Introduction:
Famous for its 15th century Inca site, Machu Picchu, situated 2,430 meters above sea level and the ancient geoglyphs, The Nazca Lines, Peru is the star performer in the South American Continent of 2014. The latest report published by the International Monetary Fund (IMF) described the macroeconomic performance of Peru as “exceptional”. Prominent and effective macroeconomic policies, determined structural reforms, increased foreign direct investments and diversified export basket have made Peru the most economically stable country in the continent ahead of Argentina, Chile, Paraguay, Uruguay, and the others.
It is also the faster-growing nation in the region. The economy increased by almost double from 2002-2012 and GDP improved at an average annual rate of 6.3% from mining, fishing, banking and construction. As a result, the annual inflation rate lowered to 2.75%, the lowest in Latin America.
Background:
For several decades, mining had been the economic driver for Peru with its global products Silver, Gold, Copper, Zinc, and Tin. Throughout history, the country has been involved in export, chiefly minerals, one of the major sources of the country’s economy. The income generated from export is then utilized for import and external debt payments. The country, however, had been unable to attain self-sustained growth with the revenue thus generated through export.
Then over the last decade, Peru has gone through significantly marked economic reforms, introducing more promising macroeconomic policies amalgamated with favorable foreign investment, that have been key to replenishing the economy. The result was evident when the poverty decreased from 48.5% in 2004 to 25.8% in 2012. Consequently, Peru now has become able to add textiles and farm products such as artichoke and mangoes in its export list.
The influx of foreign investors not just in mining but also into banking and retail should also be credited for Peru’s improved economy. Direct foreign investments amplified significantly from $1.3 billion in 2003 to $9.3 billion in 2014.
Another reason for Peru being labeled as the star performer in Latin America is the introduction of a new National Industrial Development Plan (PNDI) with the objective to kindle the growing industrial sector, especially in the country’s highlands and jungle regions thinning the distance between national market and the local industries.
The country is currently focusing more on reducing inequality among the populace and increasing opportunity. In addition, the country deployed a strategy that mainly stresses on advancing human resource, infrastructure, encouraging entrepreneurship, innovation and technology transfer. Also, the stratagem promotes domestic supply networks and has local home products comply with the international standards.
The country’s President, Ollanta Humala, believes that along with capitalizing the profits generated from mineral export that has doubled from 30% in 1195 and 60% in 2012, the government should also give attention to productive sources and decentralization of industries, which would be the key to unlocking the door to Peru’s economic success.
GDP variables for Peru
The major economic success for Peru as a nation started from the year 2015 when the GDP of the nation saw a drastic increase during the fourth quarter of the year (The Economist). The output of the country was accelerated by the use of mining capacity of the country. This capacity enhancement occurred for a continuous three years, and there was also the continuation of weather headwinds at the external level. The political stability brought in the country from time to time also helped in the economic boost that the economy was able to achieve. The overall economic and demographic data of the country can be presented as:
(World Bank)
The major exports of Peru are minerals and ores and the second most exported good is food. Mineral fuels are also hugely exported. Domestic demand is the major growth driver for the economy; however, exports have also grown in the recent years. The major imports of Peru are final consumption goods and services, including machinery. Domestic demand and import trends suggest that modernization is also one of the major growth drivers for the economy, but the trade balance remains quite unaffected because of the imports.
The challenges and risks faced by the Peru economy as a whole may be summarized as:
Political Risk: The clash of political parties is one of the major risks that affect the economy of Peru adversely. The change and amendments made by the government with the change of ruling party in the government, protests by oppositions, provoking people against the economic favorability, etc. are the actions that have an adverse effect on the economy.
Purchase and Acquisition Risk: There are limited economies, which have purchase and acquisition relations with Peru. This led the economy to stuck in the middle due to high purchasing cost and low purchasing power of end consumer. Conflicts are later injected into the economy due to this that adversely affected the iron triangle of the country. The quality of output thus becomes poor; the cost was high and time of the economic boom increases.
Technical Risk: The liabilities like asset and capital theft and leakage in the system, reluctant stakeholders, relationship with the concerned board of other states, controversial contracts like power purchase agreement are the technical risks related to development projects that Peru is facing.
Financial Risk: The Peru economy was on the razor edge of financial risk before the start of past decade. Without proper financial analysis, the economy took projects, which created the huge question mark on the future sustainability of the economic finances. The cost was higher, there was leakage in the system that would affect the revenue, and affordability of consumer, etc. were the financial risk. Subsidy to current and future projects was another risk to bear. Also, there was a challenge in finding the investor for the national projects.
Currency Risk: The fluctuation in the foreign currency would directly impact the cost of the economy. At the same time, the inflation on petroleum products can be high as well as the international market may become volatile.
Environmental Risk: The pollution created by the power plant like air pollution due to the use of fuel, water pollution due to the disposal of polluted chemicals in water and their long-term effect are the environmental risks that the economy has to bear.
Since political risk are more well handled by the governmental sectors, the involvement of the private sector would have not only hedged the political risk but also would have made the economic activities more under control like transparent financial analysis, well inspection before jumping into contracts and conclusions. At the same time, if the economic deciders had listened to the World Bank’s report and suggestion, the more the economy would have insulated against the exposure to political risk. This would have given a chance of involvement of World Bank in to the financial systems and could have exploited the political risk insurance from World Bank.
Also, in addition, the economy could have replicated the model of developed nations’ economic models. Like in other developed nations, the economy would be ensured against political intervention and declared as an autonomous system. It would have been high insulation against political risk.
In a similar way, since the private sector is very crucial, it should have been taken care in a better way like the involvement of high-level government and international officials like an ambassador. This would have taken the economy to next level beyond the reach of cheap political interventions. In addition, the projects in the country from the very beginning should have approached healthy competitive bidding way to select the stakeholders rather than negotiating with only one without proper supervision and consultation. The fast track system adopted in the varied projects of the country has what created an extreme political intervention.
At the same time, a partnership with the local financial institution and international agencies would have helpful in managing the risk. The local financial institutions are much more down to the how system is operated in Peru states. Alliance with such financial institution also could have reduced the cost of capital for Peru and hedge against international currency fluctuation as well. Also, alliance with local contractors could have resolved the political issue to some extent as there would have been a shift in political interest towards the local contractors and they know better how to deal with political interventions (Limaeasy.com).
Works Cited
Dube, David. "Peru’S Economic Woes Echo Latin America’S". WSJ. N.p., 2016. Web. 12 Apr. 2016.
The Economics. "Hold On Tight". The Economist. N.p., 2013. Web. 12 Apr. 2016.
Limaeasy.com. "Peruvian Economy - Limaeasy". Limaeasy.com. N.p., 2016. Web. 12 Apr. 2016.
World Bank. "World Development Indicators| World DataBank." N.p., 2016. Web. <http://databank.worldbank.org/data/reports.aspx?source=2&country=PER&series=&period=>.
