The Peruvian Neuvo Sol is also known around the world as a commodity currency. At the start of the early 1990's, Peru was in chaos financially with hyperinflation destroying the Peruvian currency during this time. 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. The Peruvian Neuvo Sol accordingly has stabilized. However, with a new democratically elected leader, Peru today is experiencing some challenging times for this divided nation of 28 million people of which 50 percent live below the poverty line living on $2 USD/day or less.
POLITICS: President Alejandro Toledo who is of Indian descent representing the Possible Peru 'PP' Party has been in power since July 2001 after winning a democratic election. President Toledo's popularity is declining with recent polls in June 2003 showing 11 percent political support as many of his followers including trade unionists, striking teachers, farmers, health care employees are marching in protest demanding salary increases and tax cuts. Peru during President Toledo's rule has been swamped with a wave of social protests coupled with an increase in domestic guerilla terrorism activities. In June 2003, President Toledo was forced to declare a state of emergency to handle these issues.
Former President Fujimori was criticized for his authoritarian rule, scandals and questionnable election rigging in year 2000 with the arrival of political instability and the path towards new elections. The surprising development in Peruvian politics is that President Toledo who is a centrist has for the most part kept the same economic policies as former President Fujimori. The people are demanding change, President Toledo has no plan for change, this is his dilemma his government finds itself in. They have not been able to convey a plan to the people while the economy has not rebounded quickly enough to garner the public's support. To date, his promise for one million new jobs has not come to fruition. President Toledo is continuing with privatization programs with the goal of raising $3 billion USD by year 2005.
It should be noted that the business community in Peru is deeply troubled with the rising political support for the Aprista Party led by Alan Garcia who idenitifies with a very left leaning philosophy. The Aprista Party ruled Peru from 1985-90 during a time of hyperinflation with catastrophic results.
ECONOMY: from 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 wher 7 percent annual growth was recorded as industries were privatized in an environment where sound macroeconomic stability took hold. By year 1998, Peru's economy cooled and entered a deep recession 2 year recession due to the affect of El Nino weather disturbances, 1997-98 Asian financial crisis and the devaluation of the Brazilian Real. Only one in two Peruvians in the labour force has steady work. However, the Peruvian economy is now just starting to show signs of life slowly rebounding from the recession partly due to large government spending programs.
Peru is rich in natural resources including mineral, fishing, unexploited petroleum resources. 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 is a very important industry segment for the Peruvian economy providing for much needed capital inflow investment. 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/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/year and the world's number two exporter of gold.
Economic Statistics
GDP using PPP is measured at $132 billion USD (2001) with GDP/Capita at $4,800 USD (2001). GDP as measured by market prices is at $60 billion USD (2002). Member G-24. GDP growth during 1999 grew at 0.9 percent, 2000 at 3.1 percent, 2001 fell 0.3 percent, year 2002 at positive 5.2 percent, 2003 at 3.5 percent projected. Year 2001 inflation came in at 1.5 percent, 2002 at 2 percent, 2003 estimated to be 2.5 percent. Important to note that inflation from 1985-90 peaked at 3,000 percent. Year 2002 foreign debt is at $30 billion USD. Peru's fiscal deficit has narrowed from 3 percent of GDP in 1999 to 2.4 percent for 2001 and to 1.9 percent for 2003 projected. 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/year. Investment outflows at $1.58 billion USD/year, the trade account is balanced. Peru is a beneficiary of strong FDI at $2 billion USD/year except for year 2000 when political uncertainty took hold. The current account deficit is improving from 1998 at 6.4 percent of GDP, 2000 at 3 percent, 2001 at 2.1 percent, year 2002 at 2.2 percent of GDP, 2003 projected at 1.9 percent. Official unemployment is at 8.4 percent although the rate is much higher with underemployment.
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, domestic natural gas production is increasing, good savings & investment rates. CONCERN: environment - illegal logging, depletion of fisheries, net energy importer of oil as domestic production is down - need of new discoveries whether in the jungle or offshore, only 2.5 million phones - satisfactory telecommunications, relatively large public debt.
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 June 2003, gross international reserves were measured at $10.009 billion USD or 10.5 months coverage. This high level of reserve coverage has helped Peru to avoid currency difficulties unlike many of its neighbours. Banking system is witnessing consolidation with mergers & acquisitions as noticed with Peru's new second largest banking group, 'Banco Wiese Sudameris'. 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 band of 2.5 plus/minus 1 percent on the inflation band. It is a successful policy as inflation is low. Interbank interest rates at 3.37 percent as of July 2003. In 2002, a tax reform policy including a one-time tax amnesty was implemented as funds returned back into the formal Peruvian banking system.
REGIONAL: Colombia, Brazil, Chile, Ecuador, Bolivia
Peru has very little trade with regional economies although trade and liberalization of their own respective regional economies including Brazil, Chile, Ecuador and Bolivia is taking place. Drug cultivation in Colombia is moving into Peru, coca production is increasing with approximately 37,000 hectares now in production within Peru. In addition, more primary cocaine processing (coca to cocaine) is taking place in Peru instead of Colombia.
KNOWLEDGE: The Shining Path (SL) was founded in 1970 by philosophy professor Abimael Guzman who organized and ran a maoist leftist guerrilla group seeking to overthrow the Peruvian government. The SL vision was to transform Peru to a similar governing regime of the former ruler of China, Mao Tse-Tung and his leftist ideology of China during the 1950-70's. Some of the SL issues include the fact the Peru's government has denied citizenship to all Peruvians, the environment still has discrimination, exclusion and poverty. The brutal insurgency from the SL with violence and arms started from 1980 to 1993 where upwards of 60,000 were killed as reported by latest government reports. Car bombs, assasinations and massacres of peasant communities were common. By the early 1990's, the SL threat was so great that it came very close to overthrowing the government by rendering its power ineffective. Today, many Peruvians fear the revival of terrorism although the majority of the violence has cessated. The resurging threat of the SL is for real as it never really disappeared, the guerrilla group is now recruiting unemployed disillusioned youth as social unrest and poverty dominate certain regions of Peru. Recent guerrilla attacks have included kidnappings at an oil pipeline project, when US President George W. Bush visited Peru in 2002 a bomb blew up at a nearby shopping centre and rebel ambushes killing Peruvian army special forces.
Former President Fujimori who took power in 1990 successfully won and diminished any serious threat by the Shining Path to the Peruvian state with a quick military tactical victory by capturing SL leader Guzman in 1992. The SL guerrilla forces are now estimated at only 1000 rebels, the insurgency peaked at 10,000 fighters and hit a multi-year low in the late 1990's of only 400. A growing concern is the increased involvement with the Colombian guerrilla group FARC who is now influencing the SL by providing the Peruvian rebel group further financial resources derived from drug money laundering. It is been reported that SL has moved more into drug traffiking to fund its ambitions as Peru is now one of the world's largest producers of coca with US sponsored Plan Colombia forcing production into Peru and Bolivia from Colombia in order to meet market demand.
Current President Toledo the democratic leader may not work for a country like Peru. Former hardline authoritarian leader Fujimori displayed strong leadership in containing the Shining Path threat. It is what Peru requires to govern, strong leadership to contain this domestic terrorism threat. Former President Fujimori at times was tough but it worked effectively mixed in with sound intelligence to combat domestic terrorism. Today, President Fujimori who is exiled in Japan is being attacked for his tenure in office for alleged human rights abuses and his use of paramilitary police forces. Unfortunately, this is the type political leadership that is required to govern Peru in order to maintain stability.
CURRENCY: ISO Symbol 'PEN', Peruvian Neuvo Sol. At time of review on July 10, 2003, the Peruvian New Sol was valued at 3.473 PEN to 1 USD. As of April 2003 in relation to purchasing power parity, the Neuvo Sol was approximately 15 percent undervalued against the USD. The central bank has intervened from time to time in the currency market to manage the movement of the Neuvo Sol. 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: historical 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 PEN to 1 USD, 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. Currency crisis dates include February 1985, October 1987, August 1990.
CURRENCY FORECAST: biggest threat to the Neuvo Sol is increased threat of domestic terrorism with the growing rhetoric and increased sporadic violence from the Shining Path as an increase in domestic terrorism is likely for Peru. The government has to balance and weigh the scale in relation to the expected increase in commodity prices over the medium term versus the potential for an increase in terrrorism. Domestic guerrilla strikes will impact foreign investment and place downward pressure on the Neuvo Sol while a dramatic increase in commodity prices will place appreciation pressures.
UPDATED: July 10, 2003
