Peru: Effects of Global Recession and Future Prospects
In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have also noted the remarkable recovery in Latin American stock markets relative to the rest of the world. I have also posted a series of articles co-authored with my students at the Business School at the University of Palermo in Buenos Aires. So far, articles on Argentina, Brazil, Chile, Colombia, and Venezuela have been posted. The articles assess the impact of the global recession on these countries and their future growth prospects.
The Peruvian study is published below.
Peru: Effects of Global Recession and Future Prospects
by
Margarita Benavides, Luis Enrique Povea, and Elliott Morss
EXECUTIVE SUMMARY
The credit freeze had a significant impact in Peru. The stock market fell almost 72% resulting in an asset loss of US$68 billion. That loss has recently been pared to 35% and a US$ loss of $33 billion. The reduction in export demand resulting from the global recession has had a greater impact. In 2009, investment is expected to fall less than 1%. Consumption growth will be lower – only 2.5% versus 7.9% in both 2007 and 2008. The unemployment rate in 2009 will increase to 8.5% by the end of the year. 1010 looks better, with GDP growth of 4.3%.
IMPACT OF CREDIT FREEZE
The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down almost 72% for a loss of $68 billion, the Peruvian market has recovered somewhat and is now down 35%.
Table 1. – Global Stock Market Losses (in mil. US$)
|
|
|
|
Index |
|
|
||
| Index |
Index High |
Index Low |
Hi-Lo % Loss |
Hi-Low $ Loss |
Recent High |
Hi-Now % Loss |
Hi-Now $ Loss |
| DJ Eurstoxx 50 |
4.543 |
1.810 |
60,20% |
7.210.000 |
2.763 |
39,20% |
4.700.000 |
| Nikkei 225 (Japan) |
18.239 |
7.569 |
58,50% |
2.590.000 |
9.844 |
46,00% |
2.040.000 |
| S&P 500 (US) |
1.558 |
683 |
56,20% |
10.350.000 |
1.059 |
32,00% |
5.900.000 |
| S&P Asia 200 |
6.749 |
3.145 |
53,40% |
6.850.000 |
4.540 |
32,70% |
4.200.000 |
| TSX (Canada) |
14.984 |
7.591 |
49,30% |
810.000 |
11.173 |
25,40% |
420.000 |
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|
|
|
|
|
|
|
|
| Argentina (Merval) |
2.339 |
829 |
64,56% |
21.985 |
2333 |
0,26% |
159 |
| Brazil (Bovespar) |
73.516 |
29435 |
59,96% |
641.844 |
67413 |
8,30% |
133.079 |
| Chile (IPSA) |
3.499 |
2.101 |
39,95% |
149.307 |
3465 |
0,97% |
2.416 |
| Colombia (IGBC) |
11.439 |
6461 |
43,52% |
61.599 |
11693 |
-2,22% |
-2.422 |
| Mexico (Mexbol) |
32.721 |
16.869 |
48,45% |
227.146 |
31017 |
5,21% |
22.945 |
| Peru (IGBVL) |
23.635 |
6.716 |
71.58% |
67.774 |
15460 |
34.59% |
32.801 |
| Venezuela (IBVC) |
62.013 |
34172 |
44,90% |
|
54111 |
12,74% |
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|
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|
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| Total 7 LA Countries |
|
|
|
1.125.851 |
|
|
188.077 |
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|
|
|
|
|
|
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| Total |
|
|
|
28.660.000 |
|
|
17.550.000 |
| Total Adjusted* |
|
|
|
36.000.000 |
|
|
22.050.000 |
IMPACT OF DECLINING GLOBAL DEMAND
Peru’s leading exports are copper, gold, zinc, textiles and fish meal. They have been adversely affected by the global recession. As indicated in Table 2, they are down by 24% year to year, with mineral and petroleum exports the hardest hit.
Table 2. – Peru Export Performance (in mil. US$)
| Exports |
Oct 07-Sept 08 |
Oct08-Sept09 |
% Change |
| Total |
32,993 |
25,089 |
-24.0% |
| Fish |
1,779 |
1,655 |
-7.0% |
| Agricultural |
586 |
640 |
9.3% |
| Mineral |
19,947 |
14,813 |
-25.7% |
| Petroleum |
3,000 |
1,576 |
-47.5% |
| Other |
7,681 |
6,405 |
-16.6% |
http://estadisticas.bcrp.gob.pe/index.asp?sFrecuencia=M
THE DOMESTIC ECONOMY
Consumption growth slowed from an average of 7.9% in 2008 to 3.5% for 2009 as estimated in the LatinFocus Consensus Forecast (http://www.latin-focus.com/). Investment fell more sharply: while it grew by 28% in 2008, it is estimated to be flat in 2009. Overall, GDP growth fell from a growth rate averaging 8.3% over the last four years to an estimated growth rate of only 1.5% in 2009. However, LatinFocus estimates GDP will grow 4.3% in 2010.
EXTERNAL SECTOR
Peru has been running a significant positive trade balance over the last few years. But as Table 3 indicates, the global recession has cut into it as exports have fallen more rapidly than imports.
Table 3. – External Trade (in millions US$)
| Item |
2006 |
2007 |
2008 |
2009 (11 mos.) |
| Exports |
23,830 |
27,882 |
31,529 |
23,719 |
| Imports |
14,844 |
19,595 |
28,439 |
18,996 |
| Balance |
8,986 |
8,287 |
3,090 |
4,723 |
http://estadisticas.bcrp.gob.pe/index.asp?sFrecuencia=M
GOVERNMENT POLICIES
The Peruvian Government has reacted to the global recession by launching a US$3.5 billion stimulus package. In addition, the Central Bank has kept its interest rate at an historically low 1,25%.
Partially as a result of the global recession and the government stimulus package, the government overall balance as a percent of GDP is expected to go from surplus of 2.1% in 2008 to a deficit of 1.8% in 2009.
LOOKING AHEAD
The World Bank estimates World GDP will fall 2.9% in 2009 before recovering 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.
Table 4. – World Bank Global GDP Growth Estimates
| Region |
2007 |
2008 |
2009 |
2010 |
| World |
3,8 |
1,9 |
-2,9 |
2,0 |
| High Income |
2,6 |
0,7 |
-4,2 |
1,3 |
| Developing Countries |
8,1 |
5,9 |
1,2 |
4,4 |
| South Asia |
8,4 |
6,1 |
4,6 |
7,0 |
| India |
9,0 |
6,1 |
5,1 |
8,0 |
| East Asia and Pacific |
11,4 |
8,0 |
5,0 |
6,6 |
| China |
13,0 |
9,0 |
6,5 |
7,5 |
| Middle East and North Africa |
5,4 |
6,0 |
3,1 |
3,8 |
| Sub-Saharan Africa |
6,2 |
4,8 |
1,0 |
3,7 |
| Latin America and Caribbean |
5,8 |
4,2 |
-2,2 |
2,0 |
| Europe and Central Asia |
6,9 |
4,0 |
-4,7 |
1,6 |
Peru’s GDP is projected to grow by 3.0% in 2009 before growing by 4.3% in 2010.
Table 5. – World Bank Latin American GDP Growth Estimates
| Country, Region | 1995-2005 | 2006 |
2007 |
2008 |
2009 |
2010 |
| Brazil |
2,4 |
3,7 |
5,7 |
5,1 |
-1,1 |
2,5 |
| Mexico |
3,6 |
4,8 |
3,3 |
1,4 |
-5,8 |
1,7 |
| Argentina |
2,3 |
8,5 |
8,7 |
6,8 |
-1,5 |
1,9 |
| Venezuela |
1,6 |
10,3 |
8,4 |
4,8 |
-2,2 |
-1,4 |
| Colombia |
0,7 |
6,8 |
7,5 |
2,5 |
-0,7 |
1,8 |
| Chile |
4,2 |
4,3 |
4,7 |
3,2 |
-0,4 |
2,7 |
| Peru |
3,3 |
7,6 |
9,0 |
9,8 |
3,0 |
4,3 |
LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Peru is 1.5% for 2009 and 4.3% for 2010.
Part of the reason for projected the strong rebound is attributable to the fact commodity prices are recovering rapidly. This is important inasmuch as copper and other commodities constitute a significant portion of Peru’s exports.
The LatinFocus consensus is that exports will grow 11.4% in 2010 after falling 18.9% in 2009. The LatinFocus Consensus Unemployment Rate Forecast for Peru is 8.5% in 2009, falling to 8.2% in 2010.
Peru’s external debt is 27% of its GDP which is moderate by Latin American standards. But the Sovereign Spread it has to pay on borrowings is quite low by Latin American standards.
