Walter Molano | Peru: Close to starboard
While this year could be challenging for Peru, it could also be an opportunity for investors. A combination of El Nino, presidential elections and the collapse of commodity prices foretold of looming disaster.
The currency, the Peruvian equity market and many corporate bonds have come under pressure, but it may be premature to throw in the towel. If anything, the government's stewardship has been prudent. The question is how much of this management can be attributed to strong executives, and how much can be credited to the country's sound monetary policy.
In hindsight, Peru has had a series of sorry presidents. In the past decade, the roster was ghastly. Peru is currently governed by Ollanta Humala, a former protÈgÈ of Venezuelan bÍte noire Hugo Ch·vez. Prior to that, it was led by Alan GarcÌa, who drove the country into hyperinflation during the 1980s, presided over the nation's default on its sovereign debt and allowed the Shining Path to run free through the countryside. Before him was Alejandro Toledo, an ineffective executive who never gained the confidence of the population.
Yet, the country consistently posted one of the highest growth rates in Latin America. How did that happen? The answer is a strong institutional base and sound monetary policy.
For the past decade, the central bank was under the command of Julio Velarde Flores, one of the most prudent monetary chiefs of the emerging world. He never allowed the currency to appreciate to the same extent as his neighbours, and the country never suffered the same degree of devaluation as the rest of the neighbourhood. His current objective is to reduce the level of dollarisation, thus enhancing the country's monetary stability.
This has helped Peru confront its adverse external, political and environmental shocks. While foreign investors have been running out of the region, they have been more measured in Peru.
Interestingly, the declines in the equity market were mostly due to asset reallocation by the local pension funds - AFPs - and mutual funds. These organisations tend to mimic each other. Therefore, when some of them began to move money to offshore markets, the rest followed suit. The opposite will happen when the tide turns.
The decline in the currency was part of this process, and the poor performance by a handful of corporates was mostly due to idiosyncratic circumstances. One of the problems was the corporate debt bonanza that took place a few years ago.
Once known for their prudence, several Peruvian CFOs threw caution into the wind and went on an unprecedented borrowing spree. Some companies could justify the move since they had dollar revenues.
Others, such as large retailers and cement companies, were less justified. Their revenues were in local currency, while their obligations were in dollars. The worst offenders were the companies that used the extra liquidity to launch leveraged buyouts, thus leaving them severely vulnerable to changes in external and operational conditions.
The good news is that the economic stability has created a social preference for market-friendly policies. There are no leftists in the field of presidential contenders. The leader of the pack, Keiko Fujimori, promises to have a strong pro-market team. Her choice for first vice-president is JosÈ Chlimper. He is a graduate of NC State, a former minister of agriculture and a leading businessman. She has 33 per cent of the vote, and will most likely move to the second round. Under Peruvian electoral rules, if no one secures a simple majority, then the two leading candidates move to a second round of voting.
Next in the polls are Pedro Pablo Kuczynski (PPK), a former Wall Street banker, and Cesar AcuÒa, a semi-shady business entrepreneur from northern Peru. They are tied at 17 per cent. They are followed by former President Alan GarcÌa, who found the merits of economic prudence during his second term in office. He is polling at eight per cent.
Last is Julio Guzm·n, a young economist with degrees from Georgetown and Oxford, as well as experience at the Inter-American Development Bank. He has 5 per cent of the vote.
Therefore, there seems to be little to fear from the political theatre.
The elections are scheduled for April 10 and the second round will be six weeks later. In the meantime, the country has been lucky to have been spared the full brunt of El Nino. The environmental anomaly was much worse in North America. Last of all, Peru will continue to grow at a steady pace of three per cent to four per cent y/y, despite the global commodity downturn.
This is due to new mines that will be coming on line. Peru should almost double its annual copper production to 2.4 million tons this year, thus boosting the rate of economic expansion. In sum, the conditions may seem poor for Peru, but there is not much to worry about.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.