Peruvian President Alan Garcia boosts foreign investment and helps spur economic growth.
BY JOACHIM BAMRUD
What a year it has been for Peru. It managed to post its best economic performance in 14 years (and Latin America's second-highest growth rate), post another jump in foreign direct investments, achieve investment grade and host key regional summits with Asia and Europe. It was also ranked as Latin America's third-best country for business on the 2008 Latin Business Index from Latin Business Chronicle (behind only Chile and Panama).
Much of the credit goes to Alan Garcia, a former leftist firebrand who became Peru’s president in July 2006 amidst concern among foreign investors. The last time Garcia had ruled Peru, the country suffered from economic chaos, debt default and hyper-inflation. This time round, he has followed market-friendly policies, appointing technocrats in key positions and aggressively pushed for free trade.
”Garcia’s last government was disastrous and he assumed [office] looking for a second chance,” says Jose Luis Valderrama, president of Miami-based advertising agency Hispanic Group and president of the Peruvian American Chamber of Commerce in Miami known as PERUSA. “He is now a president in favor of open markets, surrounding himself with independents, which is healthy.”
While he inherited a strong economy from his predecessor, Alejandro Toledo, Garcia surprised many local and foreign investors for his enthusiastic embrace of free markets and free trade. “Garcia has been a surprise to many of us," Leo Rodriguez, Latin America president for U.S.-based energy and technology conglomerate Emerson, told Latin Business Chronicle in October.
His push for foreign investment is more than just words. Earlier this year his office revealed that he had sent letters to more than 600 companies in the United States, Europe, Asia and Latin America to promote Peru. One of his key jobs, Garcia says, "is to directly tell all companies in the world they should buy Peruvian products, invest in Peru, bring high-tech machines, build up our country and generate employment in our homeland." He followed up the letters with e-mail, he said.
Foreign direct investment in Peru will likely end this year at $8.4 billion, according to data from Peru’s central bank. That represents an increase of 58.45 percent from last year, when FDI also grew by more than 50 percent. Thanks to holding the Asia Pacific Economic Forum (APEC) summit last month, Peru will likely see a dramatic increase next year as well despite the global crisis, independent analysts and Peruvian officials alike forecast.
APEC: FDI BOOST
FDI in Peru will likely grow to $12.5 billion next year and $17.5 billion in 2010, according to a forecast from Maximixe, a Lima-based consulting firm. It expects the growth to be spurred by the increased awareness about Peru in Asia after it held the APEC summit. The forecast is in line with what Peruvian officials like Vice President Luis GIampietri predicts. He told the official news agency Andina last month that hosting APEC would triple FDI. "This turns Peru into a gateway for future business between the Asia-Pacific region and South America", he said.
Case in point: During APEC, Peru signed a free trade agreement with China, which will remove up to 90 percent of duties for Chinese exports to the South American nation. Only Chile has a FTA with China so far and that one also led to a FDI boom following its signature in 2005. Peru also announced the start of free trade talks with South Korea and signed an investment treaty with Japan which officials hope will be the first step towards a free trade agreement.
Earlier this month, Chinalco -- China's second-largest copper company and the world's third-largest aluminum producer – was granted a $2 billion loan from the Export-Import Bank of China for the construction of its Toromocho copper mine in Peru. That follows its $860 million acquisition last year of Peru Copper Corporation of Canada. The Toromocho should boost Peru’s copper exports by 25 percent. Construction starts next year with production scheduled to start in 2012.
Meanwhile, Peru LNG – a joint venture between U.S.-based Hunt Oil Company, South Korea-based SK Energy, Japan-based Marubeni and Spain-based Repsol YPF – announce in June that it had obtained a $2.2 billion in loans to finance the construction of a natural gas liquefaction facility to export the excess supply of Peru's abundant natural gas to international markets. The project will be the largest direct foreign investment in Peru's history, with a total project cost estimated at $3.8 Billion including financing costs, the company says.
Also Indian companies are looking at Peru. Reliance plans to explore for oil in Peru and will evaluate investing in a new petrochemicals complex. “Investments could reach hundreds of millions of dollars," Savitri Kunadi, a company officer, said after meeting with Garcia in June, according to Reuters.
Closer to home, Brazilian steel company Gerdau announced in September that it was planning to invest $1.4 billion to make its subsidiary Siderperu one of the largest steel mills in Latin America. “Peru is a strategic country for Gerdau, being a market with great potential and great development possibilities,” Gerdau CEO André Gerdau Johannpeter said in a statement after meeting with Garcia.
In addition to its new free trade agreement with China, Peru already boasted FTA’s with Canada and Singapore, is set to implement a widely-anticipated accord with the United States next year and is negotiating another one with the European Union. ”This export diversification will make Peru stronger,” Valderrama says. “It doesn’t depend on only one market.”
Unlike Mexico, for example, which exports some 80 percent to the United States alone, Peru’s exports to the United States only account for some 20 percent, he points out.
In April credit rating agency Fitch gave Peru an investment grade rating, while Standard & Poor's followed suit three months later. In August, Moody's Investors Service also revised up its ratings for Peru, albeit one just one notch under investment grade. "The upgrade was prompted by steady improvement in Peru's sovereign credit profile driven by a continued and accelerated strengthening in the balance sheet of the government and the local banks," Moody's Vice President-Senior Credit Officer Mauro Leos said in a statement.
The government plans to take advantage of the upgrade through an international bond offering next year. Earlier this month, it authorized a dollar-denominated bond sale of up to $1.35 billion next year, according to Bloomberg. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising Peru on the bond sale, Betty Sotelo, the Economy Ministry’s debt director, told the news agency last week.
Despite the progress, Garcia also faces a series of challenges apart from external ones related to the global credit crunch and falling commodity prices. The most pressing one is the continued social unrest in Peru. Despite the economic boom of recent years and poverty falling at greater levels than most of its Latin American neighbors, a significant portion of the population is still are defined as poor. Nearly half – 44.5 percent – of Peru’s population live under the poverty line, according to 2006 data quoted by the CIA. In July, thousands of inhabitants in Puerto Maldonado stormed the local headquarters of the regional governor and clashed with police to protest new mining rules.
The continued social discontent is likely the main reason why Garcia remains largely unpopular in Peru, although he's becoming slightly more popular. A poll released by Apoyo on Sunday shows that 70 percent of Peruvians are unhappy with Garcia’s performance, while only 25 percent approved. That means his popularity is up from November (23.1 percent) and October (15.0 percent).
Meanwhile, Valderrama also sees the lack of strong institutions as a key challenge for Garcia. He especially points to the so called Petrogate scandal, which led to the resignation of the whole cabinet in October, although it seemingly only involved lawyers representing a Norwegian oil company and one member of the ruling APRA party. Rather than paralyzing the whole government, it should have been handled by judicial authorities and affected only those who actually were implicated, as would have been the case in developed countries, he says.
This year, Peru's economy should expand by 9.4 percent, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). That will be the highest growth in Latin America after Uruguay.
Despite its considerable economic success this year, Peru will be hit by the global crisis next year. Its exports of commodities are expected to fall thanks to weakening international prices. Peru is the world’s largest silver miner and third-biggest copper producer.
In one way or another we will suffer because Peru depends on the prices of its metals,” Valderrama says.
The economy will likely expand by 6.0 percent next year, according to Citigroup. ECLAC is more pessimistic, forecasting a GDP growth of only 5.0 percent. However, that will still make Peru the fastest-growing economy in Latin America next year, according to ECLAC.
One thing is certain. Foreign investors are pleased Alan Garcia is steering Peru’s course. For all his achievements this year, the Peruvian President has been selected by Latin Business Chronicle as Leader of the Year.
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