In October 2015, the world’s financial leaders converged upon Lima for the World Bank Group and IMF Annual Meeting. The gathering, held in Latin America for the first time since […]
In October 2015, the world’s financial leaders converged upon Lima for the World Bank Group and IMF Annual Meeting. The gathering, held in Latin America for the first time since 1967, was a key event as leaders worldwide strategized over how best to approach the financial challenges facing the world. Headlined by speeches by Jim Yong Kim and Christine Lagarde, the directors of the World Bank and the IMF, respectively, the meetings provided key insight into the strategies that will no doubt affect both the Peruvian economy and the wider world as a whole.
The overall mood at the conference was wary concern. Lagarde projected that global growth would increase marginally to 3.6% in 2016, a level “much lower than what is needed to make deep inroads into unemployment and poverty.“ While noting that shifts in monetary policy and global commodity demands will lead to restructuring and uncertainty as countries adapt to a new norm, Lagarde sounded notes of optimism, noting that Latin America “is generally better prepared for the changing winds than in the past“ thanks to its potential in natural resources and infrastructure development.
In his prepared remarks, Kim reiterated the World Bank’s goals of ending extreme poverty by 2030 and boosting shared prosperity for the bottom 40% of the population in developing countries through a strategy summarized in three words: “grow, invest, insure.“ A trained physician, Kim drew on his prior public health work in Peru, stressing the need to increase human capital through investments in education and health programs. He concluded by talking about climate change and the need to “recommit to making tough choices.“ Though addressed to the world economy as a whole, there were several specific policies mentioned in both speeches and throughout the annual meeting that will have a great impact on the Peruvian economy. Reviewing these policies is key to understanding the direction that the Peruvian economy is headed toward and the challenges it will face in the near future.
A look at the economies of Peru’s two largest trade partners is illuminating. Lagarde’s speech briefly referenced China’s shifting economy and the US’ expected rise in interest rates, two issues that have significant effects on the Peruvian economy. China has been the world’s largest importer of commodities over the last several years as its economy has grown at tremendous rates; however, a slowdown is expected. Demand for copper, for example, has fallen over the past year as major infrastructure projects have slowed, leading to surplus supply and a corresponding fall in prices. Peru, the world’s largest copper producer, has felt the effects of these falling commodity prices; several large mining projects have been postponed in the past year.
The expected rise in interest rates in the US will also have wide-ranging effects that will be felt in Peru. After holding the short-term interest rate at zero for over five years, the Federal Reserve announced that it would be moved to 0.5%, with additional increases expected over the next year. There is no set consensus over how this will impact investment; however, this is likely to strengthen the American dollar. This could lead to a rise in imports as foreign goods become relatively less expensive for American consumers. The uncertainty created by the move might be its own biggest obstacle: investment might slow down while investors wait to see how the markets react.
Still, uncertainty should not be confused with pessimism. In his press conference at the annual meeting, Kim noted the Latin American economy is expected to improve to a growth rate of 1.1% in 2016, with Peru expected to outperform the rest of the region and reach growth of 3.3%. Though this number is below the country’s growth rate from 2000-2012, Peru is still positioned as a strong emerging market. Steady leadership and open communication should allow Peru to deal with this period of uncertainty and remain a strong and vibrant global economy.