Peru’s Hesitant Host Gestures
The IMF-World Bank annual meetings in Peru could not shake it MSCI stock market component from its lethargy, as a frontier rung downgrade may be imminent on “low liquidity,” with the Andean reading down 25 percent including Chile and Colombia through September on a general sub-region snub. Lima stock exchange officials were in New York prior to the conference in a campaign to stay in the core index, but with only three listings investor support was lukewarm. The visit coincided with an escalating dispute with hedge fund Gramercy over repayment of 40-year old Agrarian Reform Bonds issued as nationalization compensation. Their face value is marginal but local courts ordered an adjustment in 2013 which would set their value at just one-tenth the $5 billion creditors claim and may press in an action under the US-Peru free trade agreement, which would be superseded by the TPP signed in October and awaiting ratification by the dozen member countries. Finance Minister Segura reiterated that the government will follow the judicial decision, which also permits reimbursement delay through end-decade and subordinates foreign investors to domestic landowners.
The issue has not entered the 2016 presidential contest, with centrist candidates backing the current broad economic direction of counter-cyclical fiscal policy with 2 percent GDP growth from commodity collapse. The El Nino weather pattern could further batter fishing and agriculture, as copper and mining projects remain under pressure from indigenous community and environmental protests and retrenchment by global industry giants like Glencore. As TPP passage will include currency discussions and as the US Treasury Department tries to finesse the “manipulation” debate, the central bank’s regular “smoothing” operations and financial system de-dollarization measure may come under scrutiny. Banks were ordered to cut dollar loans and pension funds had to pare FX derivative positions, and repo exchanges were introduced to corral greenbacks. Double-digit annual credit growth continues due mainly to conversions, as Basel III rules are phased in after a pre-IMF meeting 25 basis point benchmark rate hike. Foreign holdings of local Treasury bills have in turn tumbled from 60 percent to 40 percent of the total as monetary authorities look to increase control.
Chile and Colombia, with their respective stock markets off 20 percent and 40 percent through Q3, have also marginally raised rates mainly to fight depreciation-induced inflation. Colombian prices were up 4 percent in the first half on 3 percent GDP growth, with unemployment falling to single digits. A deal with FARC guerillas was announced but the fiscal implications have not been clarified as the Santos administration prepares another adjustment package by year-end. The first round of the multi-year $20 billion 4G infrastructure program is due to close soon, and can partially offset the oil and gas sector slide which has hurt state-owned Ecopetrol’s share value and divestiture plans and spurred Pacific Rubiales’ bond default. Chile’s growth is only 2 percent, and the government’s labor reform push to give unions more power has provoked a business backlash that may further subdue investment into 2016. The bank NPL ratio is 3 percent but is slated to jump with tougher provisioning standards especially for high loan-to-value mortgages following another natural earthquake which may have interrupted copper capacity.
