PERU
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The Peruvian Nuevo Sol (PEN) is also known around the world as a commodity currency. At the start of the early 1990's, Peru was in financial chaos with hyperinflation destroying the value of the Peruvian currency. With the arrival of former authoritarian President Alberto Fujimori in 1990, Peru implemented a decade of free market reforms and anti-drug/terrorism policies which attracted record amounts of foreign investment into the Peruvian economy. Today, the Peruvian Nuevo Sol has accordingly stabilized in value trading at around 3 to 3.3 PEN to the US-dollar (USD). Although Peru now has a stable currency and a lowering of inflation, the country has many challenges ahead for this politically divided nation of 29.5 million people of which almost half the population live below the poverty line.

POLITICS: for a detailed analysis, please contact BankINTRO.com.

It should be noted that the business community in Peru is cautious about the current administration and its charismatic President Alan Garcia (centre-left). President Garcia formerly governed Peru from 1985-90 which experienced a tenure of hyperinflation with catastrophic economic results. Although to his credit today with valuable gained experience, he is governing in a prudent centrist position on several economic fronts in support of free trade & trade liberalization policies coupled with continuous economic policies of his predecessor, Alejandro Toledo (centrist).

ECONOMY: solid economic performance over the last 2 decades with a lowering of inflation and declining debt levels. rom year 1960-90, Peru experienced sub-par economic performance with political instability at times under the rule of a military dictatorship. During the 1990's under the leadership of former President Fujimori, Peru made great economic strides with new reforms as the nation advanced benefitting from strong foreign investment levels and a drastic lowering of annual inflation from 3000 percent in the 1980's to 10 percent per year by the late 1990's. Steady GDP growth prevailed during the 1990's particularly from 1993-97 where 7 percent annual growth was recorded as industries were privatized in an environment where sound macroeconomic stability took hold. Since 2000, Peru has been successful in liberalizing trade and recently signed a free trade deal with the United States that took hold on February 1, 2009. The economy skyrocketed upwards during the 2000’s with the global commodities boom particularly with mineral such as copper reaching 4 USD per pound on the world markets. Today in the midst of a deep economic global recession, Peru seems to be holding its own quite well although impacted with slower and depressed economic results.

Peru is rich in natural resources including mineral, fishing, unexploited petroleum reserves. Exports for Peru include agriculture, gold, metals, oil and cotton. The United States is Peru's largest export market; China today is also a growing export market in need of Peru's natural resource products.

Mining Industry
Mining is a very important industry segment for the Peruvian economy providing for much needed capital inflow investment. Upwards of 10 billion USD invested in Peru’s mining industry over the last decade, many of the world’s largest global miners have operations within the country. The mega copper-zinc mine at Antamina started production in 2001, largest foreign capital investment in years for Peru with production set for many years ahead. The value of this mining project is pegged at 750 million USD per year equal to 1.5 percent of GDP and is expected to climb with higher commodity prices on the horizon for copper, zinc, gold, etc. Peru is presently the largest gold producer in Latin America with production at about 5 million oz per year and the world’s number two exporter of gold.

Economic Statistics
Total GDP using PPP is measured at 239 billion USD (2008) with corresponding GDP per Capita at 8400 USD. GDP as measured by market prices stood at 131.4 billion USD. GDP growth during 2008 was at a very buoyant 9.2 percent annual growth, 2007 at 9 percent, years 2002-06 at 4 percent. GDP growth is projected at 3.5 percent for 2009, year 2010 at 4.5 percent. Year 2008 inflation came in at 6.7 percent, last 12 months inflation rate at 4.64 percent, year 2007 at 1.5 percent, 2006 at 2 percent, year 2005 at 1.8 percent. Inflation is estimated at 4.1 percent for 2009, year 2010 at 2.5 percent. Important to note that inflation from 1985-1990 was measured at a stunning 3,000 percent, year 1990 hyperinflation peak at 7,649%. Peru's fiscal account reversed into a surplus position of 2–3 percent of GDP from years 2006-09. Balance of trade is at 585 million USD (2002) with a capital & financial account surplus ranging from 2 to 4 percent of GDP. Remittances are worth 1 billion USD per year. The current account fell into deficit for 2008 with dramatic fall in commodity prices (ie. copper price), Peru’s current account shortfall was 3.63 billion USD. However, the trade component was in surplus during 2008 at 4.19 billion USD. The current account was in surplus 2006-07. National public debt is at 24.1 percent of GDP (2008). Official unemployment is at 8.4 percent although the rate is much higher with underemployment. Peru is the world’s number two producer of silver, number three producer of copper/zinc and number five for gold.

POSITIVE: in order to help protect Peru's 27.5 million acres of rainforest, a 5.5 million USD debt with the United States has been cancelled in a debt for nature swap, good literacy rates; young demographic profile with median age of 26, almost self-sufficient on energy production - Camisea natural gas project is a new development, good savings & investment rates, possible trade agreement with Brazil in the works. CONCERN: environment - illegal logging, depletion of fisheries, poverty is still too big, underemployment.

BANKING SYSTEM: stable, much improved although a high degree of USD dollarization is prevalent which has to be reduced. Approximately 50 percent of the money in circulation in Peru is in US-dollars as of year 2002 but dollarization has been on the decline with the rebound in the Peruvian economy. As of May 2009, official reserve assets were measured at 31.8 billion USD. This high level of reserve coverage has helped Peru to avoid currency difficulties. Since February 1998, there are no exchange control regulations. Peru's central bank, Banco Central de Reserva Del Peru is responsible for the nation's monetary policy implementing an inflation targeted framework of 1 to 3 percent inflation band. It is a successful policy as inflation has kept fairly low. Central Bank interest rate was at 6.5 percent as of December 2008, the interbank interest rate is at 4 percent (May 2009).

REGIONAL: Colombia, Brazil, Chile, Ecuador, Bolivia
Please contact BankINTRO.com for further details.

KNOWLEDGE: Illegal Drug Production & Potential Resurgence of the Shining Path (SL) contact BankINTRO.com a detailed review of these issues.

CURRENCY: ISO Symbol 'PEN', Peruvian Nuevo Sol. At time of review on May 23, 2009, the Peruvian Nuevo Sol had an exchange valuation of 3.001 PEN to the US-dollar (USD) and/or 4.201 PEN to the Euroland euro (EUR). The PEN has performed very well garnering a reputation for currency stability over the last few years with a plus/minus approximate swing of 10 percent currency valuation to the USD. Will this trend continue? As of May 2009 in relation to purchasing power parity, the Nuevo Sol was approximately 25 percent undervalued against the USD. The exchange rate regime in place follows that of a float, this has worked well as it absorb external shocks to the Peruvian economy.

CURRENCY HISTORY: the Nuevo Sol came into currency circulation on July 1991 when it replaced the former ‘inti’ currency at 1 million inti to 1 PEN reflecting the destruction of the inti currency due to hyperinflation. The inti replaced the previous Sol currency due to currency debasement from high inflations in mid 1985. Historical exchange valuations include year 1993 at 1.988 PEN to 1 USD, 1994 at 2.195, 1995 at 2.253, 1996 at 2.45, 1997 at 2.66, August 1998 at 2.96, February 1999 at 3.39, August 1999 at 3.36, January 2000 at 3.49, January 2001 at 3.52, January 2002 at 3.46, January 2003 at 3.49, June 2003 at 3.47, February 2004 at 3.484, year 2005 at 3.29, August 2006 at 3.234, April 2008 at 2.8 (high valuation), year 2008 average at 2.91, October 2008 at 3.076 and March 2009 at 3.222. Currency crisis dates include February 1985, October 1987, and August 1990.

CURRENCY FORECAST: the biggest threat to the value of Nuevo Sol is political; the potential election victory of a hard line socialist similar to what has taken place in Venezuela and in Bolivia. Eccentric left polices, nationalization of industries could be devastating to Peru’s economy. The current centrist government is Peru’s most favorable outcome coupled with centre-left and centre-right governments. The possibility of an election victory of an outright extreme left government will be Peru’s greatest gamble with its economy. True, great economic strides have taken hold over the last 10 years with tremendous GDP growth, lowering of inflation and a rising standard of living. On paper, Peru’s macro-economic statistics look appealing but many remain in poverty. A so-called economic mirage as much of the wealth being generated has yet to trickle down to the poor. Patience will win, but the current government must be cognizant of policies to help the poor. The Peruvian government has to balance and weigh the scale in relation to the expected royalties from minerals and other resources with wealth re-distribution policies to the Peruvian poor without alienating foreign global conglomerates who have invested billions into Peru’s economy.

Our best guess is based on political, if the country continues to elect centre-left, a centrist or centre-right government, Peru has a bright future indeed with a large export market for its many valuable resources. The currency should remain in a stable trading range to a trade weighted basket of industrialized currencies.

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UPDATED: May 23, 2009



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