© 2007 Europa Partners Ltd. All rights reserved. The Ongoing Crisis in the USA: Carlos A. Anderson Should we worry about its impact on the Peruvian Economy?

© 2007 Europa Partners Ltd. All rights reserved.

The Ongoing Crisis in the USA:

Carlos A. Anderson

Should we worry about its impact on the Peruvian Economy?

Table of Contents

1. Decoupling Theory: Myth or reality?

2. Contagion Channels• Current Account• Financial Channel• The Dollar Channel

3. Scenarios & Their Likely Impact

4. Conclusions

Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.

Theory: Decoupling

World Trade Simplified: Trade between 4 main Blocks

1

USA EU

ASIA2

4

3

OTHER EMERGING COUNTRIEs


Dimensions in World Trade

Trade between 4 main Blocks (2007)

1

USA EU

ASIA

OTHER EMERGING COUNTRIEs

2

4

3

North America Exports: 9%Imports: 15%

Other Emerging EconomiesExports: 13%Imports: 10%

EuropeExports: 48% Imports: 48%

Asia and AustralasiaExports: 31%Imports: 28%

Note: Region 1 includes USA only; Region 2 includes Europe and Canada; Region 3 includes Asia and Australasia and Region 4 is formed by the rest of the worldSource: GMID Euromonitor International


Since 2002 World Trade has duplicated

100

116

141

161

185

210

80

100

120

140

160

180

200

220

2002 2003 2004 2005 2006 2007

World Exports(2002=100)

Source: GMID Euromonitor International


Decoupling for Some, not All

GDP Growth correlation Latin America vs. USA


Impact of Recessions …

Impact of USA Recessions usually felt in Latin America


And Slowdowns

While USA slowdowns have a limited effect Latin America


Some Decoupling Remarks

1. Decoupling varies from region to region and country to country

2. Past events will not necessarily repeat themselves

3. However, sheer size of the USA and its still undisputed economic leadership in the world imply that a crisis in the USA will be felt throughout the world.

4. We will now focus on the mechanisms behind and the extent of the possible impact in Peru.


Contagion Channels

1. Current account• Direct trade with USA • Remittances • China & Commodity Prices

2. Financial System• Banking system and Foreign Banks• Capital Markets

3. Dollar Channel• Exchange rate fluctuations


Direct Trade with USA & China

29.1%30.9%

24.1%

19.0%

9.8% 10.9%9.5%

11.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2004 2005 2006 2007

USA China

Source: Promperu

Share US in Peruvian exports is decreasing lower potential impact

China and other emerging economies increase their participation


Remittances & FDI


Volatility in Development Flows

Low volatility Remittances flow most likely stable


Commodities Spur Peruvian Exports

0

500

1,000

1,500

2,000

2,500

3,000

Ene00 Ene01 Ene02 Ene03 Ene04 Ene05 Ene06 Ene07

0%

10%

20%

30%

40%

50%

60%

70%

80%

Export. totales (mill. US$) Mineros/TotalTotal Exports (USD M) Mining Exports/Exports


Commodities: Contribution to Exports & GDP

• Mining exports boom after 2003 share of GDP almost doubles from 10.4% in 2003 to 19.7 in 2007

• Experts as a share of GDP double between 2000 and 2007

M USD 2000 2001 2002 2003 2004 2005 2006 2007

GDP 53,323 53,935 56,756 61,342 69,735 79,485 93,027 109,069

Exports 6,955 7,026 7,714 9,091 12,809 17,368 23,800 27,956

Mining 4,804 4,730 5,369 6,356 9,199 12,950 18,374 21,493

Non Mining 2,150 2,295 2,345 2,734 3,611 4,418 5,426 6,463

CAGR

10.8%

22.0%

23.9%

17.0%

Mining / Exp. 69.1% 67.3% 69.6% 69.9% 71.8% 74.6% 77.2% 76.9%

Exp. / GDP 13.0% 13.0% 13.6% 14.8% 18.4% 21.9% 25.6% 25.6%

Mining 9.0% 8.8% 9.5% 10.4% 13.2% 16.3% 19.8% 19.7%

Non Mining 4.0% 4.3% 4.1% 4.5% 5.2% 5.6% 5.8% 5.9%

-

-

-

-

Source: IMF & Promperu


Commodity Prices are the Main Driver


Price Metal Index2001=100

Source: Perspectivas del precio de los Metales. Apoyo Consultoría. Diciembre del 2006.

The Financial Channel: Foreign Banks in Peru

• Participation by Foreign Banks in Peru relatively low


Market Share of Foreign Banks in Local Banking SystemPercentage of Total Assets

The Capital Markets

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

may-07 jul-07 sep-07 nov-07 ene-08 mar-08 may-08-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

may-07 jul-07 sep-07 nov-07 ene-08 mar-08 may-08

Volatility IGBVL Volatility Dow Jones

Period Daily Weekly DJIA IGBVL

2006 H1 20.3% -3.3% 0.5% 1.5%

2006 H2 -1.0% 0.0% 0.4% 0.9%

2007 H1 15.5% 7.2% 0.5% 1.2%

2007 H2 47.3% 79.7% 0.9% 1.4%

2008 H1 10.6% 38.3% 1.0% 1.3%

Correlation Volatility


The Dollar Channel

• The Impact through the exchange rate can be significant

• A US crises could lead to a dollar collapse, which would result in a much cheaper Dollar and a more expensive Peruvian Sol

• The possible impact on the Peruvian economy:

1. Exports to the US will fall

2. Remittances send from the US will be worth less

3. The international crisis will likely affect the worlds economic activity


2.6

2.7

2.8

2.9

3

3.1

3.2Sol versus Dollar (last year)

Source: BCRP

Scenarios

Impact on Peruvian Economy trough

Crisis USDirect

TradeRemittances

Commodity Demand & Prices

Banking System

Capital Markets

Dollar Channel

Moderate L/M L L/M L L/M L/M

Severe M L M/H L M M

• A moderate crisis will be felt through direct trade, lower demand for commodities combined with lower prices, and tightening of capital markets

• A severe crisis in the USA, with spillovers to the rest of the world including China, is the worst case scenario. Considerable lower demand for commodities combined with considerably lower prices as well as temporal investment stop as a result of higher interest rates could have considerable implications for Peru. An even weaker dollar will make exports to the US more expensive while imports will be cheaper and as a result the current account will worsen


Conclusions

• Peru's exposure to US economy is important given current account channel, (trade and remittances) financial channel (effect on the Lima Bolsa) and the dollar channel.

• However, the impact of a US slowdown may be more reduced than in the past given:

1. Robust internal demand

2. Improvement of credibility and fiscal policies

3. The increasing role of the rest of the emerging countries in the worlds economy


© 2007 Europa Partners Ltd. All rights reserved. The Ongoing Crisis in the USA: Carlos A. Anderson Should we worry about its impact on the Peruvian Economy?

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