Uncertain prospects, by Alonso Segura

2022 is presented as a very uncertain year in economic matters. We run the risk of wasting tremendously favorable external conditions.

After a terrible 2020 for Peru, both in public health and in economic and social indicators, 2021 has been a year of faster recovery than initially expected. Understanding the reason for this dynamic is essential to analyze the conditions of entry to 2022.

2021 was a year of strong growth globally. After the biggest recession in decades, monetary and fiscal impulses on an unprecedented scale, and the economic “reopening”, generated a huge rebound. Those countries with the largest contractions in 2020, partly due to quarantines and restrictions on more severe activities, on average, benefited from a greater base effect. Not suffering third or even fourth waves of the virus that lead to new closures has been, so far, also decisive. That was the case of Peru, which also implemented one of the greatest credit impulses that gave it a kind of fundamental artificial respirator, given the magnitude of the blow suffered.

The prices of our export products, including copper, which reached or were very close to historical highs, were also key. The terms of trade (the ratio between prices of exports and imports) of our country are at a maximum of almost fifty years. It is widely documented that, for our country, benign external conditions have significant positive effects on different economic indicators.

How much of this carries over to 2022? On the one hand, the base / reopening effects have been declining during 2021, and are already negligible for next year. However, external conditions are expected to continue to be favorable, both in terms of growth and export prices, but in an environment that is not without risks. The first is that global inflationary pressures do not subside, and that this not only continues to erode the purchasing power of consumers (in addition to its regressive effects), but also leads to withdrawals of more aggressive monetary stimuli from central banks that could compromise the recovery and asset prices. The second, obviously, is that new variants of the virus that are more transmissible or resistant to vaccines, in addition to their effects on public health, generate additional disruptions to economic activities and feed back into inflationary processes. It is still too early to gauge the magnitude of this risk, but it should not be underestimated.

Which brings us to the domestic source factors. Benign external conditions generate positive multiplier impacts on the economy mainly through the private investment, which is normally very procyclical, that is, it responds to these external impulses and amplifies them. In turn, increased private investment, through employment and income, drives household consumption. But this process is not automatic, and that is the main risk to economic dynamics not only in 2022 but in the medium term.

For favorable external conditions to translate into private investment, trust is needed. And that is the problem. The indicators of business expectations, which usually explode in benign external contexts such as the current one, are in pessimism territory. Causality has been broken. This suggests a contraction in private investment during 2022.

The reasons for this pessimism are evidently from an internal source. Something responds to the climate of political conflict. But, as the behavior of the exchange rate and capital flows (possibly the largest outflow in history) suggest, the uncertainty is due to government decisions and announcements.

This, in turn, seems not to understand (or not care) the situation. Projects economic scenarios with private investment that grow even stronger than the PBI, which, in turn, does so at rates significantly higher than the pre-pandemic five-year period. Their “reactivation” proposals, turning their backs on the dynamics of private investment, are based on public spending initiatives, in many cases of dubious quality and necessity, and financed with income that might not materialize in a context of lower growth. It insists on a tax reform that penalizes forms of capital income generation and therefore further discourages private investment (this is already manifesting itself through high rates of dividend distribution). And the list goes on.

The problem is not only temporary. At the end of the day, although we would be wasting a great opportunity, as long as raw material prices remain high, that gives us a floor in the short term. What should concern us is the non-existence of conditions for the formulation and implementation of public policies that reverse the marked weakening of the economic and development foundations of our country. Worse still, the government’s agenda seems geared toward achieving the exact opposite.

That is the cost of policies far from evidence and based on ideologies that never worked, neither in Peru, nor elsewhere throughout history. Is there still an opportunity for change in government? For the good of Peruvians, hopefully.