Peruvian economy faces deep recession without radical government action
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The Peruvian economy is at risk of a severe recession if the government does not take more radical measures in response to the coronavirus pandemic. While Peru previously saw strong economic growth driven by exports, foreign investment, tourism, and remittances, these external factors will not contribute much to growth in 2020. A month-long lockdown has reduced domestic production and incomes. Other countries are implementing stimulus packages equivalent to 10% of GDP, but Peru's measures only amount to 2% of GDP and do not provide support to many people and small businesses losing income. If the government does not take more direct action to support incomes and prevent widespread business failures, Peru could experience a much deeper recession given the global economic crisis.
![Peruvianeconomy and the risk of a deeprecessionif government does
not take more radical measures
It isclear that the worldeconomyandtrade will declinethisyear,inacrisisworse thanthe
global financial crisisof 2008 and 2009. Analystsandinternationalorganizationssuchasthe
OECD and the IMF already forecastso [1].The Peruvianeconomy steadily grew since the
secondhalf of the 2000s, at a pace of three timesthe annual average of LatinAmerican
countries, partlydrivenby afavorable external sector:due tohigherexportsof goods, huge
foreigndirectinvestment, increasingtourism,andremittancesfromPeruviansabroad. For
example, in2019 almost65 billiondollarsenteredthe countryfromthose sources,anamount
equivalenttoaround30% of Peruvianeconomy outputthatyear.Around 47.7 billiondollars
came fromexports of goods,8.9 billiondollars fromforeign directinvestment,4.8billion
dollars fromtourism,and3.3 billiondollarsfromremittancesof Peruviansabroad.Peru'sGDP
that yearwas $ 228 billion.Thisyearonlypartof that amountof $ 65 millionwouldenterPeru.
Then, thisyear2020, external factorscannotbe expectedtocontribute toPeru'seconomic
growth,and as statedbefore onlyafractionof the 65 billiondollars receivedin2019 would
enterPeruvianeconomy.Sothe country has to strengthen itsdomesticdemand,asstrongas
possible.Butwithamonthof inactivityof muchof the national productive apparatusdue to
quarantine (national lockdown) imposedfrommarch16 that will lastuntil April 12(and
assumingthatthe situation normalizes afterthatperiod, aquite optimisticassumption),
overall productionwill decrease andpeople´s income (andconsumption) will alsodecrease.If
policiesare nottaken quicklymanycompanieswould gobankrupt,unemploymentwould
increase andwithit social unrest.
The governmentneedstoactdirectlysupportingthe income of the populationandpreventing
companiesfromgoingbankrupt asmany of themdo notreceive anyincome orproduce and
have paymentstodo. Facedwithsimilarproblems, whatare othercountriesdoing? In
countriesas differentas USA,Canada,Spain,Japan[2],Malaysia or Bolivia, governmentsare
implementingenormouseconomicstimuluspackagesforamountsequal toorgreaterthan
10% of the size of theirGDP (inpolicies known as“helicoptermoney”1
).InPeru,notonlythe
amountof the economicstimulus isinsufficient,addingupeverything sofarannounced would
amountto only 2% of GDP; butthe mostimportantthingisthat itdoesnot put the moneyin
the handsof all the people whoare losingincome.
Notonlythe poorestfamiliesinPeruare losingincome,andtothissegmentthe governmentis
givinganexceptional bonusof 760 soles (around220 dollars).Intotal itis estimatedthat3.5
million households wouldreceive thatamount(Perutotal populationisaround32 million).But
not onlythose people are losingincome,everybody islosingit.Andcompaniestoo.Let'stake
the example of abarber shop where 2 to 6 or more people workingthere will nothave an
income forat leasta month.These people are notlikelytogetthatgovernmentbonus.And
small companieslikethis barbershop will nothave money topaythe rentof the premises,nor
the utilities.Whathasthe governmentdone tohelpthisbusiness?The onlythingithasdone is
to give thembusiness abreakby exemptingthem topaytaxesinmarch and April andother
minormeasureswithlittleimpact.
1 See for example: https://www.forbes.com/sites/vineerbhansali/2020/03/17/helicopter-money-is-
here/#425bf46c781e](https://image.slidesharecdn.com/peruvianeconomywouldgointoadeeprecessionifthegovernmentdoesnotactmoreproactively-200401161639/85/Peruvian-economy-would-go-into-a-deep-recession-if-the-government-does-not-take-radical-measures-1-320.jpg)
![The government, besides givingabonustothe poorestfamilies,willallow anamountof upto
2,400 solestobe withdrawnfrom eachworker’sService Time Compensation(CTSbyits
acronymin Spanish).Butthiswill onlyreachasmall part of the populationthat have CTS and
worksin companiesinthe formal sector(accordingto some calculationslessthan50% of
Peruvianshave employmentinthe formal sector),andthiswillcause those people savings to
decrease, asCTS islike a savingfundthatwouldallow themtosupplementthe meager
pensionthatmanywill receivewhentheyretire. Anothermeasureisthe one-month
suspensionof worker’s contributionintothe private pensionfund(AFPbyits Spanish
acronym),butalsothis will have a limitedeffectsince mostPeruviansdonotcontribute tothe
AFPs,andwill alsoaffecttheirpensionfund. The lastmeasure thatthe governmentis
proposingis toallowworkerswhohave beenunemployedinthe last6 monthsto withdraw up
to 2,000 solesfromitsaccountin the AFPfund.
Lastlythe governmentwill grantasubsidyamountingto35% of the salariesof employeeswho
earnup to 1,500 solespermonth, measure aimedatpreservingemploymentandhelp
companies. Butthatmeasure will be forcompanies inthe formal sectorof the economy,and
subjecttoa seriesof conditions.Manycompaniesare unlikelytomeettheseconditions,
especially inthe case of the vast majorityof small andmicro-businessesthatare informal.
What are governmentslike the USor other countries mentioneddoing?Incountriesthathave
unemploymentinsurance suchasthe US or Canada,for example,the governmentwill
temporarilyincreasethe amounttheyreceivefromthisinsurance [3],[4],andinother
countriesthere will be directtransferstoworkers (andfamilies) whoreceive asalarynotso
high, or to retiredpersons,asinMalaysia[5],or theywill give moneytoall peopleof working
age,as in Japan(whichdidsomethingsimilarin1999 and 2009) andwill doit again. Besides
this,governmentswill giveloanstobusiness atlow interestrates.
In summary,whatthe governmentmustdoisgive to everypersonof workingage anamount
of letsay700 soles,sothattheycan spendit onwhat theywant(exceptperhapsforpeople
whoearn more than a givenamountof perhaps 7,000 solesa month).Thatmoneywould
enterthe economyinthe formof consumption,thusreactivatingthe productiveapparatus.
The advantage of thissystemisthatit isfast and doesnotrequire bureaucraticexpensessuch
as administeringthe foodbasketsthatthe governmentisgoingtogive to poor families
throughthe country's municipalities authorities (andthusalsoavoidingthe corruptionthatits
managementof thatmeasure mayentail).
If the Peruviangovernmentdoesnotactmore proactively,the Peruvianeconomywill suffera
deeprecession,especiallygiven the negative internationalenvironment.AndinPeru,the
government,unlikemanyothercountries,hasthe possibilitytodo more andspendmore.Peru
has a low inflationrate,alowfiscal deficit,large international reserves,andalow publicdebt.
There isa Fiscal StabilizationFundforemergencycaseslike this.Andevenif itdidnothave it,
we are ina momentof emergency,the world economy isinemergency,andgovernmentsall
overthe worldare takingverydramaticeconomicmeasures.
If the Peruvian governmentdoesnot take more radical measures,itseconomy will decrease
more than whata negative external environmentpredicts, andwill create social discontent,
givingargumentstoradical political sectors,justwhennextyearthere willbe apresidential
election. Social unrestwillgive radical leftistpartiesashotinthe arm.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Peruvian economy faces deep recession without radical government action
- 1. Peruvianeconomy and the risk of a deeprecessionif government does not take more radical measures It isclear that the worldeconomyandtrade will declinethisyear,inacrisisworse thanthe global financial crisisof 2008 and 2009. Analystsandinternationalorganizationssuchasthe OECD and the IMF already forecastso [1].The Peruvianeconomy steadily grew since the secondhalf of the 2000s, at a pace of three timesthe annual average of LatinAmerican countries, partlydrivenby afavorable external sector:due tohigherexportsof goods, huge foreigndirectinvestment, increasingtourism,andremittancesfromPeruviansabroad. For example, in2019 almost65 billiondollarsenteredthe countryfromthose sources,anamount equivalenttoaround30% of Peruvianeconomy outputthatyear.Around 47.7 billiondollars came fromexports of goods,8.9 billiondollars fromforeign directinvestment,4.8billion dollars fromtourism,and3.3 billiondollarsfromremittancesof Peruviansabroad.Peru'sGDP that yearwas $ 228 billion.Thisyearonlypartof that amountof $ 65 millionwouldenterPeru. Then, thisyear2020, external factorscannotbe expectedtocontribute toPeru'seconomic growth,and as statedbefore onlyafractionof the 65 billiondollars receivedin2019 would enterPeruvianeconomy.Sothe country has to strengthen itsdomesticdemand,asstrongas possible.Butwithamonthof inactivityof muchof the national productive apparatusdue to quarantine (national lockdown) imposedfrommarch16 that will lastuntil April 12(and assumingthatthe situation normalizes afterthatperiod, aquite optimisticassumption), overall productionwill decrease andpeople´s income (andconsumption) will alsodecrease.If policiesare nottaken quicklymanycompanieswould gobankrupt,unemploymentwould increase andwithit social unrest. The governmentneedstoactdirectlysupportingthe income of the populationandpreventing companiesfromgoingbankrupt asmany of themdo notreceive anyincome orproduce and have paymentstodo. Facedwithsimilarproblems, whatare othercountriesdoing? In countriesas differentas USA,Canada,Spain,Japan[2],Malaysia or Bolivia, governmentsare implementingenormouseconomicstimuluspackagesforamountsequal toorgreaterthan 10% of the size of theirGDP (inpolicies known as“helicoptermoney”1 ).InPeru,notonlythe amountof the economicstimulus isinsufficient,addingupeverything sofarannounced would amountto only 2% of GDP; butthe mostimportantthingisthat itdoesnot put the moneyin the handsof all the people whoare losingincome. Notonlythe poorestfamiliesinPeruare losingincome,andtothissegmentthe governmentis givinganexceptional bonusof 760 soles (around220 dollars).Intotal itis estimatedthat3.5 million households wouldreceive thatamount(Perutotal populationisaround32 million).But not onlythose people are losingincome,everybody islosingit.Andcompaniestoo.Let'stake the example of abarber shop where 2 to 6 or more people workingthere will nothave an income forat leasta month.These people are notlikelytogetthatgovernmentbonus.And small companieslikethis barbershop will nothave money topaythe rentof the premises,nor the utilities.Whathasthe governmentdone tohelpthisbusiness?The onlythingithasdone is to give thembusiness abreakby exemptingthem topaytaxesinmarch and April andother minormeasureswithlittleimpact. 1 See for example: https://www.forbes.com/sites/vineerbhansali/2020/03/17/helicopter-money-is- here/#425bf46c781e
- 2. The government, besides givingabonustothe poorestfamilies,willallow anamountof upto 2,400 solestobe withdrawnfrom eachworker’sService Time Compensation(CTSbyits acronymin Spanish).Butthiswill onlyreachasmall part of the populationthat have CTS and worksin companiesinthe formal sector(accordingto some calculationslessthan50% of Peruvianshave employmentinthe formal sector),andthiswillcause those people savings to decrease, asCTS islike a savingfundthatwouldallow themtosupplementthe meager pensionthatmanywill receivewhentheyretire. Anothermeasureisthe one-month suspensionof worker’s contributionintothe private pensionfund(AFPbyits Spanish acronym),butalsothis will have a limitedeffectsince mostPeruviansdonotcontribute tothe AFPs,andwill alsoaffecttheirpensionfund. The lastmeasure thatthe governmentis proposingis toallowworkerswhohave beenunemployedinthe last6 monthsto withdraw up to 2,000 solesfromitsaccountin the AFPfund. Lastlythe governmentwill grantasubsidyamountingto35% of the salariesof employeeswho earnup to 1,500 solespermonth, measure aimedatpreservingemploymentandhelp companies. Butthatmeasure will be forcompanies inthe formal sectorof the economy,and subjecttoa seriesof conditions.Manycompaniesare unlikelytomeettheseconditions, especially inthe case of the vast majorityof small andmicro-businessesthatare informal. What are governmentslike the USor other countries mentioneddoing?Incountriesthathave unemploymentinsurance suchasthe US or Canada,for example,the governmentwill temporarilyincreasethe amounttheyreceivefromthisinsurance [3],[4],andinother countriesthere will be directtransferstoworkers (andfamilies) whoreceive asalarynotso high, or to retiredpersons,asinMalaysia[5],or theywill give moneytoall peopleof working age,as in Japan(whichdidsomethingsimilarin1999 and 2009) andwill doit again. Besides this,governmentswill giveloanstobusiness atlow interestrates. In summary,whatthe governmentmustdoisgive to everypersonof workingage anamount of letsay700 soles,sothattheycan spendit onwhat theywant(exceptperhapsforpeople whoearn more than a givenamountof perhaps 7,000 solesa month).Thatmoneywould enterthe economyinthe formof consumption,thusreactivatingthe productiveapparatus. The advantage of thissystemisthatit isfast and doesnotrequire bureaucraticexpensessuch as administeringthe foodbasketsthatthe governmentisgoingtogive to poor families throughthe country's municipalities authorities (andthusalsoavoidingthe corruptionthatits managementof thatmeasure mayentail). If the Peruviangovernmentdoesnotactmore proactively,the Peruvianeconomywill suffera deeprecession,especiallygiven the negative internationalenvironment.AndinPeru,the government,unlikemanyothercountries,hasthe possibilitytodo more andspendmore.Peru has a low inflationrate,alowfiscal deficit,large international reserves,andalow publicdebt. There isa Fiscal StabilizationFundforemergencycaseslike this.Andevenif itdidnothave it, we are ina momentof emergency,the world economy isinemergency,andgovernmentsall overthe worldare takingverydramaticeconomicmeasures. If the Peruvian governmentdoesnot take more radical measures,itseconomy will decrease more than whata negative external environmentpredicts, andwill create social discontent, givingargumentstoradical political sectors,justwhennextyearthere willbe apresidential election. Social unrestwillgive radical leftistpartiesashotinthe arm.
- 3. [1] See: https://gestion.pe/economia/coronavirus-fmi-ya-esta-claro-que-estamos-en-una-recesion-igual- o-peor-que-2009-nndc-noticia/?fbclid=IwAR2unOVXYomdtoKQpZd68iwz- cmykLU4WmzCD261pmCNSSLxDA4Ke8i2F0w [2] See: https://japantoday.com/category/politics/japan-plans-huge-stimulus-package-to- cushion-blow-from-coronavirus? [3] See for example: https://rpp.pe/economia/internacional/coronavirus-22-billones-de-dolares- senado-de-eeuu-aprueba-el-mayor-rescate-economico-de-su-historia-noticia-1254292 [4] https://www.ft.com/content/2c70c1d5-b14e-4584-bd32- bb674dde3d9a?fbclid=IwAR0pZWTZgSPwMZz2NHiienS3O1b6mqseNvODQfbn6i2b6hxhdbFBv8 Lydqk [5] See: https://asia.nikkei.com/Spotlight/Coronavirus/Malaysia-adds-53bn-of-coronavirus-stimulus-as- fiscal-pressure- mounts?fbclid=IwAR2Ev80NlCnSALbb6L5KNPd3RUIpKr14sRARrlvmsc6Jwy1evjDtQQUzcYc