Peru: Reasons for confidence

Over the past decade Peru’s economic performance has been in the upper echelon of growth figures for Latin American countries, with growing GDP and shrinking debt. As President-elect Ollanta Humala prepares to take office on July 28 investors will now be watching carefully to see how his policies will affect the growth trajectory.

The economy has consistently progressed through strong macroeconomic growth, with an average GDP growth of 7.2% over the past five years; falling public debt, down to 23% of GDP from 46% in 2001; and an easing of inflationary pressure, down to 3.1% from 5.8% in 2008.

Despite its recent display of economic prowess, the narrow runoff victory of Humala over Keiko Fujimori has caused some trepidation within the investment community – as was evidenced on June 6, when the bourse fell a record 12.5%. Concerns stem from Humala’s campaign platform, which contained a number of populist policies. Having narrowly lost a bid for president in 2006, Humala adopted a more centrist position in this race, akin to that seen in neighbouring Brazil under former president, Luiz Inacio Lula da Silva.

Humala’s mission to rectify social inequities in Peruvian society has some outsiders concerned that economic growth could take a back seat. However, Humala is not expected to deviate widely from the path laid before him, especially where it met his own social policy aims; the country’s poverty line fell from 48.7% to 34.8% between 2005 and 2009 during a period of strong private sector investment.

According to recent World Bank projections, GDP growth in Latin America and the Caribbean will average 4.5% in 2011, with Peru expecting to see 6.9% GDP growth. Furthermore, Peru will continue to edge out regional competition in 2012 and 2013, where it is expected to grow 6.1% and 5.2%, respectively. Humala, while maintaining a strong stance on social issues such as crime and poverty, has moved to reassure investors that the current economic model will remain. Investors will keep a keen eye on several factors in the near future, including the continuation of support for an independent central bank and established mining royalties, as well as a robust, uninhibited private sector.

One of Peru’s established economic contributors, the mining sector comprises 60% of all exports, and is widely expected to invest between $40bn-50bn in the country over the course of the next decade. However, the industry awaits details of possible increases in royalties and taxes under Humala. “In principle there was a political consensus during the campaign to charge a windfall profits tax on miners,” Humala told Reuters on June 7, “The tax rate we need to talk about with companies, taking their profit margins into account.”

Such statements have drawn cautious reactions from some industry leaders, including Oscar Gonzalez, the CEO of Southern Copper, one of the world’s largest copper producers. Southern Copper currently has $2bn-worth of investment plans in Peru. Gonzalez told the press, “We are in a holding pattern until we see what measures the new government will take.”

While there is some concern over how Humala’s government will handle the mining industry some analysts remain confident in the belief that even a radical change in policy would not be enough to scare away large multinational investment in the sector. Pablo Secada, the chief economist at the Peruvian Institute of Economy, recently told international press that, “mining companies will continue to invest in Peru even if Humala doubles taxes on their profits to finance higher spending on health, education and infrastructure projects”.

While some in the investment community are adopting a “wait and see” stance, others are continuing with business as usual. For example, mobile services provider Claro, a unit of Mexico’s America Movil, announced a three-year, $1bn investment on June 9, just days after Humala’s victory. Claro, which is owned by Mexican billionaire Carlos Slim, is expected to invest $350m in 2011, primarily in mobile and fixed-line networks. The timing of the first major foreign investment under Humala’s government could not have been better for the incoming leader and the markets; however a more accurate assessment of the president’s expected policy approach is likely to arrive as cabinet appointments are expected in the near future.

Further encouragement for the economy and government came in the form of recommendations from leading investment firms, such as JP Morgan, to buy Peruvian debt as the large-scale sell-off following the election results has been seen as exaggerated by most analysts. Joyce Chang, global head of emerging markets research at JPMorgan stated at the Reuters 2011 Investment Outlook Summit, “I think that there’s probably going to be, at this stage of the game, more positive than negative surprises. We would frankly look for opportunities to add exposure.”

Even though concerns remain over the policies that will be adopted by Humala’s government, most analysts predict it will continue to be cooperative with the private sector. The country’s economic performance over the last decade speaks for itself, and should Humala emulate the established path set before him – while availing himself and his government of moderate and sensible social reform – Peru will certainly continue to prove itself a rising star in Latin America.