Emerging markets: Peru – Latin America’s hidden growth story

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Unnoticed by many, Peru has become one of the world’s leading emerging markets, with impressive growth underpinned by improved corporate governance.

Twenty years after the end of a period marked by hyperinflation and terrorist activity, Peru has come to be seen as one of the world’s leading emerging markets. In the view of the International Monetary Fund, it has become a “rising star,” with a good base of economic stability, low inflation and steady GDP growth.

Now the sixth-largest economy in South America, Peru has continued to grow while larger nations such as Brazil and Argentina have faltered. This has enabled the country to reduce unemployment and poverty, and it has even started to be talked of as a potential middle-income country (one of the categories the World Bank uses to classify economies; Brazil, India and China are all middle-income countries).

The Government of President Pedro Pablo Kuczynski, elected in July 2016, is now trying to consolidate this progress by prioritizing investment in technology and infrastructure projects, and positioning the country as a hub for international trade in the region. These initiatives are being supported by structural and regulatory reforms aimed at making it easier to do business in Peru.

Structural reforms include a new institutional framework for public and public-private infrastructure investment, aimed at reducing red tape, along with reductions in administrative procedures, changes to the labor market and a new, more efficient tax regime for SMEs. These are building on the reforms that got under way in the 1990s. In the intervening years, Peru has increased its competitiveness and dismantled trade barriers, with average import tariffs falling to just 1.1%.

“We are pursuing responsible macroeconomic policies that are good for growth and good for investment.”
Julio Velarde, Central Reserve Bank of Peru
  • Economic challenges

    Julio Velarde, Governor of the Central Reserve Bank of Peru, highlights the fact that economic growth has averaged more than 5% per annum since 2000, and suggests that there is still room for improvement. “President Kuczynski is planning a new phase of growth based on pushing investment in infrastructure and increasing domestic demand,” he says.

    He sees three main economic challenges facing the country. “First, the last Government had a higher deficit than the new Government was expecting, which has meant reductions in public expenditure. Second, Peru – like many countries in Latin America – has been affected by the corruption scandals related to Brazilian companies such as Odebrecht. Third, earlier this year, we had the worst flooding in the north of the country since 1925.”

    Indeed, estimates suggest that the floods, which were linked to the El Niño weather cycle, could take more than 1% off growth this year. However, increased spending on infrastructure may offset some of the negative impact.

    Velarde points out that, despite these challenges, Peru still has many strengths. Foreign Direct Investment (FDI) into Peru totaled US$2.05b in the first quarter of 2017, an increase of 61% over the same period last year.

    There are other indicators of a healthy economic trajectory, too. “In 2015, we had a trade deficit of US$2.9b. Now we forecast a trade surplus of US$4.9b for 2017, because we have been one of the most successful countries in boosting exports, which grew by around 15% during the last 12 months,” says Velarde. He adds that Peru is the world’s second-largest producer of copper, and copper production this year is expected to be 90% higher than three years ago. Textile exports are also beginning to increase.

  • Attracting investment

    The country’s traditional strength in mining and minerals remains a strong attraction for foreign investors, according to Roque Benavides, Chairman of Buenaventura, Peru’s largest publicly traded precious metals mining company. (He is also currently the President of Peru’s National Confederation of Private Business Associations.) The company reported a 24% increase in net sales in Q1 2017 to US$272.8m, underlining the relatively healthy condition of the sector.

    Peru is one of the world’s biggest producers of base and precious metals, and among the top four producers of silver, lead, zinc, tin and molybdenum. This strength is proving to be a compelling proposition for investors. An estimated 70% of current exports are raw material, mainly minerals.

    “There are some social issues that have affected mining projects, but in general terms, the investment environment for mining is quite strong, particularly in terms of taxation,” says Benavides.

    He continues: “Peru is blessed with natural resources, but it is what has happened around it – such as the building of infrastructure worthy of an advanced economy, and the creation of a secure environment for investors – that has really attracted investment, both Peruvian and foreign.”

    The Government’s relentless focus on implementing investment facilitation measures has been supported by steps designed to make it easier to do business in Peru. In the World Bank’s Ease of Doing Business 2017 rankings, Peru retains third position among Latin American countries and is 54th globally. This has incentivized both Peruvian and foreign investment. According to Benavides, around 80% of private investment in Peru is from Peruvian nationals

  • Good governance

    Efforts to implement high corporate governance standards have played a key role in affirming confidence in the investment climate. IFRS is standard in financial reporting in Peruvian firms.

    According to Juan Paredes, Assurance Leader at EY Peru, the current generation of management is highly professional and fully committed to a strong reporting process. Listed firms comply with the separation of CEO and chairman functions and have begun to implement other corporate governance leading practices. “We have some big companies that are listed abroad and that have adopted strict internal regulations with respect to disputes between board members, management and the audit committees,” he adds.

    Buenaventura, one of the country’s largest companies, has put good corporate governance at the heart of its operations. “We’ve adapted to international norms and, like most Peruvian companies, we feel that we are getting a boost from adopting IFRS,” says Benavides.

    Velarde adds that the Peruvian companies that have received a premium in the value of their equity on the stock exchange are the ones that have made an effort to incorporate better corporate governance standards.

    The issue of corporate governance has risen to the top of the agenda in Latin America since the Odebrecht scandal, which affected most of the region. The scandal broke in late 2016, when Brazil’s largest construction company pleaded guilty in a US federal court to having paid US$788m in bribes to government officials throughout Latin America in order to secure public works contracts.

    The shockwaves spread quickly across the continent. Velarde says Peru was particularly badly affected, as Odebrecht established itself in the country more than 40 years ago. “That has not only affected Brazilian companies, but also some Peruvian companies that were partnering with them,” he explains. “In turn, that has affected public investment in Peru.”

    Lessons are being learned. One side effect of the Odebrecht affair should be a more intense oversight of contracts in future. “Companies will need more time to look at projects, because of the trust issue that has arisen out of this,” says Benavides. “Some people will be looking at contracts much more closely, and that means projects could be delayed, or will take additional time to complete.”

    Despite these challenges, the impressive economic performance of the last decade and a half won’t be undone overnight. The reforms have burnished Peru’s reputation as an investor-friendly location.

    “I’m optimistic about Peru’s prospects, as I am about many countries in Latin America,” Velarde concludes. “We have put behind us the days of hyperinflation and fiscal deficits, and we are pursuing responsible macroeconomic policies that are good for growth and good for investment.”

    To find out more about investing in Peru, download Peru’s Business and Investment Guide.

  • Viewpoint: Juan Paredes, EY

    Peru is an open country; it’s very friendly to foreign investors. Bankers here say that you can decide to take dividends in the morning and send out the money in the afternoon. That is because we have a free financial market. You can remit the money abroad very easily, and also obtain money from any other country likewise.

    Another big positive is the equal treatment accorded to Peruvians and foreigners. As a foreign business person, you can do the same things and you won’t be treated any differently to a local. That’s attractive to overseas companies looking to move to Peru, because it means you can set up a business easily and achieve things quickly.

    The country is very stable and there’s a good macroeconomic environment. At EY, we are forecasting GDP growth of more than 2% this year, and it would have been higher but for the flooding in the northern part of the country in March. We expect GDP growth to be above 3% in 2018, thanks in part to the plans the Government has to rebuild affected zones in the north. This is also a huge opportunity for foreign investors interested in the construction sector.

    Of course, there are some challenges to doing business in Peru. First, the government sector needs to be more competitive. There are still obstacles, such as the large number of approvals needed to do things like build roads. These processes can take a lot of time, and we need to change that and become faster.

    We use IFRS for all companies in Peru. Publicly listed entities have separate corporate governance measures to comply with, such as the separation of chairman and CEO functions. But in general, while the corporate governance code provides structure, it is implemented on a comply-or-explain basis, which makes it flexible enough to meet individual companies’ needs.

    Juan Paredes is Assurance Leader, EY Peru

  • Peru fact file

    Population: Estimated at 31,151,643 in 2015
    Official languages: Spanish, Quechua, Aymara
    Capital: Lima
    Currency: Sol (PEN)
    Land area: 1,285,216km2
    Bordering countries: Ecuador, Colombia, Brazil, Bolivia, Chile
    Natural resources: Copper, silver, gold, timber, fish, iron ore, coal, phosphate, potash, natural gas
    Nominal GDP: US$180.291b (2016 estimate)
    GDP growth: 3.9% in 2016
    Inflation rate: 3.97% YOY in March 2017

July 2017