Committed to improvement: Market-friendly policies continue

After recent displays of strong economic growth, Peru finds itself among the leading emerging economies. Although the election of President Ollanta Humala in June 2011 sparked concern over an anticipated shift in economic agenda within the investor community, the administration has demonstrated its commitment to continuing the successful economic policies that have served Peru well in the past decade.

MAKING PROGRESS: Furthermore, a newfound focus on reform and addition of social inclusion programmes have been welcomed by the international community as the government endeavours to eradicate poverty and maximise economic benefits for the country’s poor.

Christine Lagarde, managing director of the IMF, lauded Peru’s economic policies during her November 2011 visit. “Peru is one of the most vibrant economies in the world. Economic performance has been very strong, with a decade-long expansion – the longest on record – resulting in the tripling of per capita income and a 20-point fall in poverty rates. Peru certainly has a lot to be proud of,” Lagarde said.

Peru has continued to climb in international business rankings.

Forbes’ October 2011 “Best Countries for Business” assessment listed Peru at number 42 out of 134 countries surveyed, the second-strongest ranking in Latin America and the Caribbean and trailing behind only Chile (24). Indeed, Peru’s business environment, based on 11 factors including red tape, investor protection and corruption, beat out regional competitors Mexico (57), Colombia (62) and Brazil (89).

Moving up six places in the World Economic Forum’s (WEF) Global Competitiveness Index 2011-12 from 73 to 67, Peru found itself situated between Russia and Colombia. Peru scored well in the indices of labour market efficiency (43), financial market development (38) and macroeconomic environment (52), while infrastructure (88), institutions (95), and health and primary education (97) were seen to be lacking. Indeed, these areas have placed high on the administration’s agenda, with an extensive $20.5bn, five-year infrastructure budget and numerous social development programmes already announced.

RATINGS UPGRADE: These policies have not gone unnoticed by Standard & Poor’s (S&P), Fitch and Moody’s as each of the ratings agencies has granted Peru investment-grade status, while two of the three have recently upgraded Peru’s credit evaluation. S&P decided to increase Peru’s credit rating to “BBB” from “BBB-” with a stable outlook in August 2011, referencing President Humala’s continuation of successful economic policies. Fitch raised Peru’s foreign debt rating to “BBB” from “BBB-” in early November 2012, also citing the preservation of successful economic policy, as well as the new administration’s ability to negotiate increased mining royalties. Moody’s was the only agency to maintain its rating of Peru at “Baa3”, its lowest investment-grade level, citing predictable government policies even amidst poor institutional rankings.

Despite its strong economic growth and recent reforms, Peru still has work to do to catch up with neighbours such as Argentina, Uruguay and Chile. Its economic performance owes much to its mineral resources and the impact rising commodity prices have had on export revenues, trade and overall economic growth. This was one of the reasons the WEF considers Peru an “efficiency-driven” economy, whereas those of Argentina, Uruguay and Chile fall into the transitory category between “efficiency-driven” and “innovation-driven”. Improving business sophistication and innovation are key elements Peru must focus on to make the transition to an innovation-driven economy.

It is vital for Peru to continue promoting private sector-driven investment and growth strategies. Increased budget outlays on social infrastructure such as schools and hospitals will be as important to economic development as hard infrastructure in the form of roads and ports. Having experienced 10 years of macroeconomic expansion, Peru finds itself in a position where it must now translate this growth into economic development – a hurdle which has stifled many a nation.