An Upturn In Peruvian Economic Growth May Be Temporary

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Includes: EPU
by: Discount Fountain
Summary

Peru's economy grew at a rate of 2.68 percent in March as a result of increased mining activity.

However, commodity prices still remain under threat.

With an El Nino event forecasted for the country, there is a risk that fishing exports will not grow at the anticipated rate.

In this context, Peruvian economic growth may struggle to pass the 2 percent mark again in 2016.

In spite of a broad downturn in commodities, Peruvian economic growth appears to have rebounded to the fastest pace in 11 months at a rate of 2.68 percent in March compared with the same period last year. With 60 percent of Peru's export earnings originating from mineral sales, a rebound in mining activity by 18 percent compared with the previous year accounted for a large portion of Peru's recovery.

However, having previously argued that a mining recovery could potentially be under threat - with investment bank UBS predicting a pullback in iron ore prices to $45 per tonne by the end of this year - the effects of the same could extend to the Peruvian economy as a whole should the current recovery simply be fueled by a rise in mining prices.

In this regard, we could be looking at a growth rate which is lower than the 2.68 percent achieved this year should lower prices across mining commodities materialize, or if the Peruvian economy fails to capitalize on growth across other industries. This holds true across commodities in the more general sense, such as that of copper and gold, of which Peru is respectively the third and eighth largest worldwide producer. With U.S. interest rates all but set to rise by September of this year, we may well see prices of these commodities fall if past proves to be prologue.

Moreover, Peru also appears to be under pressure as far as growth across other industries is concerned. For instance, while fishing earnings had increased by 17.74 percent as a result of a rebound in anchovy catches, anticipation of an El Nino weather event before the end of this year has led to speculation that catches for 2015 will be significantly lower. Additionally, while financial services had seen growth of over 12 percent this year, the central bank has been forced to cut reserve requirements to 6.5 percent in order to spur lending growth. However, should a slowdown across some of the industries mentioned materialize, then there is a risk that loan demand will decrease and this in turn will negatively impact growth in the financial services sector.

To conclude, while Peru's economy has been on an uptrend as a result of increased export activity, many extraneous factors threaten growth in Peru going into 2016, and I am therefore somewhat pessimistic that economic growth in the country exceed the level achieved this year.

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