High in the Peruvian Andes and thousands of miles from home, two foreign rivals are hard at work. Brazilian bulldozers toil through the night, razing dense rainforest for a highway to the Pacific beyond. Chinese engineers stake their own claim, relocating an entire Peruvian town to make room for what one day will be one of the world’s biggest copper mines.
Beijing and Brasilia are lavishing Peru with cash, lured in by the promise of gold, copper and important Asia-Latin America sea routes. The two countries accounted for a large chunk of the $18.8bn that foreign companies spent here last year on everything from mobile phone networks to oil exploration, stimulating economic growth that reached 10.1% in the second quarter.
The sudden flood of cash is changing the face of Peru, sparking a massive overhaul in infrastructure that politicians here hope will spur its economy forward. The Transoceanic Highway is one such project. More than 2600 kilometres of roads are being renovated or built to connect the Brazilian Amazonian state of Acre with Peruvian ports to the west, facilitating trade with Asia. When linked to pre-existing roads across the border, they will form a cross-continental trade route.
“The corridor is expected to promote trade flows between Peru and the west centre of Brazil and northern Bolivia with the Pacific Ocean basin,” says Enrique Garcia, chief executive of the Andean Development Fund. Together with the Brazilian National Development Bank, it is helping finance the $1.3bn project that will turn Peru into a regional logistical hub and link many remote communities to domestic markets for the first time – albeit at huge environmental expense.
Across this country, airports, ports and roads are slowly being transformed. Odebrecht, a Brazilian construction company that is heavily involved with the construction of the Transoceanic Highway, has been working in Peru since 1979. Its operations include building train lines, hydroelectric plants and roads. It plans to invest more than $10bn in the country over the next five years.
But although infrastructure upgrades will play a major role in Peru’s future potential, it is mining that is currently fuelling the country's economy, propelling GDP growth to an average 8.3% between 2005 and 2008 – more than double the average figure of the previous five years. The country boasts reserves of gold, silver and copper, which have made it the target for investment from resource-hungry countries from abroad – a trend that looks set to continue.
“So long as the country maintains its clear and stable rules, investments that were destined for countries such as Australia – where they're now creating special [mining] taxes – could head towards Peru, increasing the amount of capital coming in here,” says José Miguel Morales of Peru’s National Society of Mining, Petroleum and Energy, which expects investment in the industry to total $35bn by 2015.
At Toromocho, four hours south-east of Lima, foreign capital is at work. Aluminium Corporation of China paid $860m in 2007 for a concession here. It will spend a further $2.2bn – and relocate an entire town – over the next two years, building an enormous copper mine to feed China’s demand and make Peru the world’s number two copper exporter – behind neighbouring Chile.
Other companies have been keen to join in. Brazil’s Vale and Petrobras corporations are among those that have spent millions of dollars on concessions of their own, boosting government coffers in Lima. Under current president Alan García, Peru’s fiscal situation has been steadily reformed, improving its appeal further to investors. Credit default swaps linked to the country’s debt are now lower than contracts linked to Italy, Spain and Mexico as a result of government efforts to rein in its debt.
Indeed, exports have more than doubled since 2004 and – despite a blip last year as a result of the global recession – are this year expected to beat 2008’s record of $31.5bn, a far cry from the 1990s when Peru imported more than it sold abroad. More than 60% of that is accounted for by mining-related exports, which are currently more than five times their 2000 levels.
“Higher commodity prices, particularly for gold and copper, combined with increased external demand, have led to a strong rebound in exports,” says Theresa Paiz‐Fredel, an analyst at Fitch Ratings. “Investment has benefited from the re-activation of mining, commercial real estate and infrastructure projects either under way or in the pipeline.”
An improvement in infrastructure, such as the Transoceanic Highway, as well as other new roads, ports and airports, are expected to increase total exports to $40bn by 2015, according to trade body Proinversion. Lima is hoping such upgrades will help broaden the base of its economy, weaning Peru off its reliance on mining exports – and decreasing its vulnerability to commodity price fluctuations.
Already, government efforts to diversify the economy are starting to pay off. Unlike some nations in Africa and elsewhere, Lima has been shrewd in its negotiations with foreign powers over access to its mineral wealth. In April 2009, it became one of only a handful of countries to sign a bilateral free-trade agreement with China. It already had a similar agreement in place with the US.
The Chinese market
The hope is that as Chinese consumers spend more, Peru’s exporters will prosper. The country’s Pacific ports, which offer direct access across the ocean to Chinese markets, are being upgraded in preparation. Although the free-trade agreement with China has drawn opposition from some groups such as textile workers, the deal is expected to make China the biggest importer of Peruvian goods this year – ousting long-running top exporter, the US.
“The importance of the China factor has increased in recent years as Peru has been one of the countries that has benefited the most from increased trade links to that market,” says Mauro Leos, an analyst at Moody’s Investors Service. “Exports going to China have doubled during the past 10 years as the corresponding market share has shot up to 15%.”
Such politicking has already pushed Peru’s growth rate ahead of most of its emerging market peers – in 2010, it is expected to have one of the highest year-on-year GDP increases in the world. Still, the country remains racked by other problems including poverty and insecurity in some parts of the country, which could derail such economic progress in future. Income per capita remains low compared to many of its peers, which could create the potential for political upheaval.
Still, the country faces elections next year, and all of the main candidates have shown a willingness to continue President Garcia’s openness to foreign capital. Their biggest challenge will be channelling the windfall – the result of Peru’s mineral wealth and strategic location – into creating a sustainable economy which will improve the lives of its people – and maintain that even when the gold and copper are gone.
“Given the economy’s performance during the global crisis, consensus on the key pillars of macroeconomic policy – which includes maintaining macroeconomic stability underpinned by responsible fiscal policy, attracting private investment and strengthening the country’s export capacity – has become further entrenched,” concludes Ms Paiz‐Fredel.