Peru:  Recessionary Economy Only Moderately Affected by Attacks (continued)

The Impact of the Attacks on the Peruvian Economy

1. Trade exposure to US limited.  With 16.5% of GDP based on exports, Peru has a below-average exposure to the global economy compared to its regional peers.  Moreover, with 27.5% of total exports directed to the United States, the direct exposure to dropout in US demand for Peruvian products remains well below 5% of GDP.   

2.  Prices for main commodities likely to come under pressure.  More important than the direct exposure to the US, is the downside pressure the global softening is likely to have on some of Peru’s main commodities.  In the first seven months of the year, mining products accounted for 42.4% of total exports.  Copper, zinc, lead, tin and iron, which make up more than half of the mineral mining exports, are prone to react to fluctuations in global industrial output.  The negative impact of lower metal prices on world markets may be mitigated by increased production in the new Antamina mine, which recently went into operation.  Additionally, the country stands to profit from rising gold prices, which resulted from the increased uncertainty in international politics.  Gold accounts for 36.6% of total mineral mining exports and thus constitutes Peru’s single most important mining commodity.  Fishing exports, which accounted for 16.7% of total exports in the first seven months of the year, should also prove relatively inelastic to shifts in global demand.  Finally, as a net importer of fuels, Peru’s external balances may profit from the slide in oil prices observed since 13 September. 

3. Flight-to-capital prompts only limited impact on stock and bond markets.  The flight-to-quality that has been affecting all emerging market economies has also had an effect on Peruvian financial markets.  However, as one of the smaller emerging markets, the downside effects of the terrorist attacks were limited.  In fact, compared to the seven other major regional stock exchanges, Peruvian stocks emerged as the least affected both in the immediate aftermath as well as through the end of September.  The hike in bond spreads remained below 50 basis points shortly after the attacks but rose substantially thereafter.  As a result, Peruvian authorities have decided to postpone the issuance of a planned US$ 500 million bond in international markets until the current loss of investor confidence subsides and appetite for emerging market high yield bonds returns.  The bond issue would have presented the first time that Peru enters international capital markets in decades and the postponement threatens to jeopardise the administration’s plan to kick-start the ailing economy with a job creation programme, which was meant to be partially financed with bond proceeds. 

In the longer haul, Peru may also suffer from reduced inflows of foreign direct investment.  Private sector long-term capital flows constitute a major share of total capital inflows.  In 2000, 80.9% of the capital account surplus was provided by private sector long-term capital.  The endurance of the current investor risk aversion is difficult to gauge for the time being and certainly also depends on the scale of the US response.  In addition, lower commodity prices could stall planned investments in the mining sector in the short-term until prices recover.  Finally, aid flows, which also represent an important source of capital inflows – in 1999 official development assistance (ODA) accounted for 0.82% of gross national product (GNP), according to OECD statistics – are likely to escape unscathed even as national governments reallocate resources to mitigate the impact of the attacks on their national industries. 

4.  Tourism downturn will not have a major impact on economic output.  With one of Latin America’s most famous tourist attractions, Machu Picchu, Peru stands to loose substantially from travellers’ current reluctance to embark on international trips.  The World Travel and Tourism Council estimates that the travel and tourism industry will contribute 3.9% to total gross domestic product (GDP) this year.  Furthermore, international tourism receipts accounted for 1.9% of GDP in 2000, according to data from the World Tourism Organisation.  While this figure constitutes an important share, only one fifth of tourist arrivals are from the United States, which as a result accounts for 0.4% of GDP.  Thus, while the fallout will be notable in the tourism industry, the impact on the economy as a whole should be limited, provided that the current international situation does not deteriorate further. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.