The rapid descent of the Peruvian Sol is affecting consumers in Peru. While the US is seeing official rates of inflation below the Fed target of 2%, Peru is paying a lot more for imported products including appliances because of the decline in the national currency the Peruvian Sol.

Sol Falls Below $3.10

Today the Sol broke below $3.10 according to El Comercio with some of the bigger banks offering an exchange rate of $3.165. This decline of the Sol has a direct effect on borrowers many of whom borrowed in dollars during the last few years as the value of the Sol climbed to an exchange value of S./2.50 to one USD. Monthly payments are rising inexorably in a country where over 50% of the  debt is in dollars.

Peru does not have much internal manufacturing. Primarily based in exports (mining, agricultural,) they rely on imports to supply the growing consumption of electronics & appliances. With the decline of the currency, the buying power of the consumer is reduced as inflation continues to outpace wage gains.

Appliances prices will rise because of the rising dollar

From El Comercio Via Bing Translator (author corrections, comments in parenthesis)

The prices of appliances could increase between 5% and 10% along this year due mainly to the expansion of the exchange rate has impacted in the cost of raw materials and imports, indicates Christian Aliaga, specialist in the sector and director Manager of 360 ° sales and Marketing.

In the case of Samsung, for example, projected increase 8% its prices this month. Not only by the higher cost of inputs, but also by an own strategy in the segmentation of its products, says Paola Osterling, Manager of product and Marketing for Samsung appliances.

(Many companies are discounting and/or having sales which is offsetting some of the gains, but overall the prices are clearly moving up somewhat rapidly.)

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Economy Slowing

While rising import and debt costs affect every consumer directly, the overall economy is also affected as the national currency falls, little by little the economy starts to slow as these additional costs ripple through the marketplace.

After initial high growth expectations announced at the beginning of the year, some as high as 5% growth for 2015, more analysts are beginning to recognize the reality that the economy is not growing as rapidly as earlier predicted.

Expectations about the economy, deteriorating according to a survey by the BCR

According to an article in Gestion, the Central Reserve Bank of Peru (BCR)  now expects growth to be 4% for 2015 & expect growth to return to 5% annually by 2017. Of course, these are the same folks that predicted 5% growth for 2014, only to see it come in at half that. I’m sticking by my original estimate of sub 2.5% growth for 2015. No matter how you look at it, a 20% decline in expectations is significant, especially coming from the Central Bank..

Industry expectations have also fallen, particularly in the mining sector where falling commodity prices have left many projects in limbo as production costs rise above metals prices. The Expectations Index fell from 56 to 54 in the last three months.

In a separate survey of consumers, a growing number believe that they will earn less in 2015 than in 2014. The majority expect to be paid about the same. As the inflation rate rises however, this will translate into less money available for discretionary purchases.

International Reserves Grow in February

International reserves grew as of March 3rd from $61.896 billion to $62.408 billion, equivalent to about 19 months worth of imports, about 30% of GDP.

It’s early in the year, but already the headwinds are gradually increasing. The BCR expects the Sol vs Dollar to fall to $3.20  by year end. This seemingly small drop comes on top of over 20% in under 3 years. Expect more “surprises.”

©2015 Ben Gangloff

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