By the Blouin News Business staff

Can Peru’s GDP growth maintain its tempo?

by in Americas.

Peruvian President Ollanta Humala at the end of his speech to the nation at Congress on Independence Day in Lima, July 28, 2013. Photo: Reuters

President Ollanta Humala after his Independence Day speech in Lima, July 28, 2013. Photo: Reuters

Peru’s president Ollanta Humala has cause to pause for thought. Two years into his five-year term his approval ratings have hit new lows. Social discontent and political dissatisfaction is slowly, though steadily, spreading. Now the country’s well-performing economy is showing signs of slowing after averaging annual growth of 6.5% over the past decade. In May, growth slowed more than expected, to 5% year-on-year, brining growth in the first five months of this year to 5.4%. Investors, too, are starting to think Humala’s best years are behind him.

A slowing global economy has held back the Andean country, which is closely connected to global commodities markets. Peru is a leading exporter of copper and gold. As international demand for the metals decreases, so does the country’s mining exports. Take China and copper: China accounts for 40% of global copper demand and owns 24% of Peru’s mines. As China’s economy has slowed, the metal’s price has been hit — down 25% from its late-February peak. Copper accounts for a fifth of Peru’s export earnings. The effect of lower prices transmits itself quickly to the economy.

In his annual Independence Day speech to Congress on July 28, Humala made a clear reference to the connection. “Are these signs that the cycle that has favored our economic growth is coming to an end? It is possible,” he said. But he thought the country had the wherewithal to survive lower commodity export earnings. He highlighted Peru’s low public debt and high international reserves (close to $70 billion, equivalent to more than 33% of GDP, according to the central bank). Another strong pillar of Peru’s expansion has been an expanding middle class, which will continue to boost domestic demand. The official forecast of 6% growth for this year still looks optimistic, however.

The middle class could be the determinant of the success of Humala’s remaining three years in office. Segments of society are marching in the streets, emulating protesters in Chile and Brazil, and gaining momentum. Despite the wealth mining has produced “the country has failed to generate mass economic improvements for the rural poor, many of whom are further marginalized by the focus now being fixed on the increase in mining exports and the failure to address widespread inequality”, writes the Council on Hemispheric Affairs.

Peru’s finance minister Luis M. Castilla and the governor of the Central Reserve Bank, Julio Velarde get most of the credit for the macroeconomic stability Peru has experienced since Humala came to office. As demonstrators start to challenge his government and Humala has less mining revenues to pay for public spending to reduce social divisions, the country’s economic future will be evermore in their hands.