Clarity:Peru

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September 2013

Weathering the Storm: Perus Increasing Resistance to International Shocks

Ben Bernankes June 19th comments, regarding the Federal Reserves plan to decrease the stimulus, has put
economies around the world in a strange new position. In the months leading up to Bernankes remarks, gold and
copper prices had fallen, interest rates had begun to rise and the long term value of the dollar seemed promising,
indicating to many that the U.S. economy had begun recovering. With such positive factors working for the U.S.,
this can spell trouble for emerging economies such as Peru whose trade balance is heavily dependent on the
commodities prices. As a result U.S. investors have already begun to repatriate short-term capital in a flight to
safety.
The Feds plan to decrease its 85 billion USD stimulus plan signals that the U.S. economy is gaining economic
stability. It is projected that further actions will be contingent upon future GDP forecasts of the U.S. economy,
unemployment rates, and inflation targets. Stimulus reductions are projected to continuously decline during 2013
ending by mid-2014. Verra seeks to illustrate potential impacts to the Peruvian economy as a result of changes in
the Feds policy in terms of the Peruvian IGBVL, currency, balance of trade and foreign reserves.

Economic Outlook

Perus outlook is based on strong fundamentals, terms of trade, and growth promoting government policy, allowing
it to emerge as one of the fastest growing economies in Latin America over the past decade. The economy has
shown short-term vulnerability to global growth shocks and the recently announced U.S. recovery, resulting
from exposure as a primary product exporter heavily dependent on commodities. At the domestic level, economic
prospects reflect a projected real GDP growth of
5.5% for 2013, while inflation levels have fallen
FDI Growth by Receiving Country '11-'12
50%
within the central banks target range of 1 and 3
40%
percent. Collectively, steady GDP growth and stable
30%
inflation levels enabled Peru to reach the highest
growth rate of foreign direct investment (FDI) in
20%
Latin America during 2012.
10%
0%

IGBVL & Short-Term Investment

-10%

-20%
The relationship between short-term capital
investment outflows on a countrys capital markets
-30%
and the value of its currency can be devastating,
-40%
Peru
Chile
Bolivia
Colombia
Brazil
Mexico
as it infiltrates indexes and affects markets and
currency rates. Relating such events to the Peruvian
economy, we see that the market has been able to attract and retain investors at record high numbers, as external
capital has reached 12.2 billion USD for 2012, representing a 4 billion USD increase from 2011. Over the last 8 years,
the IGBVLs performance has shown a positive trend, before a recent decline of roughly 4,600 points to 14,600 in
July before rebounding to 16,444 points on September 16, 2013. The same volatile behavior has been evident for
total short-term capital investment during the transition from the 1st to 2nd quarter. Recent figures present a 616
million USD inflow of short-term capital, while the second quarter reported an outflow of 191 million USD. Although

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this is a net gain of 425 million USD for the first half of the year, it illustrates a major decline in the magnitude
of investments, disrupting previous trends of inflows since Q2 2012. Meanwhile, the swings in the IGBVL and the
decline of short-term capital investments reflect upon a weaker Sol where Peru has stabilized speculations and
capital outflows with a build-up of foreign reserves.

IGBVL: Performance Following FED Announcement

17000.0
16500.0
16000.0
15500.0
15000.0
14500.0
6/3/13

6/7/13

6/11/13 6/15/13 6/19/13 6/23/13 6/27/13

7/1/13

7/5/13

7/9/13

Foreign Reserves

Perus currency, the Nuevo Sol, has depreciated in contrast to better economic conditions within the U.S. such as falling
unemployment, healthy GDP growth and an appreciating dollar. The average exchange rate PEN/USD decreased from
2.5599 on January 2013 to 2.74699 on September 23, 2013. At the same time, the highest and lowest closing rates have
occurred on August and April 22 of 2013 with 2.8219 and 2.5292 PEN/USD respectively. Although the Sol has declined
roughly 10% against the dollar as portfolio investors seek better short-term investment returns, Perus foreign
reserve holdings have been gradually increasing to make up for further currency depreciation. Recent figures show
reserve holdings of 67.1 billion USD for
International Reserves per Year (Millions of US$)
July 2013, over a 20 million USD increase
from July 2011, when reserves amounted
to 47.6 billion USD. Meanwhile, as the
global economy recovers Perus exports
should grow as the Nuevo Sol loses value,
presenting Peruvian goods attractive to
the world market.

67,417
63,991

48,816
44,105

31,196

33,135

27,689

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8,613

9,598

10,194

Dec.
2001

Dec.
2002

Dec.
2003

12,631

14,097

Dec.
2004

Dec.
2005

17,275

Dec.
2006

Dec.
2007

Dec.
2008

Dec.
2009

Dec.
2010

Dec.
2011

Dec. Sep. 24
2012 2013

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Trade Deficit

The Central Bank of Peru reported export declines of 713.3 million USD from July 2012 to July 2013. A decline impacting
Perus major exports of which copper accounts for 19 % of total shipments in volume, followed by gold 17%, and
gasoline, lead ore, and textiles with 5%, 4%, and 3%, respectively. The United States is Perus main export partner,
receiving 16% of total exports followed by China with 14%, Chile with 5% and Canada accounting for 4.8 %. At the
same time, imports dropped to 3.19 billion USD
in June of 2013 from 3.79 billion USD in June
Short-Term Capital Flows (Millions of US$)
$1,500.0
2012, reporting a trade deficit of 114 million
USD for June 2013.
$1,000.0

Finance Minister Luis Miguel Castilla

$500.0
estimates that Peru will post a 666 million USD
$0.0
trade deficit this year, the first deficit in more
I
II
III
IV
I
II
III
IV
I
II
than a decade. These estimates are in line with
2011
2012
2013
-$500.0
projections for 2014, at roughly a 485 million
USD deficit. Although imports and exports -$1,000.0
have declined, Peru should weather the storm
by developing its mining, agriculture and -$1,500.0
domestic economy proposing alternatives for
growth. A currently appreciating dollar does bode well for Peru and its exports, but will not be the only factor
contributing to economic expansion.

Conclusion

Over the past decade Peru implemented structural and monetary changes to strengthen its economy, in doing so
it has become a key player, leading the region in foreign investment growth for 2012. Looking forward, Peru should
remain resilient in the face of investor uncertainty. The Andean country will accumulate foreign reserves to better
stabilize the economy in times of capital flight, a depreciating Nuevo Sol and declining metal commodity prices.

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