The Peruvian economy is overcoming a “perfect storm” because of the virus.

IPE manager, Diego Macera, makes a diagnosis of the country’s situation The Peruvian economy is overcoming a “perfect storm” because of the virus.

The world, regional and Peruvian economy is going through a difficult and complex situation due to the impact of the Covid-19 virus, which has caused a crisis of devastating consequences with enormous impact on the daily lives of thousands of households, which have seen their family income reduced, due to the mandatory confinement that the Government ordered in its attempt to prevent further spread of such a deadly disease. The loss of jobs and cuts in wages are direct consequences of the pandemic that overwhelms us today.

The economist Diego Macera, manager of the Peruvian Institute of Economics (IPE), evaluates the current situation of the country and what is coming this 2021 before the proximity of the presidential elections of April 11. In addition, it refers to the Arequipa, Tacna, Puno regions and provides advice to micro and small companies so that they continue to operate in an increasingly competitive market.

  1. After having hit bottom in 2020, how do you perceive the rebound of the Peruvian economy in 2021?

The feeling is one of cautious optimism. After one of the strongest falls in the world for a dismal second quarter in 2020, we expect a double-digit rebound in 2021, led by sectors such as construction and mining. The challenge is that this rebound also translates into a rapid recovery of quality jobs. Without a doubt, the main determining factors will be the management of the pandemic and political risk.

  1. GDP for 2020 collapsed around 13% due to the health crisis and, according to the BCR, a growth rate of 11.5% is expected in 2021. Is it viable or too optimistic?

We think that it is within reason and in fact, within the enormous uncertainty that exists in 2021, we also think that it is the most feasible scenario. That’s not to say there aren’t huge downside risks, but many of these are perfectly avoidable.

  1. Would Peru achieve the highest economic growth in the region?

After having one of the strongest declines in the region in 2020, it is expected that the rebound of 2021 will also be one of the steepest. We anticipate that the production level will return to its pre-pandemic levels in 2022, and that the GDP per capita will recover its value in 2019 only after 2023 or 2024.

  1. However, what can happen with a re-outbreak of the virus, a second or third wave of Covid?

This is the biggest risk in the medium term. New containment measures, especially if they are not well structured, would have an immediate impact on the recovery. I do not mean to say that they cannot be necessary or justified in the presence of a second wave, but I do mean that the restriction decisions that are made must be carefully evaluated. We should have learned something from what happened in April, May and June.

  1. Furthermore, does the electoral process underway with so many presidential candidates generate uncertainty, expectation and even risk of political radicalism in the proposals?

Undoubtedly the electoral processes in Peru always generate uncertainty, but in the current context of crisis and such institutional weakness, regular uncertainty multiplies. In any case, it is likely that, even if candidates with more radical tendencies are elected in the first round, they will have to moderate their speech to appeal to the center voter during the second round. We have seen it before. The riskiest thing on the agenda is the change of the Constitution.

  1. What are the risks that the country faces in an electoral situation?

In the immediate term, a lot of expectation is generated by the campaign teams, the potential government teams, and of course the polls. This sets the tone for the summer months, and some investments decide to go ahead or not based on this. Of course, the greatest risk is that in the campaign the populism that we have seen in recent months will intensify and that there will be an irresponsible handling of public policy proposals.

  1. Why has the economic rebound in the southern regions been tepid?

The south contracted almost 10% in the third quarter of 2020 compared to the same period in 2019. In the second quarter it had fallen more than 25%. That’s an improvement of more than 15 percentage points between the first and second quarters. In part, the lower mining production explains why the recovery has been slower in the southern zone than what happened, for example, in the central zone, where the improvement between the second and third quarters compared to last year was 23.4 percentage points.

  1. What are the strengths and weaknesses in the Arequipa recovery?

In 2020, Arequipa fell from position 2 to position 4 in the Regional Competitiveness Index (INCORE) that we have been preparing for 8 years at the IPE. Much of this drop is explained by setbacks in the institutional pillar, where the low level of approval of the regional government’s discharge stands out. On the other hand, Arequipa is a region with a lot of potential on different fronts – tourism, agriculture, mining, manufacturing. Arequipa, in fact, has the opportunity to become a hub for the southern region in different activities.

  1. Will only mining save the region?

I would not say only, but I would say that mining should be a strategic and fundamental ally for the reactivation of the region. Both ongoing projects, such as Cerro Verde, as well as new projects, such as Tía María, can contribute a lot to regional development in terms of direct and indirect employment, economic movement, taxes, fees, etc.

  1. How can Tacna boost your local economic activity?

Despite the problems, Tacna continues to be a region with enormous potential and remains the third most competitive region in Peru, according to the IPE. Its areas for improvement are mainly in the institutional pillar. Taking advantage of key sectors for the region such as mining and commerce will be essential in 2021.

  1. Has the closure of the border collapsed the regional economy that lives off trade and services, in the absence of Chilean consumers?

The region had a fall of 8.1% in the third quarter, somewhat better than the national average fall of 9.4%. It is expected that during 2021 the cross-border trade and services sectors will progressively stabilize at levels lower than 2019 but much better than 2020, especially as Chile is more advanced with the vaccine.

  1. Is the situation in Puno more complex due to such high rates of poverty and informality?

The most difficult thing is always the low level of productivity. As a consequence, high levels of poverty are seen. It is essential to have, first, an aggressive investment policy in the region and, second, prioritize the productivity of the agricultural sector, where a very significant proportion of the population works. Better seeds, better cultivation techniques, fostering associativity -the case of Cecovasa in Puno was interesting, for example-, infrastructure -such as the connection between Sandia-Carabaya with access to markets-, among others, are part of the urgent agenda .

  1. What do you suggest to the authorities to improve the living conditions of the population?

I think we have to stop populism and start solving real problems. How we carry water where it is lacking. How we finished that road that is half built five years ago. How we promote productive and responsible investment in sectors such as agriculture or mining. Those are real issues where half of what is talked about is done.

  1. Finally, what advice do you offer to micro and small companies in crisis so that they do not disappear from the market?

I think that many companies are going to have to bravely face a process of reinvention. If the business model of 2019 is no longer sustainable in 2021, we cannot hold on to the past. The longer we take to make decisions, the worse it will be. In hard-hit sectors like tourism, change can be painful, but it has to be done.

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