Peru likely to suffer from US trade and monetary policy
16 September 2018
Peru is not seen by international markets as one of the countries most exposed to the possible contagion effects of the solvency problems afflicting Turkey and Argentina, but its economy is likely to be affected by the US Trump administration’s trade and finance policies.
Peru’s macroeconomic vulnerability to an Emerging Market crisis is cushioned by the relative strength of its balance of payments and the size of its reserves. The country’s finance ministry has also kept close to the script prescribed by the international financial community, avoiding anything that could remotely be described as ‘economic populism’.
But the Trump administration’s protectionist trade policies, particularly the racheting up of the tariff war with China, may have very negative consequences for Peru.
Its economy is increasingly dependent on copper sales to China, and Trump’s trade policies, if fully implemented, can only have the effect of stemming Chinese demand. A slowdown in Chinese growth will involve a slowdown in the construction and communications industries which absorb most Peruvian-supplied copper.
Christine Lagarde, the head of the IMF, last week drew attention to the likely impact of tariffs on Chinese exports and the knock-on effects on those countries included in China’s supply train.
Copper prices have already declined notably in recent months to the detriment of Peru’s mining industry. In the first week of September, copper prices were averaging US$2.64 a pound. This compares with US$3.12 as recently as May.
Peru may also suffer from the Federal Reserve’s pre-announced raising of interest rates. If these take effect over the next twelve months, they will tend to divert capital flows away from Latin America by making it more attractive to invest in the United States. It will also raise the costs of debt servicing for countries with substantial dollar-denominated debts.