By Nicholas Asheshov —
The big swings on the stock exchanges in New York, Europe, China and Japan are telling the Lima financial market that there will be no uptick in the Peru economy for this year and most of next.
There are two reasons, one planet-wide, the other homegrown.
The bungee-jumps on the world markets reflect a new understanding that the big economies —the U.S., Europe, China and Japan— are growing at one or two percent only, some, perhaps the United States, a bit more, and most, including China, rather less.
This is not exactly a recession but at best it is marking time, a vegetative growth.
Until now the understanding was that it was the job of the BRICS— the emerging markets of Brazil, Russia, India, China and South Africa— to provide the get-up-and-go for world growth. With this mirage collapsing in recession and inefficiency, a thorough re-pricing downwards of assets everywhere is underway, and likely to continue for a few years yet. It started most clearly last year with the devaluation of the Yen and the Euro against the dollar, which within a few months made some of the world’s great economies 20% or more cheaper in dollar terms. This was an early bump of reality. Japan, Russia and Europe were way over-priced and still are. French visitors to Lima and Cusco today can buy Paris-quality croissants, and the coffee to go with them, at one-quarter of the Left Bank price.
Other revaluations came with the cuts of oil and gas, steel and iron ore, with prices at or below production cost in itself cheapened by new technical efficiencies. Secondary down-pricing came with cuts in a swathe of agro commodities like corn and soya and freight rates, with attendant markdowns in the price of farmland and shipping fleets.
These had been preceded, of course, by low-priced money. This down-pricing will, it seems, continue for the coming few years, a great shakeout which could see big changes too in the perverse inefficiencies, political and economic, of countries as diverse as France, Italy, Brazil and China itself. In South America it might help Venezuela and Argentina to turn round their long run of misfortune.
The world is, in effect, becoming cheaper and values of everything from real estate and the S&P to gold and silver is being notched down.
So the swooping markets seem likely to continue, reflecting tectonic movements: a delicate time, and a lot of opportunity. Even countries, important by any standards, like Russia, Canada, Australia, Mexico, Brazil, Turkey and India just a couple of years ago thought they were the tail that wagged the dog. This included Peru, Chile and Colombia and was no illusion, with commodities prices twice their present levels. Certainly not for Peru. But this today has vanished not just here in Lima, Sao Paulo, Moscow and Djakarta but at the Wall St and London investment houses.
The second reason for a sober immediate outlook for Peru is internal, made in Peru. The financial establishment, the Credito, the Continental, Interbank and Scotiabank were slow to understand that they and their clients were about to be hammered by a combination of lower income and foreign exchange risk. They have been forcing the Central Bank, the BCRP, to hold back the natural, free market soles price of the dollar to protect their balance sheets. Morgan Stanley notes, for example, the rapid increase in “bad debt formation” of the Credito and the “deterioration“ of its “asset quality” related mostly to its overblown portfolio of loans in dollars. MS is gloomy, in the same way, about the Peru corporate sector. It says, for instance, that Graña & Montero, GyM, the Lima construction company that was a 2013 Wall St high flyer, may be cheap today but is definitely not yet a Buy. GyM’s price has been knocked low, with dollar obligations and an emptying order book. Even so, MS says it is a “value trap,” meaning its low price does not mean it is a snap. This may be a good description of a lot of Peru today.
As a footnote, the banks continue to charge eye-popping rates by today’s international standards, between 12% and 61%, according to the Banking Superintendency.
High interest rates and an overvalued currency is the opposite of the recipe being pushed by central banks and governments elsewhere to pull and push soft economies. Peru’s banking establishment has in this way isolated itself from the financial realities reflected in the super-volatility of re-pricing markets everywhere. This is not just poor judgment. The banks are passing the dodgy end of their balance sheets onto the Peruvian economy as a whole. Taking advantage of a lame duck government and a malleable Central Bank board, the banks and hundreds of dollar-borrowing corporate clients are being subsidized by the Central Bank on their way to safety. This rescue operation is costing the country more than $1,000bn a month and maybe, under the accounting table, much more, over the past couple of years. This past week, for instance, the Central Bank introduced a new set of mechanisms to issue Soles certificates with guaranteed dollar repurchase. An immediate result was levitation, a revaluation of the Sol by close on 3%, from S/.3.30 to S/.3.22.
Peru’s has been the only currency in the world to revalue against the dollar this past couple of weeks, quite an achievement. This blatant rate-rigging comes just a few weeks before the IMF and the World Bank hold their annual general meetings in Lima.
Peru needs a higher, not lower, priced dollar to keep on an even keel. The mispriced dollar is setting back the economy as a whole but has sent a specially sharp message to exporters that the exchange rate here is controlled by no one knows who and is no more free than China’s.
Peru’s external finances are still in good shape. This is compared with not just the neighbors and Peru’s own history but with OECD, industrialized countries — Peru does not owe a ton of unpayable paper to everyone else.
Inflation exists but, frankly, it’s just, say, five percent. Europe, Japan, the United States and even China would regard it as an achievement to have numbers as energetic as Peru’s. Unemployment and underemployment is a statistical mystery but much of Europe itself, including leaders like France and Italy, is seriously worse, which is a big shift. Europeans, led by Spaniards, are coming to seek work in Peru for the first time in more than half a century. The outlook for some of the main Peru products like copper, lead, zinc, gold and silver may turn out to be positive within as little as a couple of years. Miners in the Andes have lived with these up-down cycles for centuries: the first time the bottom fell out of the modern silver market was in 1580 when the first solid supplies of Peru and Mexico mine output glutted the European market and the Conquista project nearly collapsed: it was rescued by demand from Ming Dynasty China.
Among the big moves this past week was, for instance, a jump in the stock price of Freeport McMoRan, one of the world’s great copper and gold miners, owner and operator of the Cerro Verde mine in Arequipa. Freeport’s price had fallen 75% over the past year but it jumped 18% last Thursday when it transpired that Carl Icahn, the Wall St investor, had bought a leading position in the company.
If this, as hoped, marks a bottom to the market, the new government in Lima next year may give this timing the feet to get things moving.
Nick Asheshov was editor of the Andean Air Mail & Peruvian Times during the 1970s and 1980s, and of The South Pacific Mail, Santiago during the 1990s. He was Latin America Editor of Institutional Investor, New York over the same period. He lives in Urubamba, where he writes a blog and where he has been prominent in the hotel and railway business.