WHAT A YEAR

Peru 2015 | DIPLOMACY | YEAR IN REVIEW

After a year of declining growth, Peru's market is poised for resurgence. But as the economy scrambles back, impending elections and ongoing reforms warrant a close eye.

If economic conditions hold, Peru may come close to doubling last year's growth rate, after the national economy finally succumbed to a global downturn in 2014 that sent regional economies spinning. Two factors support this assessment—democratic consolidation and strong economic fundamentals. In fact, these same characteristics may well be responsible for Peru's quick recovery and bright outlook. On the economic side, 2014 saw the country strengthen its position in international trade, establishing the right conditions for a strong domestic economy.

President Humala has made social cohesion and reducing poverty the central tenets of his presidential strategy. This means shedding the country's past reputation for rebel insurgency, social stratification, and a string of marginally democratic presidents. The results are in, and in 2014 alone, some 289,000 Peruvians were lifted out of poverty. This figure represents a 22.7% decrease in the number of citizens living below the poverty line.

To combat corruption and nepotism, a constitutional amendment restricted the presidential position to one five-year term. This means that 2014 saw the contenders for the presidential position jockeying for attention, giving observers a chance to evaluate the competition in the run up to the October 5th elections. Two former presidents are likely candidates. Alan Garcia and Alejandro Toledo. Keiko Fujimori leads the pack—after losing by a slim margin to President Humala in 2011—but given her father's poor track record, she is a polarizing figure.

Despite starting out on a strong footing, 5% GDP growth in 1Q2014 according to INEI—lower production, falling prices, and softer demand from China had a significant impact and by 4Q2014, growth was an abysmal 1%. In fact, economic activity was primarily weighed down by falling exports. Decreased global demand and falling prices for commodity exports exerted pressure on the external sector—especially exporters, importers, and sub-sectors of the capital markets. The potential for even more fall off was mitigated by decisive central bank moves to prop up the sol, which kept import prices manageable, and offset a potential slump in consumer activity.

Moving into 2015, exports contracted at an alarming rate, and the country's trade balance hit a record deficit. Meanwhile, business confidence fell into pessimistic territory in March—46.7 points in April, according to the Central Bank's business confidence indicator—that suggests investment growth will remain weak in the near term. The government is boosting growth with countercyclical fiscal spending, while pushing through investment reform. And with last year's doldrums fresh in everyone's minds, economic players were mostly confident that these policies would fuel economic momentum as the year progresses. President Humala's popularity is closely linked to the economy, and he has limited time in office in which to enact further policies. But if the current situation seems austere relative to the commodity-boom of yester year, Peru remains in better shape than most of its regional peers.

Another development in 2014 was the authorization by the Council of Ministers of the fourth stimulus package, worth 1.6 billion soles (about $547 million) to boost the Peruvian economy. President Humala's stimulus plan consisted of a multi-pronged agenda—legal reform to promote economic activity, short-term fiscal stimulus measures, streamlining administrative processes and eliminating redundant bureaucracy; and tariff reduction and youth employment programs.

The final dynamic of Peru's aggressive growth measures has also been the most controversial. The backlash from the country's youth outlines a contentious region within the social sphere. As Peru integrates into the international economy, its working class is adamant that the social safety net remain intact, and that the gains of the external sector are equitably distributed.

The law, passed by congress, is designed to reduce the costs of formalization by lowering barriers to entry into the formal sector. While workers in the informal sector are left to fend for themselves, formal sector workers have a service compensation fund, bonuses, family bonus, 30-days of vacation, and a share in profits. Companies are now able to waive many of these rights in an effort to incentivize young hires.

The young, for their part, are not thrilled by the idea of less time off and fewer benefits that their older counterparts. Many have taken to the streets to vocalize this. In January 2015, lawmakers rescinded the unpopular legislation, after heavy backlash from student organizations and labor unions.

The physical outlay of the country is changing rapidly as well. President Humala and China's President Xi Jinping signed a series of agreements in Beijing that will change the way that companies do business in Peru. The agreements finalized a number of projects in the mining and petroleum sectors. However, the most exiting development was a memorandum of understanding to create a Twin Ocean Railroad Connection with Brazil. This new railway will establish rail coast-to-coast transport and drive up trade between Pacific Rim countries and the Atlantic.

In more abstract terms, Peru is bolstering its bridges to the east through visa-free travel to the EU that will be implemented in 2015. The motion, which was promoted by Spain and approved by the European Parliament in May 2014, will allow individuals from Peru to visit Europe without a visa for a maximum time of 90 days. The world is shrinking, and Peru is everywhere.