OBG talks to Luis Miguel Castilla Rubio, Minister of Economy and Finance

PeruEconomy

Interview

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Luis Miguel Castilla Rubio, Minister of Economy and Finance

Interview: Luis Miguel Castilla Rubio

What are the incentives for public-private partnerships (PPPs) to tackle the housing and infrastructure deficits in the country?

LUIS MIGUEL CASTILLA RUBIO : The infrastructure gap adds up to $40bn in sectors like energy, transport, water and electricity. During 2012-13 we anticipate receiving investment flows over $10bn in PPPs. The Ministry of Housing is also reforming to efficiently subsidise low-income groups. Our legal framework is investor friendly and does not discriminate between domestic and foreign investors. There is complete mobility for dividend and profit repatriation, as well as several value-added tax (VAT) reimbursement incentives. The taxation and VAT scheme is simple and Peru has signed multiple investment protection agreements as well as free trade agreements (FTAs) that have their own investment provisions.

What impact will further economic integration in South America have on the growth rate?

CASTILLA: The lifting of tariff barriers was critical to the export boom of recent years. The goal is to double our current $45bn in exports within five years. We have seen significant growth in non-traditional exports. This is important because they are mostly value-added products traded with our regional neighbours and are labour intensive.

Trade with more mature markets, such as the US and Europe, will face a slowdown, so Peru must strengthen intra-regional trade. In that respect, upcoming FTAs with Venezuela and Panama are quite important, along with an EU treaty that will soon be ratified and one with Japan that went into effect in March 2012. We may sign further FTAs with Russia and India, placing more than 95% of Peru’s trade under free trade agreements.

What are up and coming industries in which foreign direct investors may be interested?

CASTILLA: Peru is becoming a leading exporter in produce to very demanding European and Asian markets. Additionally, we have an established a strong high-quality clothing manufacturing industry, and thanks to our small time zone difference with the US, there are great opportunities to establish customer service call centres for large US-based corporations.

As for energy, we hope to explore natural gas reserves and we plan to develop a petrochemical complex in the south. We are already in talks with potential investors.

How do you plan to maintain a solid growth rate without stoking inflation?

CASTILLA: The high growth rate, averaging 6% over the past decade, was coupled with a low mean inflation rate of 2.5%; all this has been the result of sound monetary policy and fiscal discipline. Higher inflation arose in 2011 from external supply shocks in the form of higher food and oil prices. But, since the second quarter of 2012, inflation is coming back in line with central bank targets.

Fiscal discipline enables us to save on good days so we can spend on difficult ones. We have developed several public savings cushions. In addition, we have reduced our debt-to-GDP ratio, which is close to 20%.

What about the informal labour sector?

CASTILLA: This is one of our main challenges – over 60% of Peruvians lack a formal job without access to social security and a pension. We are trying to make the benefits of being a formal worker more evident, as well as trying to reduce labour costs. There is an ongoing debate between labour market flexibility, on the one hand, and more labour rights on the other.

We want to strike a balance between providing flexible markets that are competitive while creating room for more decent jobs. Legislative changes in this regard should be in place in 2012. We are also looking at other schemes, such as tax breaks, special tax regimes for small and medium-sized enterprises and microenterprises, to make informal labour join the formal economy. More formality means more productivity, higher wages and people being better-off overall.

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