A Middle Class Emerges From Peru Growth

Courtesy of The Financial Times, an interesting article on the emergence of a middle class in Peru:

As Chinese-made motorcycle-taxis try to avoid minivans on the chaotic and dusty outskirts of Peru’s capital, Lima, a glossy and incongruent structure rises amid the street stalls and shanties: a new shopping mall.

“Soon, everything will be possible here,” reads a banner.

Life in Villa El Salvador – a district mostly inhabited by impoverished indigenous Peruvians who migrated to the city in search of better prospects – is hard and gives little occasion for superlatives. But the superlatives rush forth when the subject turns to the Mega Plaza Express shopping centre.

“I love it here – there was nothing to do around here before. Now, I can come to the movies, take my children to the arcade, go to the supermarket and deposit my wage at the bank, all in one afternoon,” says Rosa Vilches, a worker at a nearby factory.

In recent years, rising Asian demand for copper and gold has bolstered Peruvian growth. The Andean country’s gross domestic product rose 6.7 per cent year on year in October 2012, marking 38 consecutive months of growth.

Even if growth has slowed from the 2010 high of 8.8 per cent as demand from China weakens, Peru “remains among the fastest-growing economies in Latin America, with consumption and investment the key drivers”, Capital Economics, a consultancy, said in a recent note.

Consumer spending – fuelled by easily approved bank loans and credit cards – has risen as more and more people are lifted out of poverty and the country’s middle class expands.

Sales in 2012 topped $5.3bn, an increase of 20 per cent over the previous year, the Association of Shopping Centres of Peru said. The increase was due not only to stronger consumer confidence, but also to the existence of centres such as Mega Plaza Express.

“This is just what happens in any country when it starts to become more dynamic in terms of domestic demand by an emerging middle class that begins to consume more and more,” Julio Velarde, Peru’s central banker, told the Financial Times. He labelled October’s expansion “spectacular”.

Many have more cash in their pocket to spend. The percentage of people living on less than $2 a day has halved to about 28 per cent in the past 10 years. Ollanta Humala, Peru’s president, has pledged to cut the poverty rate to 15 per cent before he leaves office in 2015 through social cash transfer schemes, an increase in minimum wages and pensions. Overall, wages have grown at an annual rate of between 6 and 7 per cent in the past decade.

This growth is palpable in Mega Plaza Express. Just 20 years ago, the area was nothing more than a deserted and hilly expanse with a handful of factories and shacks made of breeze blocks. Now there are DirecTV, Bata shoes and RadioShack stores, while sales associates desperately chase down potential customers offering everything from trinkets to cheap insurance, car loans and mortgages. Despite the still relatively low banking penetration of 30 per cent, there is a proliferation of cash machines.

“We get new clients almost every day,” says an employee at the mall branch of the Banco de Crédito del Peru, the country’s largest bank, which is expected to open some 100 new branches next year.

Still, much of the economy remains informal and untaxed. The strengthening sol – trading at its strongest level in 16 years – could hurt manufacturers and non-commodity exporters. The central bank has purchased a record $13bn so far this year in its attempts to keep the national currency from appreciating too rapidly. The central bank is to raise reserve requirements this month amid fears the credit boom could spin out of control.

Mr Velarde and others fear the rising number of dollar-denominated loans could leave borrowers vulnerable if the exchange rate turns against them.

“The risk exists – it is there,” says Raúl Salazar, chief economist at Macroconsult, a consultancy in Lima. “For now it is moderate, but we have to keep our eyes peeled.”

This entry was posted on Wednesday, January 9th, 2013 at 6:35 pm and is filed under Peru.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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