Exerting Resilience: Peru Rebounds from Challenges to Post Positive Growth
27 Dec 2017
2017 will be remembered as a mixed year for Peru, and yet despite some challenges, it will serve as the foundation for a considerably optimistic 2018.
The terrible flooding caused by the El Niño phenomenon at the beginning of the year led to the loss of many lives and caused widespread damage to large parts of the country, destroying thousands of homes and leaving key infrastructure, such as bridges and roads, unusable. We will also remember, at least while its effects remain on the political front, the Odebrecht scandal – a corruption case that has affected a number of infrastructure projects both locally and regionally.
While impossible to ignore, these issues have not been able to wipe out the resilience of the business community.
Perhaps in some ways, both incidents have helped accelerate development plans. The public sector was determined to expand spending to rebuild the country through the Reconstruction with Changes (Reconstrucción con Cambios, RCC) programme, which has played a part in boosting investor confidence. In mid-June Peru’s central bank, the Banco Central de Reserva del Perú (BCRP), forecast public investment would expand by 7% this year and 15% in 2018.
The strategy appears to be working so far; increased public outlays are helping to stimulate private spending, which the BCRP expects to grow by 3.5% in 2018. It is hoped that this confidence will allow the private sector to take a stronger lead in national investment next year.
Oxford Business Group’s third Business Barometer: Peru CEO Survey, an in-person poll of local CEOs conducted from early October through to the end of November 2017, demonstrated a high level of optimism from companies operating in the country.
Some 89% of those surveyed have either positive or very positive expectations for local business in the next 12 months, a finding similar to the 90.2% figure recorded in OBG’s first Peru CEO Survey, released in February 2017. The result shows that the negative effects of El Niño and the corruption crisis have
not affected market activity or outlook. For example, cement consumption has continually increased over the past five years, demonstrating how the construction sector – the most affected by the two situations – has maintained demand in light of the setbacks.
In fact, around two-thirds (64%) of respondents believe the country’s GDP will grow by more than 3% in the next year. This exceeds the 2.7% forecast the IMF set for the Andean country in its October World Economic Outlook.
Meanwhile, a majority have also flagged their intention to invest further, with 58% of CEOs likely or very likely to make a significant capital investment in the next year.
The ability to overcome adverse situations in the short term is to be applauded. However, greater structural and long-term thinking continues to be needed, with the survey highlighting the importance of increasing investment in research and development (R&D) to make a qualitative leap: 27% identified R&D as the skill in greatest need, followed by leadership (16%) and computer technology (15%).
Another challenge facing the country involves balancing the interests of the public and private sectors to maximise growth. The current tax system, for instance, leaves business leaders divided: 56% said the tax environment is either competitive or very competitive, while 44% characterised it uncompetitive. That said, international firms are slightly more positive about Peru’s tax environment than local ones: 69% of international companies said the country’s tax environment is competitive or very competitive.
In a positive note to end, the financial sector is looking healthy. An increased and more diverse offer from both traditional and new players has resulted in an improved financing environment, with three-quarters (74%) of respondents saying access to credit was either easy or very easy. A strong, continued flow of financing will be crucial for Peru in 2018 as it looks to capitalise on 2017’s positive performance.