US-China trade war could cost Peru dear

08 June 2019

Cheer-leader or sober analyst? The Ministry of Economy and Finance (MEF) tends to abound with confidence in its predictions at times when independent economists prefer a less ecstatic take on the future of growth.

In its predictions for 2019, the MEF forecast a growth rate of 4.2%, the fastest for several years. However, this does not sit easily with concerns about what a trade war between the United States and China might mean for Peru.

According to Kurt Burneo, at Centrum (the Catholic University’s business school), increases in tariffs between Peru’s two most important export markets can only bring bad news. He calculates that they could lop a full percentage point off this year’s growth rate. Peru stands to lose from any decline in demand for minerals, especially copper.

Burneo points to the effect of lower demand on the exchange rate, and how faster devaluation would lead to a fall in real incomes and therefore a drop in domestic demand.

The MEF’s figures for growth presuppose a 7.6% increase in private investment over the course of the year, and an increase in public investment of 4.5%.

But according to the latest MEF figures, there was a 6% fall in public investment over the first five months of 2019. The problem here, it appears, is the incapacity of decentralised governments to spend the resources at their disposal, notably with relation to repairing the damage caused in 2017 by the Niño Costero.

For the record, the central bank (BCRP) published figures at the end of May showing that GDP grew by 2.3% in the first quarter of 2019 in relation to the same period of 2018. Primary export sectors were mainly in negative territory with those sectors that grew fastest being those geared mainly to the domestic economy. 

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