Global Crisis affects Peru

Humala: Global Economic Crisis Has Reached Peru

The global economic crisis has reached Peru, President Ollanta Humala said Wednesday, pointing to a sharp decline in tax revenue from the key mining sector.

“The world is going through a tremendous economic crisis. The crisis has reached Peru and that’s why we’ve had a big decrease in [mining taxes], which affects the regions,” Humala said in comments reported by El Comercio, Peru’s largest circulation newspaper.

Tax revenue from the mining canon —an important tax on mining companies that is distributed to regional governments where the extractive activity takes place— has fallen more than 3 billion soles (over $1 billion). The sharp decline is the result of lower earnings in the mining sector as a result of falling metal prices.

President Humala came into office in 2011 with high hopes of using mining taxes to boost spending on government social programs aimed at alleviating poverty. Humala said that despite the decline in tax revenue, the government will not paralyze public works. He said the central government will assist regional governments that will have seen their revenue cut significantly.

Metal prices have tanked due to two reasons. The first is slower growth in China, the world’s top consumer of commodities, and the second is the growing possibility that the U.S. Federal Reserve will begin to scale down its quantitative easing program.

This is having an impact on Peru. Exports, which are heavily dependent on copper and gold shipments, have brought in sharply lower revenues so far this year, while economic activity has also started to lose its pace more quickly than many private sector and government economists had originally forecast.

BBVA Banco Continetal, for example, recently lowered its outlook for Peru’s 2013 economic growth to 5.7 percent, from 6.5 percent. It argues that Peru is going to have a “soft landing.” Executives in Peru’s biggest banking and mining companies have also warned about the growing risks to the country as a result of the slowdown in China.

While the growth figure is still strong to many emerging and developed countries, it is lower than Peru’s growth during recent years. Peru’s economy expanded 6.3 percent in 2012, 6.9 percent in 2011 and 8.8 percent in 2010.