A Small Arrhythmia, Then Investment Flows
Diego de la Torre vividly recalls the urgent call he received last year from his joint venture partners in the United States less than 24 hours after Peru’s President Ollanta Humala took office.
“They nervously asked me, ‘What happened? What’s going on?’” recounts de la Torre, chairman and co-founder of La Viga, Peru’s largest building materials distribution company, who also has a joint venture with a U.S. company that produces dry ready mix concrete in the local market. “They had heard in the news that a president sympathetic to (Venezuela’s President Hugo) Chavez had won the elections— when I had sold them the idea that Peru was a country as attractive and stable as Chile. We ended up delaying investments for about a month and a half.”
Leaders of many of the country’s top businesses took a similar wait-and-see stance following the election results, which brought victory for self-proclaimed nationalist presidential candidate Humala in July of last year.
“All bets were on what was going to happen during the government’s first months,” says Mauricio Olaya, partner at Muniz Ramirez Perez-Taiman & Olaya, one of the country’s top law firms. “Fortunately, the change in government came during a time of high investor optimism. Suddenly stepping on the brakes with projects already in the pipeline was not an option.”
Fast forward to today— exactly one year after President Humala took office— and many of the country’s top businesses are already moving ahead with programmed investments, or are ready to do so.
“The government’s message to maintain the momentum of the economic model built consumer confidence, reflected in healthy internal demand, and encouraged business executives to continue with their investment plans,” notes Rizal Bragagnini, general manager of San Fernando, the country’s largest poultry company.
This sentiment is echoed among other Peruvian business leaders, who say that after an initial stage of apprehension following elections, they are proceeding with their business plans, albeit cautiously. “Despite this uncertainty, we didn’t put the brake on or cancel our investments because of the potential risk the change in government represented,” says Andre Canguçu chief financial officer of GDF SUEZ Latin America, whose local subsidiary EnerSur operates four electricity generation plants.
“We intend to continue to invest in Peru. There is ample room to grow not only in the energy sector, but in other sectors as well.”
Canguçu and other market leaders concur that there were two main factors that helped dissipate concerns and gain back investor confidence following the elections: President Humala’s decision to continue with the current economic model and his choice of candidates to form his economic team, namely the finance minister, central bank president, and premier.
“The announcement of the main government figures sent a positive message to the business sector. It gave us the reassurance to continue with our current projects and to embark on new ones,” says Canguçu. GDF SUEZ, Peru’s third largest electric power generator, is currently developing three different energy projects that add up to close to $1 billion in investments, all of which are scheduled to come online within the next six to 24 months.
Aside from high investor confidence, factors such as the country’s tight fiscal and monetary policies, competitive foreign investment laws, and stable judicial framework have translated into continued growth across most sectors of Peru’s economy, especially in construction, agriculture, financial services, and retail. GDP growth is expected to come in at 6 percent this year, a slight drop from last year but still much higher than that of other countries around the world.
Peru’s Free Trade Agreements (FTAs) with countries like the United States, Canada, China, Japan, Thailand, Singapore, South Korea, Mexico, Chile, and most recently, with the European Union, will certainly help maintain Peru’s competitiveness, economists say. “Although there was a small arrhythmia in the pumping of investments following elections, Peru continues to be a magnet for investments,” assures de la Torre.
While executives praise President Humala’s efforts to keep the economy on course, they are quick to criticize the government’s management, or rather lack thereof, when dealing with social conflicts, which have intensified since the beginning of the year, especially in the mining sector.
“The feeling of unrest is, without a doubt, Peru’s biggest risk domestically,” says Alonso Segura, chief economist at Banco de Credito del Peru (BCP), the country’s largest financial institution. “These social conflicts are worrisome because the government is not finding a solution to the problems at hand. We do not know how well the government can maneuver politically to get these (mining) projects up and running again.”
Most of the protests are socio-environmental, or involve clashes with government officials, or labor disputes. Much of this unrest also has to do with the fact that marginalized communities— where most of the conflicts are born— have yet to feel the social inclusion the president pro-mised during his campaign. Local political interests also play an important role, adds Daniel Cordova, managing partner at U.S.-based public relations consulting firm Newlink Group in Peru.
“This social movement gains strength because elected regional authorities join this opposition against investments in order to garner political support, when they should be promoting investments,” says Cordova, whose clients include mining heavyweights like Minera Yanacocha and Southern Peru. “These authorities are like mini-Chavista leaders that are putting capital investments at risk by wa-ving the ecological flag.”
Industry experts point to the case in the northern department of Cajamarca, where regional President Gregorio Santos has been leading protests against the development of the massive $4.8 billion Minas Conga project, the country’s largest private sector investment ever. Protestors say that the gold mining project, which is being developed by U.S.-based Newmont Mining, will harm the area’s water supply.
Clashes between police officers and opponents of the mine have resulted in several deaths, and the government declared a state of emergency in the area in July.
“Minas Conga is emblematic of the social instabi-lity, the governability and political management of situations in general,” says BCP’s Segura.
For now, all eyes are on Minas Conga. But there are other projects raising concerns for investors. These include violent protests over the past year against operations owned by mining giants Xstrata, Southern Copper Corporation and Anglo American. Uprisings against two of Xtrata’s mines earlier this year, for example, resulted in the death of protestors and even in the kidnapping of a local official. Opponents are protesting against alleged mining pollution and are demanding compensation.
At the end of July, the president appointed human rights lawyer Juan Jimenez as his new premier, and Jimenez, in turn, announced the creation of the Office for Dialogue and Sustainability. The Office, which replaces the former Conflicts Office, aims to resolve the country’s social and environmental protests by stepping up dialogue and negotiation.
While social conflicts are, and will continue to be, the main issue on the government’s agenda, business leaders say there are other concerns that need to be addressed.
At the forefront: promoting infrastructure development, improving the quality of the education and health systems, boosting law enforcement and formalizing businesses. And although the country’s poverty rate has dramatically decreased to 30 percent, down from 48 percent in 2005, there’s plenty of room for improvement. The same is true, analysts say, for the country’s unequal income distribution.
Reforms to Peru’s private pension fund system, approved by Congress and the Executive in July, also promise to grab headlines moving forward.
There’s plenty at stake. The country’s four private pension funds (known as AFPs) have $30 billion in assets under management, equal to 20 percent of the country’s GDP.
Peru’s private pension funds association is challenging the constitutionality of the new legislation, which aims to expand coverage to residents and lower commissions by luring competition.
Another main concern among business leaders is the slowdown of the global economy, with the most intense focus on the United States, China and Europe. Economic sluggishness there will certainly be felt in Peru.
“A determining factor in investor confidence right now is the negative impact of social conflicts and the international economic crisis,” said in July Hugo Santa Maria, managing partner for economic studies at Apoyo Consultoría, one of the country’s leading business consulting firms. “It’s not all local, or what the government does or doesn’t do.”
And for Peru, which is largely dependent on mining and commodity exports, the health of the global economy is particularly relevant, Santa Maria notes.
As overall exports continue to drop, it’s unlikely the government will reach its target of $50 billion in export earnings for the year.
But despite the challenges that lie ahead, most business leaders agree with de la Torre’s positive outlook for the country. “Peru’s perspectives are very encouraging,” says de la Torre, who teaches business at Universidad del Pacifico.
“We have witnessed with optimism how the left is adopting a version of governing similar to (former Chilean President Michelle) Bachelet and (former British Prime Minister) Tony Blair. The trend is to consolidate the economic model and enter the free market independent of the government’s political color.”
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