Peru retains some of the best economic fundamentals of any Latin American economy, despite political uncertainty and a slackening pace of growth. The International Monetary Fund forecasts that the country’s economy will grow by 3.8% in 2015 compared with 3.4% in Colombia, 3% in Mexico and 2.7% in Chile. The Peruvian government is not quite so optimistic: it estimates GDP growth will come in at about 3% (private economic analysts are predicting an even lower figure, in the range of 2.5% to 3%) but the main economic indicators remain some of the best in South America.
Inflation stands at about 3.4%, with unemployment at 6%. The country has $62bn in central bank reserves, and showed a fiscal deficit of only -0.1% of GDP in 2014.
However, a drop in commodity prices means the economy is no longer growing at the rapid rate of 2010 to 2014, when it expanded on average by 5.7% annually and earned Peru the title of ‘the Latin American tiger’. The country is a leading global producer of copper, silver and gold.
The Peruvian government is also becoming increasingly concerned about the slowdown in China, along with the country’s stock market volatility. China is Peru’s biggest purchaser of copper, a mainstay of the Peruvian economy.
Meanwhile, in July, the Peruvian government declared a 60-day state of emergency in towns in several regions to brace for possible damage from the El Niño weather system. The economic impact of this has been limited so far, but could increase if there is strong El Niño activity during the Peruvian summer.
“The economy is not growing as quickly as we would like, mostly because of China’s economic slowdown and the effect of El Niño,” says Alberto Pasco-Font, chief executive of Lima-based private equity firm Enfoca and former chief executive of Peru’s inward development agency, ProInversion. “However, in many ways the country is one of the most dynamic in Latin America. Some large mining projects are coming on board soon that should boost economic growth. [And] the country is not that affected by industrial action.”
Peru, with a $202bn economy and a population of 31 million, faces mounting political uncertainty in the run-up to presidential elections in April 2016. President Ollanta Humala is unable to run because of constitutional term limits. Keiko Fujimori, who leads the centre-right Fuerza Popular party and is the daughter of controversial ex-president Alberto Fujimori, is the current favourite to win the election according to opinion polls. Other possible candidates include Pedro Pablo Kuczynski, a former prime minister with centrist political views, Alan Garcia, a centre-left politician and former president, and Alejandro Toledo, another former president who leads the centrist party, Peru Possible.
“Politically, there is a degree of uncertainty at the moment because of elections next year,” says Mr Pasco-Font. “Although Ms Fujimori is the favourite, it’s quite possible that another strong contender will emerge.”
Peru has pursued a market-friendly economic policy for the past 15 years. According to the World Bank’s Doing Business Report 2015, the country is second best country in which to do business in Latin America, after Colombia. Of the 189 countries surveyed in the report, Peru is ranked 35th, above Mexico at 39 and Chile at 41.
In terms of obtaining credit, Peru and Mexico are jointly ranked 12th best countries in the world by the World Bank. Colombia is the highest placed country in Latin America for this indicator, positioned number two globally.
Peru was one of the first Latin American countries to start a privatisation programme, under Mr Fujimori, who was president from 1990 to 2000. His government started to grant private firms concessions to build and run infrastructure projects and this policy continued under Mr Toledo (2001-06), Mr Garcia (2006-11) and incumbent Mr Humala. Many of these took the form of public-private partnerships (PPPs).
Between 2002 and July this year, Peru awarded 83 concessions with a total commitment to invest of $25.7bn, according to ProInversion. The government also realised 67 transactions in which it sold its equity stakes in public companies to the private sector, which were valued at a total of $14.1bn.
Furthermore, the private sector participated in 15 projects led by the Telecommunications Investment Fund, which was set up by the Ministry of Transport and Communications to ensure that rural and less advantaged parts of Peru have access to telecommunications. These projects were valued at $363m.
Mr Humala and Mr Garcia’s administrations placed the greatest emphasis on the private concessions. Most were awarded in the electricity generation and transmission sectors, followed by transportation (including roads, airports and railways) and telecommunications.
As well as the country’s mining sector, the projects have been important in enabling foreign firms to invest in the Peruvian economy. According to the Peruvian central bank, the country attracted $7.9bn in FDI in 2014, compared with $9.3bn in 2013.
According to the National Association for Infrastructure Development, a trade association made up of the country’s biggest construction companies, Peru suffers from a huge ‘infrastructure gap’ of $88bn (estimated for the years 2012 to 2021) and PPPs will have a major role to play in helping to fill it.
Plugging the gap
“We think that the panorama for the Peruvian economy is favourable,” says Tito Pique Romero, chief executive of ICCGSA Inversiones, one of Peru’s biggest construction and engineering companies. “Despite the adverse conditions of the global economy – which has impacted upon Peru – the prospects for the continuation of PPPs remain good, especially as both the private and public sectors have built up an impressive level of expertise in applying the mechanism. The infrastructure gap is so vast that a lot of scope exists for the continuing use of the PPP model in the country.”
Javier Amézaga, chief executive of Cosapi, another major Peruvian engineering and construction company that has been involved in a number of concessions, agrees that the country’s economic future is encouraging. “Today, Peru enjoys a stable economy and legal system and has investment-grade status with a stable outlook,” he says. “Our growth has been based on free trade and the promotion of private investment, with the goal of increasing our competitiveness and promoting exports.”
Total investment in Peru as a percentage of GDP stands at 26.8%, the highest rate in Latin America, according to the IMF. Colombia comes next with 24.4% and Chile and Mexico are tied at 21%.
During the past decade, strong economic growth, mostly based on the mining and infrastructure sectors, has helped to reduce poverty. Between 2005 and 2013, poverty rates in Peru fell by more than half, from approximately 55.6% to 22.7% of the population, according to the World Bank. During the same period, average income per head rose to $6540, from $2750. In 2015 it has fallen to $5960 because of changes in the exchange rate.
In 2013, the World Bank estimated that almost 500,000 people escaped poverty in Peru. Furthermore, the share of the population living below the official extreme poverty line declined dramatically, to 4.7% in 2013 from 15.8% in 2005. Extreme poverty is highly rural and is concentrated in 8% of Peru’s districts.
Between 2005 to 2013, Peru’s middle class more than doubled in size to about 35% of the population, creating huge opportunities in economic sectors including financial services, healthcare, education and real estate. Continued infrastructure development is key to reducing poverty and expanding the size of the middle class. ProInversion estimates that it adds at least 1% to GDP growth every year.
“There is a political consensus in Peru about applying the PPP model,” says ProInversion chief executive Carlos Herrera. “Whoever becomes president next year will carry on with the mechanism. It has worked well for Peru until now and will continue to do so. By improving infrastructure, PPP projects help the country in many ways. Irrigation projects promote economic development in remote rural areas. Transportation improvements give a boost to tourism throughout the country.”
Free trade has been important to Peru’s development: almost 95% of its exports are covered by free-trade agreements. The country is also a founder member of the Pacific Alliance, a trading bloc that aims to improve commercial links within its four member states (the other participants are Chile, Colombia and Mexico) and to strengthen ties to Asia. These economies are seen by foreign investors as the most dynamic in the region and account for one-third of the Latin American economy.
Overall, Peru’s growth should pick up again within the next couple of years as major mining and infrastructure projects go live, and a jolt to the commodities cycle could also bring benefits.