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The Americas

Peru boom spurs growth of middle class

By Andres Schipani,January 09, 2013

Overhead of Pacific Ocean from Larcomar mall, in Limas upscale Miraflores… (Paul Kennedy/GETTY IMAGES/LONELY…)

LIMA, 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 burst forth when the subject turns to the Mega Plaza Express shopping center.

“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,” said 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 percent year on year in October 2012, marking 38 consecutive months of growth.

Even if growth has slowed from the 2010 high of 8.8 percent, 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, fueled 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 $5.3 billion, an increase of 20 percent over the previous year, the Association of Shopping Centers of Peru said. The increase was due not only to stronger consumer confidence, but also to the existence of centers 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,” said Julio Velarde, Peru’s central banker. He labeled October’s expansion “spectacular.”

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

This growth is palpable at Mega Plaza Express. Just 20 years ago, the area was a deserted, hilly expanse with a handful of factories and concrete-block shacks. 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 percent, there is a proliferation of cash machines.

“We get new clients almost every day,” said an employee at the mall branch of the Banco de Credito del Peru, the country’s largest bank, which is expected to open about 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 $13 billion so far this year in its attempts to keep the national currency from appreciating too rapidly. The bank is to raise reserve requirements this month amid fears the credit boom could spin out of control.

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,” said Raal Salazar, chief economist at Macroconsult, a consultancy in Lima. “For now it is moderate, but we have to keep our eyes peeled.”

— Financial Times