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%.
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.
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.