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Peru’s central bank has been among the most proactive of any emerging market central bank in fighting the downturn – and managing the rebound. The numbers speak for themselves Julio Velarde, the president of Peru’s Central Reserve Bank (BCR), is a serious man, but there is no way for him to hide a smile when he ticks off the economic forecast for the country in the coming decade.
The BCR in early September raised its GDP forecast for this Andean country to 8% for 2010, up more than three points since the start of the year. All other macro numbers are performing better than originally anticipated at the start of 2010, particularly after GDP grew by less than 1% as a result of the international financial crisis. The bank is forecasting 6% growth for 2011, but this too could be on the low side.
“The macro numbers are very good. The current accounts deficit will be under 2%; we will have a trade surplus of $5 billion, and investment in coming years is very encouraging, with more than $50 billion committed in large projects alone,” he says in an interview with Emerging Markets. “Even with the United States and European Union growing at low rates, we will do very well in the coming decade.”
Velarde cautions, however, that the country needs to avoid a sense of complacency because of the good numbers. And he is leading that effort.
The BCR has been aggressive on a number of fronts to guarantee that growth – Peru had the second-fastest annualized growth in the first quarter of the year after Brazil. Inflation is so far under control at 2.3% for the first eight months of the year.
The bank has been increasing benchmark interest rates from April, with a 0.5% increase, the largest monthly increase so far, in September. The benchmark rate is now 3%. The rate dropped to 1.25% at the height of the international crisis, one of the lowest in the emerging markets.
“There is no justification for low rates with a GDP that increased by more than 10% in the second quarter, and with strong indicators for the third quarter in consumption of electricity, cement, etc. We will slowly increase the rates, but with a close eye on the world situation, because there is still a great deal of uncertainty,” he says.
While not wanting to forecast an exact rate, Velarde says a neutral interest rate would be between 3.5% and 4%, “but we are in no hurry to get there, because inflation is under control.”
The BCR is also carefully watching the influx of capital to take advantage of Peru’s growth, adjusting up the reserve requirements to ease pressure. The short-term requirement for overseas loans, for example, was increased ten points, to 75%, as of September 12.
Velarde says Peru modifies reserves requirements, because the economy remains highly dollarized, with slightly more than 46% of loans in U.S. dollars. The increases allow for the “possibility to reduce short-term external inflows that could create unsustainable growth in loans”, he says.
One area where the BCR has been very aggressive, but is still criticized by exporters and some analysts, is purchasing dollars to keep Peru’s nuevo sol from appreciating too quickly. The bank has intervened heavily this year, acquiring $7.3 billion through mid-September, most of this in the previous two months. This has boosted foreign reserves to a record $42 billion in September, equivalent to nearly one-third of the country’s GDP. The nuevo sol has, nevertheless, appreciated 3.4% against the dollar through September, reaching a two-year high.
Velarde says the BCR is not controlling the rate, as some have charged, but keeping volatility in check. “We intervene more than other countries because we have a dollarized economy. There is the risk of short-term capital flooding the market, and when you have nearly 50% of loans, there is the risk of rapid appreciation. Our policy is to control volatility,” he says.