Peru’s Government Struggles to Confront Economic Reality

The government of Ollanta Humala faces a tough year ahead of the next presidential election.

A reluctance to devalue the sol, a collapse in world commodity prices and protests at the deregulation of extractive industries promise an uncomfortable year for Peru’s president, Ollanta Humala, before the election in 2016.

After more than decade as one the highest-growing economies in the world, Peru’s expansion weakened last year. Falling commodity prices, particularly a 25 percent price reduction in copper in the last six months, have hit Peru hard.

The Central Reserve Bank’s desire to proceed with “business as usual,” forecasting growth for 2015 between 4.5 and 5 percent, can only exacerbate Peru’s predicament.

Peru has a dollarized economy. The strong and stable American currency is frequently used by local companies for business purposes. While many of Peru’s Latin American neighbors have tried to stimulate their economies and halt deflation by devaluing their currencies in accordance with market forces, Peru’s sol has been revalued against the dollar to stave off another period of inflation.

The more pressing concern now is recession. An excessively strong currency will reduce export demand. At the same time, the government’s plans to increase copper production now that prices are low carries the risk of Peru selling its natural resources short.

Claims that growth can be nourished by deregulating the mining industry seem unrealistic in the light of the cancelations of the Tia Maria copper mining project worth $1 billion and the Pluspetrol gas project amid the deaths of environmental protesters. The Conga mining project, the largest in Peruvian history, worth an estimated $4.7 billion, has been suspended since 2011.

Political stability is far from a given as the Humala government is on its sixth prime minister and sixth interior minister since 2011.

With a presidential election due next year, Humala may want to avoid facing economic reality and persist with optimistic predictions of growth. However, the central bank’s estimated $66 billion reserves may not be enough to keep up the charade until next summer.