Peruvian economy and finance minister Ismael Benavides, and Central Bank President Julio Velarde, this weekend cautioned that the optimism prevalent in Peru must not cloud policymakers’ view or divert attention from the need for continued reforms.
Peru must focus on education, institutional reform, such as the judiciary, and the issue of security, Benavides told Emerging Markets.
Velarde said that there is “enthusiasm that we will grow indefinitely at high rates, which could lead to complacency in criteria for making loans. We need to guard against complacency.”
And there is the issue of inflation, which both men say is now their number one concern. Inflation remains low, and it is likely to remain below the Central Bank’s target of 3%, even though it ran higher than expected in the first two months of the year.
Inflation was 0.77% through February. Velarde said it might increase slightly in March given that higher food and fuel prices are bringing to influence the price of other items.
The Central Bank is working aggressively to contain the increase, and has raised interest rates for eight of the past 11 months. “We have increased the rate by 2.5 basis points in 11 months, which is a strong increase for any central bank,” said Velarde. The interest rate, according to market analysts, should stabilize at 4%.
The caution expressed by Benavides and Velarde strikes a contrast with the opti¶mistic messages that dominate the news in Peru.
President Alan Garcia said earlier this month that Peru would have the second fastest growing economy this year after China, and the Central Reserve Bank is forecasting GDP growth in the first quarter to top 9%, and easily to exceed 7% for the full year.
Benavides told Emerging Markets that there are three drivers for strong growth: exports, investment and internal demand. Exports in 2010 were slightly above $35 billion, double the amount from five years ago.
The National Mining, Petroleum and Energy Society (SNMPE) estimates investment in its three sectors to exceed $50 billion in the coming years. And there is a boom underway in construction, which expanded by 16.2% in January, and manufacturing, up 14.4%.
“Peru is playing a catch-up game”, Benavides said. “People are buying homes, vehicles, appliances for the home, clothing. They are spending on what they did not spend on in the past.”
He said that Peru can maintain growth similar to Chile in the 1990s, by guaranteeing continued levels of investment. “The country needs to invest between 20 and 25% of GDP if it hopes to growth by 8% annually. We need to maintain this,” he said.
The other concern for Benavides is the noise around the country’s upcoming April 10 presidential elections. Of the 10 candidates, only five have any chance of winning, and the gap between these has tightened considerably in recent weeks.
About 5% separates the top candidate from the candidate in fifth place. Fernando Tuesta, a pollster from Catholic University’s Public Opinion Institute, said there could almost be a five-way tie. The top two finishers will face each other in a runoff on June 5.
Benavides said: “My top concern is inflation, but number two is the promises being made by candidates. We need to maintain a good business climate and talk about new taxes and changing the rules of the game is not good when you need to continue attracting investment.”