Countercyclical policies are helping Peru out of the commodity rut
Copper, one of peru’s principal exports, was already three years into a price slump when Alonso Segura Vasi took office as Peru’s finance minister in September 2014. Immediately, the metal entered another even sharper fall that has taken it to lows not seen since 2009.
It was something of a baptism of fire for Segura, a former chief economist at BCP, Peru’s largest bank, who had a tough act to follow after replacing Luis Miguel Castilla. Castilla had been a highly popular official and figure of stability as finance minister while other cabinet posts frequently changed under President Ollanta Humala.
“Markets liked Luis Castilla a lot but the government’s credibility has remained high under the new minister, which you can see with the very stable behaviour of the dollar curve versus other Latam credits,” says Alvaro Vivanco, Latin American strategist at BBVA in New York.
After an absence of more than 2½ years, Peru has also made its presence felt in the bond markets. The government issued in October 2014, March 2015 and August 2015, raising both nuevo sol and dollar notes.
“In the bond market Peru’s execution has been excellent; they have issued at the right time and have kept several lines of funding open,” says Vivanco.
The sovereign’s latest issue in August may have surprised some with its timing — it was in the middle of the holiday season. But DCM bankers have since praised Peru’s shrewdness for anticipating the severe volatility bout that hit EM debt markets in September.
That Peru has been able to increase debt issuance without causing concern is in part thanks to the fact that — unlike most of its neighbours — the country had been running fiscal surpluses during the boom times. This left it with far greater space to react and Vivanco believes that “Peru has done a very good job in implementing countercyclical fiscal policies”.
Indeed, while most other Latin American countries suffer from public spending cuts, Segura has guided growth to above 3% for the first two quarters of 2015 and the month of July.
“Peru’s government has been very proactive with the measures it has taken to help the economy counter the effect of low commodity prices, on both a macroeconomic and microeconomic level,” says Juan Lorenzo Maldonado, economist at Credit Suisse.
GDP growth has so far been driven by an increase in mining production, while there is disappointment that public investment has decreased as new regional and local governments settle in.
But there are hopes that Segura’s determination to reduce red tape could help to change this.
“There have been real efforts to increase public sector investment at the national, regional and local level as well as several fiscal stimulus initiatives that should help growth dynamics in the coming months,” says Maldonado.—Oliver West
LOOKING TO THE LONG TERM
Peru’s finance minister knows that the current government has less than a year left in office, with presidential elections due in April 2016, but this is not stopping him fighting tirelessly for measures that he believes will improve the country’s long term economic outlook.
Discussing with Emerging Markets the challenges he faced when he became finance minister, Alonso Segura not only mentions that Peru was in the midst of a significant external shock but emphasises that the job is “tougher” because his government does not have a majority in Congress.
It is to Segura’s credit, therefore, that he is not letting the situation drift.
“We are seeking to give the next government a more level ground on which to conduct business,” he says. “Although we are in our last year, we continue to push hard to reduce transaction costs in the economy.”
To do this, Segura’s “most pressing issue” is to achieve legislative decrees that allow him to take the measures necessary to encourage investment, he says. These are emergency decrees that can be used for urgent economic measures.
“In formulating the 2016 budget, we aimed for a responsible fiscal countercyclical policy that uses the fiscal solvency of the country in a responsible way,” says Segura. “Of course we accompanied this with some business reforms in areas like simplifying how to get licences and to eliminate the red tape needed to get projects going.”
Segura highlights that the government has made several changes to the composition of the budget, “pushing for resources for human capital, improving PPPs and allocating resources to a diversification plan that seeks to improve productivity of companies across different regions”.
Much of what Segura wants to promote is, by its long term nature, not going to bear fruit during this government. But in the short term, he claims to be cautiously optimistic.
“Partly because of the measures we’ve taken, Peru’s GDP is one of the few in the region that has accelerated,” says the minister. “We have built up the strength to deal with situations like this and that is why we have growth.
“Although we know we will not be growing at 6% like before, Peru will continue to be one of the leaders in the region in terms of economic performance and we’re undertaking the reforms necessary to increase potential growth.”