U.S.-born global financial crisis metastasized: Peru’s year-end inflation expected to top 7.6 percent

Peru's average national inflation rate is expected to rise well beyond the Central Bank's set goal of 2 percent to a decade-high of 7.6 percent by the end of 2008, according to Lima's Chamber of Commerce, or CCL.

Imported inflation, which occurs when imported raw or partly-finished goods become more expensive, often as a result of currency depreciation, no longer drives inflation in Peru. According to the CCL, 75 percent of inflation is due to internal factors, such as a greater internal demand for goods.

“Before, external factors were the most important component of inflation,” CCL Economic Institute’s Director, César Peñaranda, told daily La Republica. “But now, they have reduced the prices of food and oil. The Central Bank’s measures are good and couldn’t be any more forceful because that would complicate the economy.”

Peru’s average national inflation rate for the first eight months of this year registered at 4.7 percent, beyond the Central Bank’s set goal of 2 percent, and rose slightly from 0.56 percent in July to 0.59 percent in August. Consumer prices rose 0.57 percent in September, and transportation costs have surged.

But, Peru’s Central Bank, who in August lifted deposit requirements for borrowers in an attempt to control inflationary pressures, has yet to budge on its benchmark interest rate fixed at 6.5 percent.

“This decision is based on the high level of uncertainty concerning the world economy’s evolution and the impact it will have on global economic activity, our exports and imports’ international prices as well as the international financial flows,” said a representative of the Central Bank Thursday after a monthly monetary policy meeting.

“We must emphasize that recently prices have fallen for raw material and oil, that imported food prices tend to fall, and that this favors the gradual reduction of inflation in the country.”

Article courtesy of the Peruvian Times.

Peru's March Consumer Prices Climb Most in Four Years

Peru's consumer prices climbed the most in four years last month, and more than economists estimated, led by higher costs for fruits, vegetables and fish.

The monthly inflation rate accelerated to 1.04 percent in March from 0.91 percent in February, the national statistics agency said today. Annual inflation quickened to 5.55 percent from 4.82 percent in February, the agency said.

Economists had estimated monthly inflation of 0.5 percent and annual inflation of 4.99 percent last month, according to the median estimates compiled by Bloomberg. The central bank may force banks to keep higher levels of reserves on deposits, thereby decreasing liquidity, said Jorge Sanchez, an analyst at Lima-based consulting firm Maximixe Consult SA.

"Inflation was higher than expected,'' Sanchez said in a telephone interview. "It's partly due to food wholesaler speculation and rising prices of imports, which is beyond the bank's control.''

Fish prices rose 7.4 percent last month as demand increased during Holy Week, when many practicing Catholics remove meat from their diets and eat more seafood. Fruit and vegetable prices jumped 9.5 percent as flooding and landslides during the rainy season limited food supplies.

Prices will drop by May as an economic slump in the U.S. blunts demand for commodities, central bank President Julio Velarde said March 27. The bank targets annual inflation of no more than 3 percent.

"Recent cuts in tariffs to food imports and excise taxes to fuels are likely to be helpful, but not in the very short term,'' Boris Segura, an economist at Morgan Stanley in New York, wrote in a March 30 report. "Food inflation is likely to keep exerting pressure.''

Peru's currency, the sol, strengthened 0.7 percent to 2.731 per dollar at 1:25 p.m. New York time.

March's monthly inflation rate was the highest since February 2004.

Alex Emery, Bloomberg.com

Rising prices, accelerating inflation and falling exchange rates are all affecting The Colour of Hope and our work. Funds go considerably less far now than they did a few months ago. We're hoping that the situation evens out by May, as predicted.

Business Executives Annual Conference 2007

Each year, a Business Executives Annual Conference (Conferencia Anual de Ejecutivos – CADE) is held in Peru.

The 45^th CADE took place this year from 29^th November to 1^st December in the city of Trujillo in northern Peru. The objective of this year’s debate was to determine “Everything we need to be a just and prosperous country”, or in the words of the CADE committee, to determine what Peru needs to do in order to become a first world country within the next 30 years.

However, the conclusion this year seems sadly little more than a reinforcement of what was established in previous years, namely, the need to gain a better understanding of how to breach the ever widening ‘rich poor divide’.

Things have advanced very little since 2006. As one of the members of the audience commented, “Peru is a long way off being a just and prosperous country, because it’s much easier to be prosperous than just.” Only very few of the many speakers who attended the event commented on what actually needs be done to combat poverty and to encourage social integration.

The two foreign speakers, Juan Enríquez Cabot and Xavire Sala-i-Martín claimed that the only way to attain justice, equality and prosperity is by investing in the future, and specifically by investing in education. 84% of those who attended CADE 2007 agreed that the Peruvian government’s main goal should be to improve the quality of the country’s education.

Yet the need to invest in education comes as old news – the last Global Competitiveness Report from the World Economic Forum ranked Peruvian primary education 95^th out of 131 countries - the worst in the whole of South America.

The president of CADE 2007, Diego de la Torre (pictured above), called attention to the need for greater social responsibility and anthropological sensitivity as new concepts that should be form the basis of any enterprise in Peru. And the president of the Peruvian Institute of Business Administration (Instituto Peruano de Administracion de Empresas - IPAE), Claudio Herzka (pictured above), stated that in order to become more competitive, Peru needs to focus on the long-term.

Yet both of these proposals require long term investment, commitment and stability; goals that despite nearly 6 years of steady economic growth, Peru still hasn’t attained. Fernando Zavala, ex Economics Minister stated that Peru’s economy is above the average for Latin America and 95% of those who attended CADE 2007 agreed that Peru is advancing. Yet there is still a lot of work to be done with regards to poverty reduction – 43% of Peru is still living below the poverty line.

Javier Abugattás, a member of the panel, confirmed that one of the main obstacles to reducing poverty is the radical centralism that characterizes Peru. And Jaime Saavedra, another panel member, added that there is a great deal of inequality regarding the distribution of the country’s basic services – it is almost impossible for prospective businessmen from jungle regions to generate a sizeable income when the communication and transport systems are so deficient.

The discussion could have gone on for much longer, but when Fernando Zavala requested a second 6-minute extension, many members of the audience complained that they’d “be late for lunch”. It seems they had discussed poverty reduction for far long enough. Unfortunately, for the majority of Peruvians the debate is only just getting started.

Photo courtesy of El Comercio, Sunday 2nd December edition

Update - Falling exchange rates and rising prices in Peru

Here is a comment that a Colour of Hope supporter made in reply to post, Falling exchange rates and rising prices cause alarm across Peru, from Wednesday, 10th October -

The dollar is indeed weak worldwide, and food price inflation is indeed a universal phenomenon (there have even been boycotts of pasta in Italy over its increased prices), but that doesn't of course make the situation any less devastating.

The good news is that with the orthodox macroeconomic policy pursued by Alan Garcia, Peru almost certainly won't see the hyperinflation it experienced when he attempted to spend more money than the government had in the 1980s. The bad news is that with stockpiles low worldwide food prices won't get any lower over the next year or two.

Expect the Peruvian government to come under increasing pressure to follow countries such as Argentina, and, most recently Russia, in imposing price caps on food. While this is superficially appealing, it has the perverse effect of increasing scarcity (because shops can't afford to stock goods that they have to sell at a loss) and forcing the government to spend vast amounts of money to keep prices low, which, in the long run, is what would make hyperinflation more likely again.

What is the situation at the moment? Have food prices dropped at all? Are price controls being discussed? Is the government getting the blame? Are Humala or any other populist figures capitalising on the issue?

The situation in Peru hasn't changed so far, unfortunately. Food prices haven't dropped and exchange rates haven't returned to what they were before 10th October. The good news though, is that rates haven't fallen any further. Although the dollar has remained at an all-time low, it seems to be stable for now.

I think there are mixed views about the government - Alan García has recently raised the minimum wage, which brought him some popularity amongst lower-middle classes. But after the 1980's fiasco, many people are extremely sceptical about the government's ability to control inflation. I haven't heard much about price controls so far, but there was talk of introducing a maximum price for milk.

El VRAE - The Forgotten Valley of Peru

More coca is produced in the VRAE (River Apurímac and River Ene Valley) than anywhere else in Peru. Naturally, it has become an epicentre for cocaine production and is a regular drug trafficking route.

The entire valley has only one local police station and six policemen. The station is cut off from all communication given that the only telephone was disconnected 6 months ago due to unpaid bills.

54.27% of the valley's population is poor and 44.84% is extremely poor. 51% are suffering from chronic malnutrition.

80% of housing lacks potable water and 77% has no street lighting.

The life expectancy for women in the valley is 60 and 64 for men.

Of the 200,000 people living in the valley, only 10,000 (5%) have finished secondary school.

30% of the population as a whole and 49% of women in the valley is illiterate.

Anteccasa, one of the valley's typical towns, has no running water, electricity or medical service. There is only one primary school for the 40 children and the teacher hardly ever turns up. If the children want to study, they must walk more than 3 hours in order to reach the next school. The nearest secondary school is even further away; nobody in Anteccasa has ever been.

The medical centre in Pichari, another VRAE town, is falling to bits. Patients must queue for hours to register because notes are taken by hand. Even if there were a computer it wouldn't be of much use because the electricity cuts out on a regular basis, ruining the few bits of medical equipment the centre has managed to obtain. Vaccinations have to be put between blocks of ice until the electricity returns and the night team quite often works by candlelight. The centre's medical staff has to work around the clock because there are not enough of them for the number of patients. The situation is the same in 8 other medical centres throughout the VRAE and there is only one hospital for the entire valley.

In 2006, the Peruvian government initiated "Plan VRAE" - "an option of peace and development for the VRAE", yet there have been no great changes to the valley's education system, medical service and general standard of living so far. The VRAE police headquarters, opened by the Plan in December last year, has only one van - hardly even sufficient to patrol the edges of the 13,000 square kilometre valley. The Plan's budget has been increased for 2008, and after a recent terrorist attack in Ocobamba, the area has been re-declared a state of emergency. But this is not enough for the VRAE people. They need to see change now, not in two, three or four years time.

Last Monday, 5th November, I posted a report by Andres Oppenheimer, entitled, "Peru may be the next rising star in Latin America". Oppenheimer states, "Peru has a long way to go, especially when it comes to competing in the global economy...but people who are optimistic about Peru in the long run may be right...it may indeed become a star economy in the not-so-distant future." This optimism may well be true for the country's economy in general; many parts of Peru are seeing steady progress and change. But the VRAE is by no means one of these parts; in the general air of development and success, the VRAE and other similar areas are all too easily forgotten.

Map courtesy of uterodemarita.com

The Oppenheimer Report - Peru may be the next rising star in Latin America

When I asked senior World Bank economist Marcelo M. Giugale in a recent television interview which countries will be the economic stars of Latin America over the next 20 years, I was surprised by his answer. The first country he mentioned was Peru.

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''Peru?'' I asked, somewhat incredulous. When economists talk about Latin America's bright spots, the first country they usually cite is Chile, which has been growing steadily for nearly two decades and has reduced poverty from about 40 percent in the early '90s to about 15 percent today, more than any other country in the region.

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When pressed for other examples of Latin American countries likely to prosper in the near future, many cite Brazil. It's a giant country that is moving toward modernity at a snail's pace, but -- with more than 50 percent of South America's GDP -- is raising high expectations because of its sheer size, and its leftist government's generally sound economic policies.

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But Peru, until now, has seldom come up as a country of the future. Most often, it has been associated with political scandals, natural disasters and political uncertainty.

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Last year's elections had pitted former President Alan García, whose irresponsible populism had ruined the country during his 1985-90 term, and Ollanta Humala, a leftist former military officer who was publicly backed by Venezuela's narcissist-Leninist leader Hugo Chávez. When Garcia won by a thin margin, Peru's business community welcomed his victory as the lesser of two evils.

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''Making predictions for the next 20 years is somewhat risky, but I would look at countries like Peru,'' Giugale said in the soon-to-be-aired Oppenheimer Presenta television interview. [Excerpts can be seen now at www.MiamiHerald.com/americas].

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''The countries that will succeed are those that find the right balance between economic efficiency and social solidarity,'' he said. ''That's because countries that follow that middle-of-the-road path are the ones that will have the most political feasibility to get things done.''

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Giugale, who cited Colombia as another country that may surprise everybody for the better in coming years, especially if it gets its free trade agreement with the United States approved by the U.S. Congress, said Peru is already showing pretty impressive growth figures. Consider:

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• Peru's economy has been growing at about 6 percent a year for the past six years, a longer period of steady growth than most countries in the region. The United Nations Economic Commission for Latin America is projecting a 7.3 percent growth for 2007, and a 6 percent increase for 2008.

• Poverty has fallen from 54 percent of the population in 2001 to about 44 percent, according to official figures.

• Inflation is at about 2.8 percent, one of the lowest rates in the region.

• Exports have risen at an average annual rate of 24 percent since 2001, including an 18 percent annual rise in nontraditional exports, mostly agricultural goods and textiles.

• Foreign direct investment has soared from $810 million in 2000 to $3.5 billion last year.

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My opinion: Peru has a long way to go, especially when it comes to competing in the global economy. Just Wednesday, the World Economic Forum's new ranking of the world's most competitive economies ranked Peru 86th among 121 countries, down eight places from its spot last year.

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But people who are optimistic about Peru in the long run may be right. García has had the wisdom to continue the sound economic policies of his predecessor, Alejandro Toledo, who despite his low popularity set the stage for long-term economic growth and a reduction of poverty.

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This is no small achievement in Latin America, a region long characterized by boom and bust cycles where many presidents love to proclaim themselves founding fathers of supposedly new and ''revolutionary'' economic models -- like we are now seeing in Venezuela, Bolivia and Ecuador -- that help them gain absolute powers, but most often at the cost of destroying their countries' economies and increasing poverty in the long run.

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Chile, and most recently Brazil, have opened a new chapter in Latin America's modern history: They are leftist-ruled countries that pursue responsible economic policies, attracting investments and creating the base for long-term growth. Peru is a welcome addition, and it may indeed become a star economy in the not-so-distant future.

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Andres Oppenheimer
aoppenheimer@herald.com

Falling exchange rates and rising prices cause alarm across Peru

The Dollar to Nuevo Sol (local Peruvian currency) exchange rate has crashed from 3.15 to 2.96 in the space of days. This means that for every $100 exchanged, people are receiving 19 Nuevo Soles fewer - the equivalent of 19 bus fares or about 4 average restaurant meals. This is extremely worrying for many local businesses who hold bank accounts in dollars and citizens whose monthly wages are paid in dollars.

The Peruvian government recently stated that the dollar has devalued worldwide, not just in Peru, and that therefore there is no reason for concern. This has done little to calm the Peruvian people however; in the 1980’s the current President, Alan Garcia, froze all bank accounts held in dollars!

At the same time, prices are beginning to rise – bread has almost doubled in price over the last few months and other basic food stuffs, such as eggs, have gone up too. What with Alan Garcia back as President, people are worried that they will suffer again the terrible hyperinflation of his 1980’s government, which was worse than that of post Nazi Germany in the late 40’s. People are scared for their savings, their livelihoods and their future.

The devaluation of the dollar and rise in prices has affected The Colour of Hope too – it means that for the near future we will need to spend more to achieve our aims. It also means that the young people we help are even more in need of aid than before – rising prices and falling exchange rates are worrying enough for those who are lucky enough to have jobs; for the unemployed they’re devastating.