Peru deficit: a warning sign?

Will Peru have to start taking advantage of its international reserves and counter-cycle fund sometime in the not-so-very-distant future?

A gloomy April suggests yes. The world’s second biggest silver, copper and zinc producer and sixth biggest gold producer has logged its first monthly trade deficit since April 2008, as well as a steep drop in gold production.

With minerals accounting for 60 per cent of Peruvian exports, any sustained drop in demand from China, the United States and Europe will take its toll on an economy that’s forecast to grow at 6 per cent this year.

Ollanta Humala, Peru’s president, has pleasantly surprised markets and investors thus far with a strong commitment to orthodox economic policy, ensuring the country is better placed than most to navigate stormy waters.

International reserves stood at $58.6bn at the end of May and the country had stowed $5.6bn in its “fiscal stabilisation” fund to help offset external shocks. Private investment flows are still strong, up 13.7 per cent, with $53bn in commitments up to 2016. Public investment has also increased 36.9 per cent year on year, with strong growth in agriculture and an ongoing credit and construction boom.

But mining remains the backbone of the economy, making up the bulk of the 11 per cent drop in exports in April, which resulted in a $144m trade deficit. Gold production the same month was down 9.69 per cent, according to the ministry of energy and mines.

Peru watchers will be eyeing both those figures closely for May for signs of a slowdown.

Related reading:
Peru: cooking up social change, beyondbrics
Who’s afraid of a slowdown in China? Not Peru, beyondbrics
Peru’s mining strikes: hotting up, beyondbrics
Special Report: Investing in Peru 2011, FT
Peru file, beyondbrics