Destination Peru: interview with Central Bank Gov Julio Velarde

The World Bank-IMF meetings will be held in Lima in 2015. The annual event will make its first return to Latin America after an absence of 48 years. The last time, in 1967, Rio de Janeiro was chosen to showcase the potential of the Brazilian economy, which burst into life eventually, rather later than expected and, currently, is flickering somewhat, flirting with a recession in the first half of this year. Now it is Peru’s turn to play standard-bearer for a region that has always been blessed with commodities, but too often blighted by economic mismanagement, corruption and missed opportunities.

This time round, the IMF may have selected its Latin American host just as the country peaks: after years of more than 6% growth, driven by strong commodity exports, Peru’s economy is slowing. After growing by 4.8% in the first quarter of this year, real GDP growth slowed to 2.0% in April and 1.8% in May. Estimates for June were also weak, leading to the prospect of possible sub-2.0% growth in Peru for the first time since 2009. Exports have fallen 11.9% in the first five months of the year as prices for copper – Peru’s largest export – have fallen by nearly 5% this year after a 7.2% drop in 2013.

The government has responded with fiscal stimulus: a series of announcements this year will add $2.1 billion through increases in healthcare and pensions benefits. Some long-term investment projects in infrastructure and mining should also support recovered growth rates in the second half of the year.

Julio Velarde, governor of the central bank, tells Euromoney that he has also been coordinating them with an easing of monetary policy.

“We started reducing interest rates in June last year and we reduced again in November and May,” says Velarde, who is optimistic that the slowdown will also prove to be a positive force for public-sector reform. “The policy rate now stands at 3.75%, and policy will continue to be moderately expansionary because the economy has slowed down. It is not a recession, and we believe that monetary and fiscal policy can serve as a bridge while some of the structural reforms are being introduced, and before they take effect.

“The good news of this slowdown is that it has moved the government to make some reforms to make the public sector efficient, and to remove some of the regulations that had been introduced by politicians when the economy was growing very strongly. At that time distortions were added – which happens everywhere. But now there is a slowdown, some of these distortions are being removed.”

As well as cutting rates, the central bank has been relaxing reserve requirements to add stimulus through greater bank lending. Velarde also says the bank has room to make further rate cuts should the growth rate hover at 2%. Inflation is predicted to fall back into its target range of between 1% and 3%.

“In principal we have room for further easing: we expect to finish the year at 2.9% and next year have 2.7% inflation – in part because of the slowdown in growth – and already inflation without food and energy is 2.7%,” says Velarde. “We expect inflation in August to be almost 0.3% below the level we had in August last year, so at the end of the month we will be within the target or very close to the target.”

Velarde was speaking in the morning before August’s meeting of the central bank monetary committee that surprised the market by keeping rates constant – about two-thirds of economists surveyed by Bloomberg had expected a 25 basis point cut. The expectations of renewed growth in the second half, as large mining investments begin to pay off, as well as large infrastructure projects such as Lima’s new subway line, probably led to the decision not to cut further.

Despite its surprise slowdown, Peru retains strong fundamentals and continues to attract foreign investors who view the country as one of the strongest credits in the region. Peruvian corporates and financial institutions have taken advantage of this demand by issuing unprecedented levels of debt in the international market.

Last year 12 corporates issued a combined $3.9 billion, helping growth by raising cheap investment funds but raising the spectre of currency risks as the new sol devalued by 9% in the year. Velarde admits that the central bank’s aim to de-dollarize the economy has been frustrated by this surge in Peruvian companies tapping the international markets.

For the full interview visit

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