News

Benavides Takes Reins of Peru Economy as Araoz Exits

Sept. 15 (Bloomberg) -- Peruvian President Alan Garcia named Ismael Benavides finance minister, charging the former banker with keeping Latin America’s fastest-growing economy from overheating as investment surges.

Benavides, a former agriculture minister and banker, replaces Mercedes Araoz, who resigned yesterday after eight months in the post. Benavides becomes the fourth finance minister since Garcia took office in 2006. Araoz will serve as economy and finance adviser to the president, Garcia told reporters today.

The new finance chief needs to rein in government spending to cool economic growth and keep a lid on inflation as private investment rebounds, said Pablo Secada, chief economist at the Peruvian Institute of Economics in Lima. Government investment may rise 32 percent this year, the central bank says.

Benavides “must ensure the ministry doesn’t lose its grip on spending,” said Secada, who was debt director at the Finance Ministry in 2008. If the expansion in outlays doesn’t slow, inflation may accelerate beyond the government’s target, forcing the central bank to raise borrowing costs, Secada said.

The pace of expansion slowed in July, lessening the chances that growth will spur above-target inflation. Gross domestic product rose 9.1 percent from a year earlier, down from 11.9 percent in June, as fishing output declined and the increase in public-works spending slowed, the national statistics agency said today.

Domestic Demand

Rebounding domestic demand led the central bank to increase its benchmark lending rate for a fifth straight month last week. Policy makers have also raised bank reserve requirements four times as private credit grew 16 percent in the second quarter from a year earlier. Consumer prices rose 2.31 percent in August, the fastest annual pace in a year.

Rising interest rates have led to a surge in capital inflows, driving the sol to its strongest level in more than two years this week. The central bank has purchased $7.7 billion this year to temper gains in the currency, which was little changed at 2.7875 per dollar at 2:34 p.m. New York time.

The Lima General Index advanced 0.2 percent today and has gained 17 percent this year.

The fishing industry contracted 14.6 percent in July after expanding 9.5 percent in June. Spending on public works rose 5.9 percent in July, compared with 53 percent the month before.

South America’s sixth-biggest economy may expand as much as 8 percent this year, boosting gross domestic product to $150 billion, central bank President Julio Velarde said yesterday.

Policy Outlook

“The appointment of a new finance minister is unlikely to change the country’s economic policies,” Carola Sandy, an analyst with Credit Suisse AG in New York, said in a note today. “We do not think that this should be negative news for the market.”

Benavides is a senior adviser to Deerfield, Illinois-based CF Industries Holdings Inc., the world’s second-largest producer of nitrogen fertilizer, and previously headed Banco Internacional del Peru, the country’s fourth-largest bank, for 12 years from 1995 to 2007.

Benavides served as fisheries minister during the second term of President Fernando Belaunde in the early 1980s. He has an undergraduate degree in engineering and a master’s in business administration from the University of California at Berkeley.

Araoz Career

Araoz spent four years in Garcia’s Cabinet, leading the trade and production ministries before becoming finance minister in December.

“It’s a good moment to take a break and return to my academic and professional world,” Araoz told reporters yesterday.

Araoz, Peru’s first female finance minister, was one of eight ministers who left Garcia’s Cabinet yesterday ahead of April’s elections, allowing some to run for congress or other public offices.

Education Minister Jose Antonio Chang became Cabinet chief after Javier Velasquez resigned to run for president. Deputy Trade Minister Eduardo Ferreyros will replace Martin Perez as head of the agency.

COTA cancels Trade Mission to Montevideo due to a lack of participants:

The Chamber of the Americas has decided to cancel their planned Trade Mission to Montevideo, Uruguay. Over the past several months we struggled to receive enough interest in the mission from the organizations whose attendance we targeted. We believe a few factors played a part in the need for cancellation, those being the current state of the economy, the timing of the event and the current cost of airfare. Though having to cancel the mission is unfortunate, COTA does plan to hold a mission there in the near future.

Marcela Sanchez: Honduras -- A Star Performer at Raising People Out of Poverty
In 1998, the second deadliest hurricane from the Atlantic, Hurricane Mitch, leveled much of Honduras and left at least 6,500 people for dead and 1 million homeless. As Honduran President Carlos Flores observed at the time, “In 72 hours we lost what we had built little by little over 50 years.” "What has happened since seems almost unfathomable," writes Latin expert Marcela Sanchez. "Honduras has raised nearly 850,000 people out of extreme poverty and cut hunger by more than one third."

In 1998, the second deadliest hurricane from the Atlantic, Hurricane Mitch, leveled much of Honduras and left at least 6,500 people for dead and 1 million homeless. As Honduran President Carlos Flores observed at the time, “In 72 hours we lost what we had built little by little over 50 years.”

What has happened since seems almost unfathomable: Honduras has raised nearly 850,000 people out of extreme poverty and cut hunger by more than one third.

Honduras is turning out to be Latin America's over-achiever in poverty reduction and development gains and one of the nations most likely to meet the Millennium Development Goals, a set of anti-poverty targets that members of the United Nations committed to reach by 2015. Later this month world leaders will gather in New York to review progress toward these goals and push to accelerate it as the deadline approaches.

According to a new report by Ben Leo, research fellow at the Washington-based Center for Global Development, Honduras has been the top scorer in the world, either meeting or surpassing six out of eight top goals. In terms of the number one goal, reducing extreme poverty by half, Honduras has exceeded expectations with a 58 percent reduction -- nine years ahead of schedule.

Development experts pinpoint that some of the top achievers of the Millennium Development Goals have been some of the poorest. “Sub-Saharan Africa accounts (for) the largest number of star performers with five countries,” Leo noted in his report. There are only two other Latin American countries among the top 15 performers, Nicaragua and Bolivia, the only two countries in the region with lower gross domestic product per capita than Honduras.

The London-based Overseas Development Institute also lists Honduras at the top of Latin America in terms of progress toward the Millennium Development Goals. In their June analysis, the ODI found that the best performers displayed consistent leadership and commitment to poverty reduction, adopted sound macro-economic policies including open trade, encouraged active community participation, and received international support.

Most data for these evaluations dates to 2008, so it is still unclear what effect the global economic crisis has had on overall poverty reduction. For the same reason, it is also difficult to know how Honduras’s military coup of June 28, 2009, may have negatively affected its efforts.

But for development workers such as Jonathan Brooks who have been deeply engaged in Honduras, even political upheaval has not been enough to disrupt the country’s progress.

Brooks is country director in Honduras for the Millennium Challenge Corporation, the U.S. aid program that seeks to reward good governance and encourage local participation in development projects. In 2005, MCC signed an agreement or “compact” with Honduras worth $215 million, making it the first Latin American country and only the second in the world to receive MCC funds.

“Through the political crisis … the commitment of the country and the government to the objectives of the compact has remained strong," said Brooks. As a consequence of the coup, the MCC’s board, headed by U.S. Secretary of State Hillary Clinton, voted to cut $10 million of the plan. Still, said Brooks, the Honduran government has sought its own financing -- evidence of what aid workers call the country’s ownership of the program.

Brooks also attributed continued progress in Honduras to the MCC's focus on results, tracking and clear deadlines. The MCC compact in Honduras is scheduled to end this month having reached important benchmarks such as increasing incomes in rural areas. More than 6000 farmers have received training on crop production and are now earning at least $2,000 per hectare as opposed to $700 before the compact.

Honduras' impressive numbers have been made possible by the participation of the people most directly affected. In the remote and poverty-stricken community of San Francisco de Opalaca, citizens banded together to make their case for development. In cooperation with the United Nations Development Program, they collected data, identified their priorities and linked them to the U.N.'s Millennium Development Goals. Eventually the government improved road conditions that connected Opalaca to the rest of the country. Other donors provided funding for a pediatric and maternal health clinic.

Opalaca like Honduras has achieved perhaps more than it could have imagined in the face of natural and political turmoil. The work is clearly not finished, but Honduras has demonstrated that even among the poorest nations, adversity does not trump progress.


Marcela Sanchez is one of the most respected journalists writing about Latin America, as evidenced by her work for the most important papers in the United States -- including both the New York Times and The Washington Post -- as well as the two most important newspapers in Colombia -- El Espectador and El Tiempo -- Colombia's En Vivo and QAP TV channels, and Venezuela's Daily Journal. We welcome her back to the Latin American Herald Tribune, where her hemispheric wisdom appears every Friday.