Economic View

Mario Farren, General Manager, Citibank Peru, on further strengthening the investment environment and formalising the economy

How can the financing of large infrastructure projects help Peru reach its goal of 4% growth in 2018?

FARREN: Syndicated loans play a great role in long-term infrastructure financing and the development of the country. Bridging loans; listings on the stock market to attract institutional investors; investment and pension funds; and insurance companies also play an equally important role. Considering that Peru has a well-structured regulatory framework, easy access to capital markets for the public and private sector, and a good investment grade, financing is not a challenge. 

The key to economic growth is to maintain a low level of inflation, stability in the financial system, independence of the central bank and steady exchange rates. If these elements are aligned and the infrastructure project pipeline is implemented, the country should be able to meet its goals.

What factors have allowed Peru to maintain an A3 investment grade from Moody’s, and how can the country remain an attractive market for investment in the long term?

FARREN: The global financial system has reached a high degree of separation from politics. Political unrest around the world has not jeopardised optimism in financial markets, and this is the case in Peru as well. In fact, the exchange rate remains stable, with spreads at historically low levels, and the appetite for Peruvian risk remains high. What ultimately indicates growth potential is regulatory and institutional soundness.

For Peru to maintain its investment status, it must make the regulatory framework more flexible. Lawmakers often associate rigidity with stability; however, the reality is that a rigid framework leads to higher levels of informality and job precariousness. Without incentives for the private sector, the economy will continue to be dominated by informality, which is a deterrent for investors. 

What type of obstacles must be overcome to enhance public and private investment?

FARREN: Price stability for the raw materials that Peru exports will be decisive for the enhancement of private investment, considering that the country’s main industry is mining. Private investment depends on factors such as consumption, trust and the long-term outlook of the political landscape. They are also tied to factors such as high mining prices, low interest rates, low spreads and the fact that – for the first time in several years – the US, Europe and Japan are showing positive growth trends simultaneously. 

A political pact between the parties to set differences aside and focus on implementing the pipeline of infrastructure projects would also help boost trust and enhance investment. The success of Peru over the last 20 years has been determined by the country’s open trade policies, the leadership role that the private sector has played as a catalyst of development, the rule of law, an independent central bank, and highly competent and professional public economic authorities. If these elements are maintained, the only obstacle to overcome would be politics.

How effective are the new regulations to combat money laundering and terrorism financing, passed by the Banking and Insurance Superintendence?

FARREN: The current regulatory framework gives the fight against money laundering and terrorism financing the priority it deserves. Compliance and money laundering officials will now report directly to company boards of directors, which is a step in the right direction. However, it is important to note that these regulatory changes only apply to a very small portion of the economy, considering the high level of informality in Peru. Informal companies, which represent more than 60% of the businesses in Peru, will continue to operate outside of the law. 

The more regulation that is passed, the higher the operational costs are for the formal sector. This makes it increasingly inaccessible for the informal sector to become formal, ultimately impacting the effectiveness of any regulation passed. Formalisation is, therefore, the greatest ally of any effort to prevent money laundering and terrorism financing. Digitalisation is also a key factor, as it enhances the traceability of transactions and decreases the need for cash, thus creating a more challenging environment for illegal transactions.