Peru Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
22 Feb 2013
eISBN:
9781475582604
ISBN:
9781475582604
Language:
English
Keywords:
ISCR; CR; Peru; commodity; export; non-traditional export; trade diversification; boom and bust cycle; world export; metal export; Mining sector; Imports; Commodity booms; textile export; trade openness
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The purpose of the study is to examine Peru’s effective interest spread through accounting decompositions, financial ratio analysis, and spread regressions. The government’s financial restructuring programs accelerated the banking sector consolidation process. Robustness of Peru’s credit system and interest rate decomposition has also been viewed. Three key financial ratios—return on equity (RoE), return on assets (RoA), and net interest margin (NIM)—focused by financial statements, have also been studied. Finally, the framework of Espino and Carrera used for the estimation of interest rate spreads has also been discussed.

Abstract

The purpose of the study is to examine Peru’s effective interest spread through accounting decompositions, financial ratio analysis, and spread regressions. The government’s financial restructuring programs accelerated the banking sector consolidation process. Robustness of Peru’s credit system and interest rate decomposition has also been viewed. Three key financial ratios—return on equity (RoE), return on assets (RoA), and net interest margin (NIM)—focused by financial statements, have also been studied. Finally, the framework of Espino and Carrera used for the estimation of interest rate spreads has also been discussed.

Trade Evolution and Policy Challenges1

Peru has been achieving high and stable economic growth since the mid 2000s largely underpinned by prudent macroeconomic management and favorable terms of trade. Buoyant commodity prices, especially for copper and gold, have benefitted Peru both in terms of expanding exports and attracting mineral related foreign direct investments. Greater diversification in products and trading partner concentration could go a long way in reducing Peru’s exposure to commodity boom and bust cycles and help to put economic growth firmly on a sustainable path.

A. Introduction

1. Peru’s trade openness has risen significantly in the last decade. Trade openness—measures as the sum of exports and imports to gross domestic products—increased to 47 percent of GDP in 2011, a great leap from 27 percent of GDP in 2002. This upward trend in trade openness was underpinned by an expansion of exports which increased seven times in nominal terms during 2000–11, on the back of the global commodity price boom. The international price of copper—one of the key exports, rose close to 400 percent in the last decade (2000–11). Imports as a share of GDP also surged rapidly during 2007–08, fueled by buoyant domestic demand and foreign direct investment inflows. Peru’s exports and imports contracted sharply, with the negative terms of trade shock of about 17 percent, during the global crisis in 2008–09. However, by 2011, Peru’s trade to GDP ratio has largely recovered to the pre-crisis peak. Trade liberalization and the establishment of free trade agreements (FTAs) with its key trading partners have also helped in increasing Peru’s trade openness.2 Among the LA6 economies, Peru’s achieved the largest gain in trade openness during the 2000–11 period, emerging as the third most open economy to trade in 2011 (Figure 1).3

Figure 1.
Figure 1.

Peru and LA6: Trade Openness

Citation: IMF Staff Country Reports 2013, 046; 10.5089/9781475582604.002.A002

Sources: BCRP; WEO Database; and Fund staff calculations.

2. Higher openness was accompanied by rising share in world trade. The share of Peru’s exports in world exports increased from 0.11 percent in 2000 to 0.28 percent in 2011. This represented an expansion of about 2 ½ times, and was larger than any other LA6 economy (which increased on average by 1½ times during the same period). At the same time, the share of Peru’s imports doubled from 0.12 percent of world imports in 2000 to 0.22 percent of world imports in 2011, recording a pace of expansion that topped among LA6 economies during 2000–2011 (Figure 2).

Figure 2.
Figure 2.

Peru and LA6: World Trade Integration

Citation: IMF Staff Country Reports 2013, 046; 10.5089/9781475582604.002.A002

Sources: UN Commodity Trade Statistics Database; World Bank WITS; and Fund staff calculations.1/ The product groups are the sum of 1-digit SITC (Revision 3) export data as follows, fuels (SITC 3), primary commodities (SITC 0. 1, 2, 4, -27, -28), non-ferrous metals & ores (SITC 68, 27, 28), and manufactures (SITC 5, 6, 7, 8, 9, -68).

3. Peru has gained world market share in mineral products since mid-2000s. Peru’s export of non-ferrous metals and ores expanded rapidly reaching an export market share of 2 percent of world exports since 2006 (from 1.2 percent in 2000) but is still low compared to other countries in the region. In comparison, the shares of Brazil and Chile in the world exports of non-ferrous metals and ores are 5¾ and 5½ percent respectively in 2011. Peru’s exports of primary commodities, while smaller than other large Latin America primary commodities exporters such as Brazil which holds 5 percent of world exports, have also gained world market share, rising steadily to about 0.5 percent of world exports in 2011 from about 0.3 percent in the early 2000s. On the other hand, the rise in Peru’s share of world imports was largely a reflection of the rising demand on primary commodities and manufactures (Figure 2).

4. This chapter provides an overview of the main characteristics of Peru’s trade boom during 2000–11, with the objective of analyzing some of its principal trends and structural changes. Section B examines the evolution of Peru’s mining exports during the past decade, which has been supported more by the rise in international metal prices than volume growth, and trends towards higher product concentration in mining. Section C focuses on Peru’s increasing exposure to China through trade linkages and their implications. Section D provides some considerations on the merits of greater diversification in trade and economic structure that could help to reduce vulnerabilities to adverse external shocks to commodity exports, and Section E concludes.

B. Riding on the Commodity Price Boom

5. The mining sector is shaping the pattern of economic development in Peru. The importance of the mining sector more than doubled from about 5½ percent of GDP in 2000 to 12 percent of GDP since 2006 at current prices. While the mining sector has become a larger part of the economy, real growth in the mining sector slowed to an annual average of 2.2 percent in 2006–11 (from 7.2 percent in 2000–05). On the other hand, the share of agriculture and fishing (8.5 percent in 2000 to 6.9 percent of GDP in 2011) and the tertiary (62 percent in 2000 to 57 percent of GDP in 2011) sectors both declined at current prices while the secondary sector has remained at around 24 percent of GDP during 2000–11.4 In part due to rich resource endowment and positive terms of trade shock, this pattern of economic development comes in contrast to many emerging and developing economies, which experienced a decline in the share of primary sector in the process of industrialization as production and employment first expanded in the secondary sector and then to the services sector as the economy moves up the value added chain.

Table 1.

Peru: Real GDP and Mining Sector GDP Growth

(Percent change; constant prices at 1994)

article image
Sources: INEI and Fund staff calculation.

6. Traditional exports gained share steadily in the period 2000–11, reflecting expansion of mining exports. Traditional exports increased by seven and a half times in dollar terms during 2000–11 to US$36 billion in 2011, representing 77 percent of total exports (20 percent of GDP) from about 70 percent to total exports in 2000. About three quarters of the expansion came from the growth in mining exports. On the other hand, non-traditional exports accounted for the remaining 23 percent of exports (6 percent of GDP) in 2011 (Figure 3).5

Figure 3.
Figure 3.

Peru: Mining Production and Mineral Exports, 2000–11

Citation: IMF Staff Country Reports 2013, 046; 10.5089/9781475582604.002.A002

Sources: BCRP; and Fund staff calculations.

7. Multiple metal exports have helped to reduce vulnerabilities. Mining exports increased by eight and a half times since 2000 to US$27 billion, accounting for 60 percent of total exports (15½ percent of GDP) in 2011. While Peru exports six key metals, the export structure has become more concentrated in copper (23 percent of total exports) and gold (22 percent of total exports), accounting for close to 80 percent of mineral exports (12 percent of GDP). The low correlation of gold prices with other metal prices has helped to reduce somewhat the impact of negative terms of trade shock.6 During the 2008–09 crisis, the decline in the value of copper exports of close to 20 percent in 2009 (copper prices plummeted by about 20 percent with nearly unchanged export volume) was partially offset by an increase in the value of gold exports of 22 percent in 2009 driven by both higher prices and volumes (Figure 3).

8. Export price growth has dwarfed export volume growth in the mining sector. One key feature that stands out during the past decade of rapid expansion in Peru’s mining exports is mostly from higher prices and less from higher volume. Metal exports increased by 8½ times in dollar terms during 2000–11, with prices contributing 2½ times more than volumes to the growth of export values. More specifically, the volume of copper exports increased by less than two and a half times (to 1.3 million metric tons) against a surge in copper prices of close to 5 times during the period. For gold, the volume change is smaller at an expansion of 57 percent (to 6.4 million troy ounces) against the effect of a five and a half times increase in gold prices (Figure 3). Given that global metal prices are projected to remain largely flat towards the medium term, further growth in the value of mining exports would hinge on volume gain through new or expansion of existing mines.

9. While non-traditional exports grew at healthy rates thanks to a rising volume, their share is still limited due to the booming prices in traditional exports. Non-traditional exports increased by five times during 2000–11 to US$10 billion in 2011 (30 percent of total exports or 6 percent of GDP). Albeit growing at an average 24 percent per annum since 2003 (excluding the temporary decline in 2009 associated with the global crisis), non-traditional exports remained at 5–6 percent of GDP since 2004 due to the rapid pick-up in traditional exports with surging mineral prices, while two major product categories, textile and agricultural and livestock, continued to account for one-half of total non-traditional exports.

10. Agricultural exports have emerged as the key non-traditional exports surpassing textile and apparel. Export of agricultural and livestock expanded by an annual average of about 20 percent during 2000–11, reaching close to 30 percent of total non-traditional exports in 2011 (from less than 20 percent in 2000). In contrast, textile and apparel exports increased by an annual average of about 10 percent during 2000–11, as saw its share declining to below 20 percent of total non-traditional exports in 2011 (Figure 4). Textile exports accounted for only about US$2 billion or 4 percent of total exports (1 percent of GDP). These recent trends largely reflect the gain in export competitiveness in Peruvian vegetable and fruits, with the notable example of asparagus which has emerged as one of the main non-traditional products exported from Peru.7 While unfavorable exchange rate movements are often cited as one of the factors impeding the growth of the textile and apparel sectors, market analysts also highlighted factors such as shortage of skilled labors, high logistics costs, and a lack of brand names as impediments faced by textile and apparel firms in further expanding exports.

Figure 4.
Figure 4.

Peru: Non-traditional Exports

Citation: IMF Staff Country Reports 2013, 046; 10.5089/9781475582604.002.A002

Sources: BCRP; and Fund staff calculations.

11. Export concentration has risen as a result of the commodity price boom. For Peru, the top 15 export product categories by SITC 3-digit level captured more than 80 percent of total exports (Table 2). They are concentrated in agriculture, mining and fuels, in part reflecting the commodity price increases, with only one of the top 15 export categories being a manufactured product. This is also consistent with the revealed comparative analysis indicating that Peru has comparative advantage in 15 categories, mostly in agricultures and mining products, measured at SITC 2-digit level (Appendix Table 1). Similarly, export concentration increased indicating declining diversification during the past decade, similar to the trend observed in other primary commodity exporters among the LA6 economies (Figure 5).8

Table 2.

Peru: Top Exports by Product, 2005-11

(Percent)

article image
Sources: UN Commodity Trade Statistics Database; and Fund staff calculations.
Figure 5.
Figure 5.

Peru and LA6: Export Product Concentration

Citation: IMF Staff Country Reports 2013, 046; 10.5089/9781475582604.002.A002

Sources: Sources: UN Commodity Trade Statistics Database; and World Bank WITS.1/ 2011 data are not available for Uruguay.

C. Increasing Trade Exposure to China

12. Export concentration by destination has declined slightly since the mid-2000s. The top three export destinations accounted for 38 percent of total in 2011, compared to 48 percent of total in 2005. However, Peru, like many other emerging economies, now relies relatively more on China than on the United States as both an export market and an import supplying country compared to a decade ago. The share of exports to China has risen steadily over the past decade to 15 percent of total exports (3.9 percent of GDP), replacing the United States as the largest single export country destination for Peru in 2011. Interestingly, the shrinkage of the United States share as an export destination (accounting for close to one-third of total exports up to the mid-2000s) has contributed to a marginal decline in export concentration by destination (Figure 6).

Figure 6.
Figure 6.

Peru: Major Trading Partners

Citation: IMF Staff Country Reports 2013, 046; 10.5089/9781475582604.002.A002

Sources: UN Commodity Trade Statistics Database; World Bank WITS; and Fund staff calculations.1/ EU comprises all 27 EU members; LA consists of LA6 economies, Argentina, Bolivia, Ecuador, Paraguay and Venezuela; and Asia consists of China, India, Indonesia, Japan Hong Kong SAR, Korea, Malaysia, the Philippines, Singapore, and Thailand.

13. Exports to China are also concentrated in a relatively narrow range of products, mainly mining exports. The breakdown in Table 3 shows that China is among the top three export destinations in seven of the top 15 export categories which covered about 80 percent of Peru’s total exports. All seven export items are mining products. China alone absorbs about 30 percent of the total copper exports (SITC 283 and 682) from Peru.

Table 3.

Peru: Top Exports by Product and by Major Export Destinations, 2011

(Percent)

article image
Sources: UN Commodity Trade Statistics Database; and Fund staff calculations.

14. However, import concentration by origin increased since 2005 due to the rapid growth of imports from China. Imports from China grew at an average rate of 30 percent during 2001–05, before accelerating further to an average of 57 percent during 2006–08 and 2010. By 2011, Peru imports a larger share from China and declining shares from other Latin America neighboring countries (Figure 6). For instance, in 2011, imports from China now accounted for 3 quarters of the imports of clothing and accessories (SITC 84), 40 percent of textile yarn and fabric (SITC 65), and one-half of the imports of telecommunication and sound equipment (SITC 76) in Peru. The rapid gain in import share by China in the apparel sector suggests the intense competition faced by Peruvian suppliers which would have implications on the production and in turn export competitiveness.

15. Peru, like other Latin America primary exporters, has recovered much faster from the global crisis than initially anticipated. The recovery owes much to the stabilizing effects from China as an important source of world growth.9 While China may remain an important driver for global growth, the Chinese economy is expected to shift towards a slower but more balanced growth, relying less on investment. This implies that China’s commodity demand would change in terms of quantity and composition. In this context, Peru’s vulnerability to China is not only related to a possible slowdown but also to the impact of Chinese demand on global commodity prices as development patterns change.

D. Towards Greater Trade Diversification

16. Turning commodity dependency into a blessing. Some regard natural resource endowment as a curse—Dutch Disease, as commodity price boom tends to lead to a currency appreciation of the primary commodity exporter, which in turn results in crowding out of the manufacturing sector.10 The approach taken by other primary commodity exporters like Canada highlights that policy can help in reducing the adjustment costs and maximize the benefits arising from commodity booms. More specifically, leaning against commodity driven movements in the nominal exchange rate to support non-commodity exports and domestic producers who face competition from imports would over time result in higher wages and inflation, causing the real exchange rate to appreciate and resulting in the same competitiveness challenge. On the other hand, measures including those to capture more value-added domestically, increase skills to compete, and sustain business investment are highlighted as ways to strengthen the benefits of a resource-rich economy (Bank of Canada (2012)).

17. Greater diversification in products and trading partners could go a long way in reducing risks to commodity boom and bust cycles. Studies have shown evidence that counties with more diversified production structure tend to have lower volatility of output, consumption, investment and increases the resilience to external shocks (see Papageorgiou and Spatafora (2012)). Trade diversification can be achieved across trading partners and products, and the latter through the introduction of new export products, a more balanced mix of existing exports, or fetching higher prices for existing products through product quality upgrading. To bring about these changes would require upgrade in production and trade structure that would generate more inter-sector linkages, and increase value-added by moving up the value-chain which have to be supported by infrastructure investments and human capacity development.

18. Higher intra-regional and intra-industry trade in Latin America could help to reduce over dependence on China and commodity trade. As a result of historical, institutional, and relative endowments and other factors, intra-regional trade accounts for less than 15 percent of Latin America trade in 2011, compared to 44 percent in Asia and 63 percent in the European Union.11 Preliminary estimates suggest that the share of intra-industry trade in LA5 economies averaged at 0.40 in 2011, with Peru (0.30) at the low end and Mexico (0.53) the highest (Appendix Table 2).12 In this context, trade diversification could be brought forward through greater division of labor in the production of manufactured goods within the region to meet the rising aggregate demand from higher regional economic growth, and increasing exports to the rest of the world. The example of the gain in export competitiveness in Peruvian vegetable and fruits highlighted the success of diversification through finding the niche markets. Efforts in fostering FDI inflows in the manufacturing sectors over the medium term and further enhancing market access through FTAs are steps in the right direction.

19. In this regard, the expansion of intra-regional and intra-industry trade in Asia in open regionalism since the mid-1980s could offer also some examples of how resource-rich exporting countries such as Peru could diversify their production and trade structure. In Asia, in response to the rapid appreciation of the Japanese yen since 1985, the shift of labor intensive manufacturing operations via Japanese foreign direct investment outflows first to the newly industrialized economies, then to resource-rich ASEAN countries and China resulted in the accelerated growth of capital goods exports to these host countries accompanied by the imports of consumer and intermediate goods to Japan and other advanced economies. Since the last decade, the rise of China as “factory Asia” and the hub of the global product sharing network further increases intra-regional trade flows, which is also enhanced by intra-industry exchange as vertical specialization trade as countries move up the global value chain.13

20. Diversification and structural transformation often have to underpin by reforms and policy measures. Other than maintaining prudent macroeconomic policies including strong fiscal position and saving some of the mining windfalls, broad-based microeconomic measures focusing on eliminating infrastructure bottlenecks, improving the quality of infrastructure, raising education and skills levels and an efficient business climate for domestic and foreign investors are keys to increasing export competitiveness. In this context, the compilation of competitiveness indicators such as unit labor cost, labor productivity and wage by sector would enable better monitoring of changes in competitiveness. Papageorgiou and Spatafora (2012) noted however that, based on country experiences, it remains an open issue to what extend industry focused and narrowly targeted measures have historically helped to underpin diversification effort.

E. Conclusions

21. Buoyant commodity prices have benefitted Peru both in terms of expanding exports and attracting mineral related foreign direct investment inflows. Nevertheless, trade concentration by product and to a lesser extent by trading partners has clearly increased with the commodity price boom. While non-traditional exports grew at healthy rates, they were outpaced by booming traditional exports. Peru, like other Latin America primary exporters, has recovered much faster from the global crisis than initially anticipated despite lackluster growth recovery in advanced economies owing much to the stabilizing effects from the emergence of China as the main driver of commodity demand and world growth. Nevertheless, there is also growing consensus that excessive concentration of exports, in particular concentration in commodities, increases vulnerabilities and could be detrimental to long-term economic development.

22. Going forward, greater diversification in products and trading partners could go a long way in reducing Peru’s exposure to commodity boom and bust cycles and help to put economic growth firmly on a sustainable path. Other than maintaining prudent macroeconomic policies, the authorities’ efforts in further trade liberalization and enhancing market access through FTAs are steps in the right direction. Further enhancement of structural reforms focusing on improving the quantity and quality of infrastructure, raising education and skills levels, and an efficient business climate for domestic and foreign investors are keys to cement growth over the medium term.

Appendix Table 1:

Peru: Revealed Comparative Advantage, 1995, 2000, 2005 and 2011 1/

article image
Sources: UN Commodity Statistics Database; and World Bank WITS.

Revealed Comparative Advantage RCA = (Xij / Xit) / (Xnj / Xnt) where X represents exports, i is a country, j is a commodity (or industry), t is a set of commodities (or industries) and n is a set of countries. If RCA >1 (RCA < 1) the country is said to have a comparative advantage (disadvantage) in the commodity / industry.

Appendix Table 2.

Selected LA6: Intra-Industry Trade Index, 2011 1/

article image
Sources: UN Commodity Trade Statistics; and Fund staff calculations.

Measured by Grubel-Lloyd Index: IITi=((Exporti+ Importi)-|Exporti- Importi|)/(Exporti+ Importi)

where 0 ≤ IITi ≤ 1. If IITi=1 there is only intra-industry trade; conversely if IITi=0, there is only inter-industry trade.

0 ≤ IITi < 0.5
0.5 ≤ IITi < 1.0
IITi = 1

References

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1

Prepared by Y. Wong (WHD).

2

At present, Peru has ten bilateral FTAs with, Canada, Chile, China, Cuba, Mexico, Panama, Singapore, Korea, Thailand and the United States, and regional FTAs such as that with the European Free Trade Association (EFTA), Andean Community, and MERCOSUR. Several others (including FTAs with the European Union (EU) and the Trans-Pacific Partnership (TPP)) are in the pipeline of entering into force or in negotiation.

3

It is worth noting that some of the recent gain in trade openness could be seen as reversing a previous decline. Peru’s trade represented 34 percent of GDP in the early 1980s but declined thereafter to around 14 percent of GDP in 1987–89, a level below other comparator countries. Structural impediments appear to be the major constraints to increase trade, including limited investment outside of the mining and gas sectors, high logistic costs and transportation related problems (IMF (2004)).

4

Secondary sector comprises manufacturing, utilities and construction.

5

In Peru’s trade statistics, traditional exports refer to the aggregate category of fishing products (i.e., fish oil and fishmeal), agricultural products (mainly coffee), mineral products and petroleum and natural gas. Non-traditional exports are a range of newer products, mostly also resource intensive but with higher value-added, including other agriculture, textile, chemicals, and fabricated metal products and machinery

6

Gold prices continued to rise, despite a decline in other metals prices, during the 2008–09 crisis. This is partly attributed to the status of gold as a safe haven asset, gold prices tend to increase in uncertain times or adverse economic conditions.

7

Asparagus exports from Peru totaled US$480 million (0.3 percent of GDP) in 2011 almost one-half is exported to the United States, with the rest exported mostly to European markets.

8

As measured by the Hirschman Herfindahl index which is the sum of squared of each product in total export. A country with a perfectly diversified export portfolio will have an index close to zero, whereas a county which exports only one product will have a value of one.

9

Empirical studies such as Cesa-Bianchi and Pesaran et al. (2011) concluded that the long-term impact of a China GDP shock on Latin American economy has increased by three times since mid-1990s based on a global vector autoregressive model for 5 large Latin American economies including Peru. Diego and Saldarriaga (2012) found that about half of the growth reported in Latin American countries by the end of 2000s can be attributed to direct and indirect multipliers effects induced by the growth of China.

10

Magud and Sosa (2010) documented that while shocks that trigger foreign exchange inflows appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports, there is no evidence in the literature that Dutch disease reduces overall economic growth.

11

Latin America consisted of LA6 economies, Argentina, Bolivia, Ecuador, Paraguay, and Venezuela; Asia comprises of ASEAN (Indonesia, Malaysia, the Philippines, and Thailand), China, Hong Kong SAR, India, Japan, Korea, and Singapore.

12

Excluding Uruguay which trade data are not available from the UN Commodity Trade database for 2010–11.

13

Intra-industry trade in Asia increased from about 0.35 in 1992 to about 0.46 in 2005 (IMF 2011).

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Cover IMF Staff Country Reports
Peru: Selected Issues Paper
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2013: Issue 046
Publisher:
International Monetary Fund
ISBN:
9781475582604
ISSN:
1934-7685
Pages:
51
DOI:
https://doi.org/10.5089/9781475582604.002

Peru and LA6: Trade Openness

Peru and LA6: World Trade Integration

Peru: Mining Production and Mineral Exports, 2000–11

Peru: Non-traditional Exports

Peru and LA6: Export Product Concentration

Peru: Major Trading Partners