annual inflation ran at just 2.3% last month, well within the 1% to 3% target range. The central bank's key interest rate stands at 4.25%, so it has a room to cut if needed.

Peru's first-quarter data show the "economy is entering a phase of permanently slower growth as the mining boom of the past decade fades," Capital Economics notes in a report. But, "ample scope for a policy stimulus should, at least, help to ensure a soft landing for the economy."

The research house expects the thrifty, market-friendly Andean nation to grow 5.3% this year. That's less than most other forecasts, but still beats projections for the other big, resource-rich countries in Latin America, especially those for heterodox Argentina and Venezuela.