Jamestown Latin America Research: Over the last several years, economic growth in Peru has performed at China-type levels, and its expansion has been Latin America’s most impressive over the last decade.
EXECUTIVE SUMMARYOver the last several years, economic growth in Peru hasperformed at China-type levels, and its expansion has beenLatin America’s most impressive over the last decade. Evenafter the change of government to a more left-leaning OllantaHumala, in 2011, growth has remained robust.• While the global backdrop has not been particularlyfavorable during the last couple years, Peru continues toexpand at a 6-7 percent pace, and with the exception of2009, has achieved 6-10 percent growth for seven of the lasteight years.• In contrast to the middle of the last decade, when exportperformance drove economic growth, overall economicactivity has been led by domestic demand.• Additionally the country is enjoying an investment boom,with billions of dollars directed into mining, energy andinfrastructure/transportation projects.• Economic growth, rising incomes and stable inflation rateshave increased demand for residential housing.POPULATION: 29.8 million2012TOTAL GDP:$200 billion(global ranking: 49)GDP PER CAPITA:$10,719(based on purchasing powerparity, global ranking: 83)2012 GDP GROWTH RATE:6.3%2012 UNEMPLOYMENT:5.6%2012 INFLATION: 2.7%PEN / USD: 2.72COUNTRY SNAPSHOTPeru Economic Update – June 2013TRENDS + VIEWSJAMESTOWN LATIN AMERICAReal Estate Private Equitywww.jamestown-latam.comContact:Bret Rosen – Managing Director, Research+1 email@example.comRio de Janeiro • Bogotá • Atlanta • New York
Lofty GDP growth rates expected to continue in 2013-14In 2012, Peru’s economy grew by 6.3 percent, and thePeruvian central bank, the Banco Central de Reservadel Perú (BCRP), expects similar growth rates in 2013and 2014. Notably, domestic demand has been themajor driver of economic activity recently, with internaldemand having risen 7.4 percent in 2012. The pace ofexport growth has fallen off substantially, however, dueto worsening terms of trade. In fact, in 2012, exportsfell from 2011 levels - although total exports have risenfrom USD 27 billion in 2009 to USD 46 billion in 2012.Meanwhile, as domestic demand surges, importscontinue to rise, and are now double 2009 levels. As aresult, Peru’s trade surplus, which notched 5.3 percent ofGDP in 2011 fell to 2.2percent for 2012.Offsetting this weakertrade performanceis a consumptionand investmentboom in the country.Investment as a percentage of GDP has risen from 23percent to 2009 to a projected 28 percent in 2013 - amongthe highest levels in Latin America. Public investmenthas taken off of late, and according to local consultantApoyo Consultoría, is expected to increase by twentypercent in 1Q13. During the change of government,public investment slipped, falling 18 percent in 2011, butis now a main priority of the government, and is forecastto increase by 15 percent in 2013. As recently as 2006,public investment accounted for just 3.1 percent of GDP,but should reach nearly 6 percent of GDP this calendaryear. Meanwhile, private investment has surged.Announced private sector investments alone acrossmining, energy, infrastructure, electricity and industryare forecast to total approximately USD 30 billion in2013-14.Total private investment in 2012 surpassed USD39 billion, double the amount realized in 2007. Privateinvestment grew by 15 percent last year, and couldexpand by double digits again in 2013. As a percentageof GDP, foreign direct investment (FDI) into Peru is thesecond highest in the region behind only Chile.PEN appreciation likely to continueThe strength of the sol (PEN) has been a major issuefor officials within the Ministry of Finance and CentralBank. The PEN has been amongst the best performingcurrencies in emerging markets over the last halfdecade, enjoying steady appreciation. The BCRP hasaccommodated this appreciation, but intervenes inthe foreign exchange market to prevent excessivestrengthening or volatility. It has accomplished this via astrategy of reserve accumulation by purchasing dollarsprimarily in the spot market. Central Bank reserves havesurged nearly USD 20 billion since the end of 2011, dueto the currency interventions of the monetary authority.In fact, reserves as a percentage of GDP are by far thehighest in the region.The authorities also have moved beyond pure USDpurchases to weaken the PEN. Namely, reserverequirements onforeign currency havebeen lifted on severaloccasions, most recentlyin late March.This policyis designed to reducedemand for dollar creditamidst a backdropwhere locals believe the pace of PEN appreciation wouldcontinue leading to faster growth in dollar credit vis-à-vis USD deposits. Additionally, the authorities havelifted the limits on foreign investments that the country’spension funds can hold, which will increase purchasesof foreign currency. On three occasions this calendarPeru Economic Update – June 2013TRENDS + VIEWSGDP growth is beingdriven by domesticconsumption and aninvestment boomThe PEN hasbeen one of thebest performingcurrencies in LatinAmericaPAGE 2TRENDS + VIEWS JUNE 1, 2013
year, most recently in April, the BCRP increased the limitby 2 percent of total assets. The limit now stands at 36percent, and the 6 percent incremental amount couldlead to USD demand totaling over 2 billion dollars.TheMinistry of Finance has also announced its intentionsto prepay several billion in USD obligations. Takingthe aforementionedmeasures intoaccount, the straightline appreciationtrend on the PENappears to havesubsided, with moretwo-way volatility now introduced into the currency.Nonetheless, the steady inflow of FDI combined withportfolio capital flows primarily into the local currencyfixed income market should keep the PEN at a relativelystrong level.Authorities and Central Bank earn investor respectThe authorities have managed the country’s fiscalsituation well, even as the markets originally questionedthe intentions of President Humala after he was elected.The country registered a fiscal surplus of 2.1 percentGDP for 2012, surpassing the total amortizations ofpublic debt in marked contrast to most of the developedworld, which has been plagued by vast fiscal problems.We would expect smaller surpluses in the upcomingyears as the government aims to deploy resources onsocial expenditures. Peru country risk as measured bycredit default swap (CDS) spreads or USD bond yieldsis amongst the lowest in emerging markets due to thestrong fiscal performance, responsible track recordof this government, and robust central bank reserves.Local currency bond yields meanwhile are at recordlows; the benchmark 2037 PEN bond yields slightlybelow 5 percent. Foreigners have piled into the localcurrency bond market: 57 percent of PEN governmentbonds are held by non-residents, as opposed to 19percent in 2009. This also represents a risk, as suddenoutflows from non-residents could occur should globalliquidity conditions and risk tolerance shift abruptly.Turning to monetary policy, the BCRP has maintained thebenchmark rate at 4.25 percent since May 2011. Inflationin Peru is volatile, as food items represent a larger shareof the inflation index when compared to other emergingmarkets countries. As food prices are more susceptibleto supply shocks, inflation in Peru can vary greatlydepending on weather cycles and other one-off events.Nonetheless the BCRP has done a commendable job intaming inflation in Peru. Forecasts for 2013 and beyondare for inflation to rise by approximately 2.5 percent,within the BCRP target range of 1-3 percent, but slightlyabove the middle of this band. The overall balance ofrisks to inflation appears to be neutral according to theBCRP especially when one considers the subdued globalenvironment. Meanwhile, credit growth is expandingat healthy levels, at around 15 percent year-on-year,and the authorities appear generally comfortable withthis pace of expansion. Credit to individuals, which isincreasing at 18 percent year-on-year, is growing at aslightly higher level than for the overall financial system.Policy mix contributes to Peru’s economic successPresident Humala enjoys a decent level of popularityespecially when compared to prior Peruvian Presidentsat this juncture in their terms. Ironically his supporthas improved the most within the higher economicstrata, which generally rejected his candidacy in 2011.A March survey by local pollster Datum put Humala’ssupport level at 51 percent, although this was downfrom 57 percent in the prior month. His popularityhas fallen somewhat in recent months due to worriesabout public security and some feelings amongst thePeru Economic Update – June 2013TRENDS + VIEWSPAGE 3TRENDS + VIEWSPrudent policies haveled to a fiscal surplusand low inflationJUNE 1, 2013
lower economic classes that he hasn’t lived up to hiscampaign promises. Also weighing on the politicalbackdrop are the ongoing worries about social unrestin certain rural areas, which halted the Minas Congamining project, the largest FDI planned commitmentin Peruvian history, and rumored plans for first ladyNadine Heredia to succeed Humala in office. Workingin Humala’s favor however are the country’s strongeconomic backdrop, solid business confidence, healthyjob market, and disjointed opposition. Finally, it doesn’tappear as if Humala will reverse his so-far responsibleeconomic policy mix, a key point on which investors arefocused.Defining the middle class opportunityPeru’smiddle-classhasgrowntremendouslyoverthelastdecade in conjunction with the country’s strong rate ofeconomic growth. Peruvian officials divide the country’sclass segments from A to E, with Class A representingthe country’s wealthiest and Class E representing thepoorest. Within these categories, Classes B and C havegrown the fastest. According to local consultant Apoyo,within urban Peru, 2.2 percent percent of the populationare classified in class A, followed by 10.5 percent in B,28.8 percent in C, 37.5 percent in D and 21.1 percent inE. Another survey carried out by APEIM for Lima only,defined that 5.1 percent are considered class A, 17.5percent as Class B, and so on. Meanwhile, an Ipsos/Apoyo poll puts 35 percent of Limeños into class C andnotes that this is the country’s fastest growing economicclass. Despite different methodologies used in thesestudies, for all of urban Peru, roughly 43.5 percent ofthe population is considered to be classes A-B-C. If weextend this analysis to the rest of the country, 33 percentare in classes A-B-C.Meanwhile poverty alleviation has been an achievementof the current and previous administrations. Accordingto national statistics institute INEI, the total incidence ofpoverty in all of Peru has fallen from 42 percent to 26percent since 2007. Rural poverty rates have fallen from74 percent in 2007 to a current level of 56 percent.Some other data help demonstrate the rise of the middleclass in Peru:Peru Economic Update – June 2013TRENDS + VIEWSPAGE 4TRENDS + VIEWS2004 2011/12URBAN POPULATION IN POVERTY 48.2% 18.0%URBAN POPULATION INEXTREME POVERTY5.7% 1.4%POPULATION IN PRECARIOUS HOUSING 10.4% 7.4%HOMES WITH INTERNET 2.1% 16.4%HOMES WITH AT LEAST ONE CELL PHONE 16.4% 75.2%HOMES WITH AT LEAST ONE COMPUTER 8.1% 25.4%HOMES WITH WASHING MACHINE 10.2% 19.9%UNEMPLOYMENT RATE - URBAN 7.3% 5.1%APOYA DATA PERU MINISTRY OF FINANCE AEPIM (LIMA ONLY)INCOMESEGMENTSMONTHLY INCOME PERHOUSEHOLD (SOLES)% OFHOUSEHOLDS% OFHOUSEHOLDS% OFHOUSEHOLDS% OFHOUSEHOLDS2004 2011 2012A 8,000 2.2% 1.1% 2.2% 5.1%B 4,200 10.5% 29.8% 2.1% 17.5%C 2,700 28.8% 29.9% 41.6% 37.1%D 1,700 37.5% 20.9% 30.0% 30.9%E 800 21.1% 18.3% 9.8% 9.4%TABLE 2: ECONOMIC DEVELOPMENT INDICATORSTABLE 1: HOUSEHOLDS BY INCOME SEGMENTJUNE 1, 2013
While a monthly income of $1,000 per month mightstrike some as impoverished, in Lima and indeed in allof Peru, this salary would allow a middle-class style ofliving. For example the current minimum wage in Peruis 750 soles per month or just shy of 300 US dollars. Incontrast, minimum wage in New York is $7.25 an hour.Over a 40 hour work week, this adds up to almost $1,250or four times the minimum wage in Peru.Note that cinema tickets in Lima cost five dollars, ahaircut around two dollars, and public transport isespecially inexpensive, with bus prices running one sol,or around forty cents – prices substantially below thoseof more developed economies. Lima’s tren eléctrico(train service) runs 1.50 soles versus $2.50 for a subwayride in NewYork.Mortgage interest rates continue to fall while issuancesincreaseMortgage rates have fallen gradually in Peru, andshould continue to decline even further as inflationfalls. Mortgage growth is running at around 25 percenton a year-on-year basis, and the pace of mortgagesis growing faster in local currency than in dollars. Asrecently as 2009, 58 percent of outstanding mortgageswere denominated in USD as opposed to 44 percentcurrently according to the most recent data.Within the more affluent areas of Lima (La Molina,Miraflores, San Borja, San Isidro, Surco), prices are up15 percent year-on-year on a per square meter basis.Wealso note that the average price of a home in Lima istransacting at approximately 16x annual rental incomebased on data provided by the BCRP. This multiple ison the higher end of the historical range and has led tosome worries that prices may be inflated in the higherend neighborhoods of Lima.Peru Economic Update – June 2013TRENDS + VIEWSPAGE 5TRENDS + VIEWS05,00010,00015,00020,00025,0002003 2004 2005 2006 2007 2008 2009 2010 2011 2012CHART 1: AGGREGATE MORTGAGE DEBT OUTSTANDINGMillionsofNuevoSolesSource: ASBANC050,000100,000150,000200,0002003 2004 2005 2006 2007 2008 2009 2010 2011 2012CHART 2: AGGREGATE NUMBER OF LOANS OUTSTANDINGNumberofMortgagesSource: ASBANCJUNE 1, 2013
Employment growth expected to remain robustUrban employment is expected to increase by 4.5percent in 2013. Meanwhile, we note that from 2007-12in metro Lima real wages per hour rose by 20 percent.The unemployment rate in Lima was 6.4 percent in1Q13 compared to 8.7 percent the year prior. For 1Q13the average income for an individual rose 3.7 percent,which is above the rate of inflation, whereas the totalwage mass for last 12 months grew 8.8 percent year onyear.Businesses’ main complaint relates to a lack of qualifiedlabor from industry to industry, and according toApoyo, one-third of companies surveyed expect tohave problems hiring capable employees in the nextsix months. Additionally, three-fourths of companiessurveyed expect to raise wages for their workers overthe same time period.%oftotalloansdenominatedin$CHART 3: DOLLAR DENOMINATED CREDIT; PERUPeru Economic Update – June 2013TRENDS + VIEWSJUNE 1, 2013 PAGE 6TRENDS + VIEWS40%50%60%70%80%90%100%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Source: ASBANCTotal CreditMortgage Loans