Peru seen heading toward period of more moderate GDP growth

Peru's economic expansion is likely to level off to a more moderate pace in the coming years on falling metals prices, decreasing mining investment and political risks, according to a note from Nomura Securities. In the last decade, Peru's economy has been one of the fastest growing in Latin America. The country's average annual GDP growth was 6.5% in 2003-12, up from 3.9% in the previous decade, according to the investment bank. This year, however, the economy has started showing signs of a slowdown. The GDP expanded 4.5% year-on-year in July this year, underperforming consensus estimates, while accumulated growth was 5%, according to official figures. In September, the Peruvian central bank downgraded its growth forecast for 2013 to 5.5% from 6.1% and made more marginal cuts to the 2014 (6.2%) and 2015 (6.3%) outlooks. "We believe that potential growth in Peru will trend down to between 5% and 6% in the medium term," Nomura said. Falling demand from China, along with a sluggish global economic recovery, point toward the end of the recent commodities boom, leading to a decline in prices for the metals on which Peru's economy is so reliant. The country, which is the world's third largest copper producer and sixth largest gold producer, gets nearly 60% of its export earnings from mineral exports. "Given Peru's large dependence on terms of trade, metal price fluctuations are a critical source of risk for growth," Nomura said. "The price of copper, one of Peru's main metal exports, has fallen by more than 30% from its 2011 peak." Falling metal prices are also expected to deter future investment in the mining sector, which accounted for 20% of total investment in 2012. In addition, much of the US$50bn in projects planned through 2018 has been delayed, often due to local unrest and environmental concerns. The investment bank added that despite some government efforts to address these concerns, the potential for future social conflicts remains. On the political front, President Ollanta Humala's approval ratings are at an all-time low, while private sector mistrust of the government is high, Nomura said. On the other hand, unemployment in Peru remains at a record low at 5.3% in July and credit growth to the private sector has remained stable, the investment bank said.