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April 18, 2016
As commodity prices continue to fall taking down countries from Venezuela to Russia, Peru has surprised many by showing it’s one of the few developing nations that is ready to ride out this plunge. Following three continuous years of running budget surpluses and stockpiling over U$D8.5 billion in a contingency fund, Peru has cut taxes, boosted spending and reduced interest rates in order to sustain its economic growth. The Peruvian President, Ollanta Humala, has also managed to attract agricultural and energy investment to reduce the country’s dependence on mining which accounts for almost 50% of Peru’s export revenue. Analysts are predicting that Peru will post the strongest economic growth figures of the major nations of Latin America this year while also boasting the region’s slowest inflation. Registering a 3.7% return on the foreign currency bonds in Peru over the last four months, is a huge success for the country as this is almost five times the average for emerging markets. It is estimated that Peru’s U$D216 billion economy will grow by 4.8% in 2015, doubling its growth last year.
Although copper has lost almost 25% of its value in 2014, Peru is planning to boost its public spending to 22% of its gross domestic product this year. This significant move which is the biggest rise since 1977 comes after President Humala cut personal and corporate tax rates in November 2014 as part of a U$D3.9 billion stimulus package. Even with this increase in public spending as well as investing in infrastructure, Peru is set to spend less as a percentage of its GDP than any other country in South America. With the country’s debt at 19% of its GDP, Peru has the third-lowest gross debt in the region. Despite winning the confidence of private investment, President Humala who took office in 2011 has not had the easiest ride. Taking a hard line on fiscal discipline the Peruvian President and his predecessors have encountered low approval ratings with the Peruvian population.
At the end of 2014, Humala’s approval rating was just 30% which was the lowest of any president in the Americas. However, of the Latin American countries, Peru is by far in the best position to confront the turbulence facing the region. Peru’s unpopular discipline has allowed it carry out stimulus projects which further winning investor confidence. The rise in investor confidence is extremely important as it is reducing Peru’s borrowing costs and therefore giving it more room to move in should the country need to seek further financing. Compared with a 0.25% average increase in foreign debt for Latin American countries, Peru’s foreign debt has fallen by 0.14% in the last four months.
In January 2015, the Banco Central de Reserva del Peru cut its overnight right to a four year low of 3.25% giving the nation’s sol-denominated bonds a welcome boost. Peru’s central bank estimates that inflation in Peru will slow to 2% this year, the midpoint of its target range from 3.22% at the close of 2014. There is more positive news within Peru as its currency, the Peruvian Nuevo Sol, continues to strengthen rising 0.2% to 3.082 per US Dollar. Peru is fast becoming the envy of Latin America as it has the luxury of having the policy tools in place to take the necessary actions to pursue countercyclical measures. While Peru is enjoying the position that they’re in right now, the same cannot be said for its Latin American neighbours.
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