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The final moment of reckoning will come in April, when Peruvians elect their next president. Here the presidential palace, Casa de Pizarro. (Photo: Uighjot120)
Wednesday, October 28, 2015

Peru: The Morning After

The commodity price decline ends Peru’s status as one of the shining stars of the Latin America.


The end of the commodity super cycle has serious ramifications for Peru. Some of them are obvious. The decline in commodity prices has dampened the nation’s income, eroded the balance of payments and spurred higher levels of unemployment.

Only two years ago, Peru was growing at more than 5 percent y/y. This year, it will probably grow less than 3 percent y/y. In July, exports plunged 20 percent y/y to $2.6 billion. Mining exports dropped 17.7 percent y/y to $1.3 billion. As a result, the trade deficit widened to $424 million, from an initial estimate of $390 million. In August, the unemployment rate rose to 6.1 percent, from a level of 5.9 percent twelve months ago.

However, these are not the main challenges facing the country. More than a decade of booming commodity prices masked the serious political and social flaws that were deeply embedded. Unfortunately, the collapse of the commodity markets will make these shortcomings seem all too apparent.

Well before its colonization, Peru was ruled by a small band of Incas. Upon the arrival of Francisco Pizarro, he found the vast region controlled by members of the royal family, a handful of military generals and a cabal of pagan clerics. By eliminating the ruling nobility, the Spanish inserted themselves into the leadership position, thus taking charge of the huge indigenous population. The decapitation process was repeated countless times after independence, allowing a small cadre of creoles to remain in power. Today, these elites are represented by a handful of mining companies and local financial institutions.

Even though the country has a reputation for having strong institutions, particularly on the economic front, the reality is quite different. There are no political parties to support the legislature or the executive. As a result, the government is held hostage by the largest economic interests. This was not a problem while the two sides were aligned. However, they began to drift apart about five years ago, and now the rate of divergence is moving faster.

The last two decades of the 20th century were terrible for Peru. Default, hyperinflation and civil war devastated the middle class. Peru’s infrastructure collapsed and the brightest minds immigrated. President Fujimori’s efforts to restore stability were slow and difficult. Therefore, the society breathed a collected sigh of relief when commodity prices soared after 9/11. Billions of dollars arrived to take advantage of the rich mineral deposits that lurked below the Andes. However, people realized that the new projects carried huge environmental costs. Mining operations are water-intensive. Peru, unfortunately, is an arid country. With finite water, farming communities realized that they were going to lose out. Large mining projects, such as Tia Maria and Conga, were eventually halted. As a result, tens of billions of dollars in additional foreign direct investment (FDI) failed to materialize, reducing jobs and government royalties. After sporting impressive GDP growth rates for years, the pace of economic expansion fell by more than half.

The final moment of reckoning will come in April, when Peruvians elect their next president. Poverty is the campaign theme dejour. A radicalization of the national dialogue is taking place, with the government militarizing the regions with the most controversial mining projects. Military and police units have come head to head with demonstrators in the provinces of Arequipa and Cajamarca. Militant NGO’s have moved aggressively against other projects, such as the construction of the hydro-electric facilities along the Maranon River, one of the sources of the Amazon River. Protestors are blocking the expansion of the Camisea gas fields by Odebrecht, as well as the construction of a transcontinental railroad by the Chinese. The clashes produced scores of deaths, with even more wounded. Leaders of the movements, such as Cajamarca Governor Gregorio Santos, were detained, leading to outcries by international human rights organizations. Government officials in Lima have resorted to labeling these organizations and individuals as terrorists, stirring memories of the civil war that devastated the nation three decades ago. The unexpected slowdown in China, along with the accompanied crash in commodity prices, confirmed the institutional rot that is a feature of Peru. The surge in commodity prices masked these problems for a decade, but now they are in open view.

Therefore, do not expect Peru to remain one of the shining stars of the Latin American firmament. It’s the morning after the party, and the sunshine has brought everything into focus. 

Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development

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