Friday, Aug 18, 2017
Government | South America | Peru

Latin America Economy

Renewed confidence in Latin America’s brightest economy


6 months ago

Photo: Presidencia Perú
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The PPK cabinet has been working diligently to modernize the country and restore business confidence, while unlocking investments and infrastructure megaprojects in a bid to boost the country’s economy

Although over the last decade headlines in Latin America have been dominated by heavyweights like Brazil and Mexico, dynamic Peru has quietly tripled the size of its economy to become one of the region’s fastest-growing, with an average annual GDP expansion of 6%. But as growth rates have slowed around the region, due in great part to falling commodity prices hitting exporters, Peru’s rising star has been at risk of fading.

Today, under the leadership of newly-elected President Pedro Pablo Kuczynski, affectionately known as PPK, Peru has put together a raft of measures to get the “Peruvian Miracle” back on track. Early indicators are positive: the 2017 GDP growth forecast of 4.5%, although lower than recent years, still places the Andean nation ahead of all other major Latin American economies.

“We’re a country that’s more or less integrated into the global economy. We’re possibly among the most open economies in Latin America. We’re a country that has signed multiple free trade agreements. We’re firm believers in the idea that, through free trade, we can improve our country’s productivity and efficiency,” says former investment banker Alfredo Thorne, Minister of Economy and Finance.

While he can do little to influence the vagaries of global economic trends that affect the prices of Peru’s exports, the president has set his mind to working on the country’s inefficiencies to ensure it makes the most of its opportunities. To achieve this, he has put in place bold reforms.

Ahead of his election in June last year, PPK’s stated aim was to put the economy back at 5% growth by 2018, and for Peru to join the Organization for Economic Co-operation and Development (OECD) by 2021. But this is not simply rhetoric: even prior to taking office, the former World Bank economist and Wall Street investor had already set his sights on luring foreign investors to the country, which is rated A3 by Moody’s and BBB+ by both Standard & Poor’s and Fitch as a result of its long-standing track record of macroeconomic stability, market-friendly policies, and prudent fiscal management.

“I’d barely arrived to a lunch with financiers and investors, and I already had in my briefcase an offer for $5 billion. Peru today can raise capital at 20 years at less than 3%, and for a country that hopefully will be growing by 5 or 6 percent, it’s actually a negative rate,” the president told gathered press following a pre-election trip to the United States in May 2016, adding that he took comfort from the knowledge that Peru could access the finance it needs for development without needing to deplete its fiscal reserves.


“We want to be a serious country in the eyes of the world, a state with a voice which has the best business climate in the region where everyone wants to come... I want Peru to be a beacon of civilization along the Pacific and in South America that everyone will look upon with admiration”

PEDRO PABLO KUCZYNSKI, President of Peru

With many years’ experience as an investor, PPK understands the importance of sustainability when trying to attract newcomers. The issue of water access is close to his heart, having set up an NGO, Agua Limpia (Clean Water) in 2007 to help finance water development projects in rural areas.  And within three months of taking office, he had established Sierra Azul, an ambitious program managed by the agriculture ministry which will address water and sanitation issues for millions of the country’s poorest people while rebuilding Andean canal systems and irrigation for farmers. With public-private funding of $88 million sought for the initiative, Peru is poised to become a leader in green infrastructure in Latin America.

But water is not the only focus for infrastructure development. In a drive to modernize the nation from the ground up, Mr. Thorne says that the government intends to boost overall infrastructure investment to 6.2% of GDP by 2021, up from 4.5% currently, in order to close the current $140 billion funding gap. “We’ve proposed that the center point of infrastructure investment be broken into two parts. One is the so-called ‘unleashing’. We’ve already made it known that there are around $18 billion worth of investments that have been stalled for various reasons. We’ve already unleashed a significant portion of them,” he explains. “The second part is by way of change: the reform of the public and co-financed investment system, the famous public-private partnerships.”

To smooth the path for new partnerships, the government is tackling corruption and red tape to reduce the length of proceedings, and working to change rigid labor laws which both hinder job creation and push employment into the informal sector. Formalizing a majority of Peru’s employees is a key priority for the PPK administration in order to improve tax revenue to finance incentives to attract foreign direct investment, with a target of 60% of jobs on the books by 2021.

Meanwhile, ProInversión, the country’s investment agency, is being decentralized to reduce project time frames, and with the removal of bureaucratic obstacles, investment projects in highways, airports, and gas pipelines are back on the block. “The projects are not limitless, though: the first to arrive will choose the best places at the table. That’s the way the game works. I would tell investors not to waste time. Otherwise, they may be left without a seat,” says Bruno Giuffra, Minister of Production.

He explains that Peru’s new and improved business environment is already taking shape: “At our Ministry, there is a Policy and Regulation Department, whose name I would like to change to the Deregulation Department, understanding the importance of lightening the regulatory burden on the country’s small businesses,” he says.

For Peru, its relationship with its second-largest trading partner the United States will be key. “I think that we should take as an important signal that President Kuczynski’s first international tour included a visit to the U.S. The president has already put down on the agenda that he’ll work with his two major trade partners, China and the U.S.,” says Mr. Thorne.

In his last international trip to Lima as U.S. president in November last year, Barack Obama hailed the country as one of the United States’ strongest partners in the Americas. And for U.S. companies already in the country – and they are many, with Peru receiving $6.5 billion of U.S.-originated FDI in 2014 – the future looks bright. Companies such as Newmont Mining, Freeport McMoRan and Southern Copper have all made big investments in Peru’s mining sector, and now the country will open its Treasury-bill market to foreign investors as a means to expand trading in local government debt.

“Peru is a country with great potential,” says Aldo Defilippi, Executive Director of AmCham Peru. “It is a market with two great advantages. The first is stability. For both the entrepreneur and the individual, predictability is fundamental. Today, Peru offers that. The second is the policy of openness to the world. The country not only enjoys multiple trade agreements which have smoothed the way for Peruvian goods and products to international markets, but restrictions to free trade and forex have also been eliminated,” he says, adding that he is optimistic about the capability of the new administration.

Just over half a year into the PPK administration, there is a new energy to the country, and the president’s stated aim of great economic growth to finance social investments is well underway, presenting exciting prospects to investors eyeing the economy.


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