The Report: Peru 2015

Economy

Following the end of the commodities supercycle that sustained Peru’s economic growth at an average rate of 6.4% per annum since the mid-2000s, the country saw growth fall sharply over the course of 2014. However, this slowdown is widely seen as a temporary lull, attributable in part to delays in some major mining developments, and the government has sought to counteract the current situation by introducing a range of measures that are designed to stimulate both private and public investment. In 2015 growth is expected to pick up again, ensuring Peru retains its place among the fastest-growing economies both within the region and globally. Nevertheless, certain long-standing structural challenges, such as the poor quality of education and the inefficiency of regional governments, will need to be tackled soon in order to boost growth potential and sustain the remarkable development the country has witnessed over the past two decades.

This chapter contains interviews with Alonso Segura, Minister of Economy and Finance; Alicia Bárcena, Executive Secretary, Economic Commission for Latin America and the Caribbean (ECLAC); and Carlos Herrera, Executive Director, ProInversión. It also includes a viewpoint from Fernando D’Alessio Ipinza, Director-General, CENTRUM Católica.

Banking

With a record of consistent profitability and credit growth, the banking sector has ridden the wave of Peru’s economic expansion during the past decade. As of June 2014, direct lending by the banking sector stood at PEN211.7bn ($75.58bn), having increased by 16% over the previous year. A firm regulatory environment is credited with having ensured that the country’s banks made it through the 2008 global financial crisis relatively unscathed. However, in 2014, the proposed end of the commodities supercycle, an economic slowdown and the prospect of rising international interest rates presented the banks with a new set of challenges. Even so, recent developments, including accelerating de-dollarisation and the consolidation of microfinance providers, suggest that the maturing industry is already dealing with these issues. The sector is set to see continued growth going into 2015.

This chapter contains interviews with Julio Velarde, Governor, Central Reserve Bank of Peru (BCRP); Carlos González-Taboada, CEO, Scotiabank Peru; and Daniel Schydlowsky, Superintendent for Banks, Insurance and Pension Funds.

Capital Markets

The development of Peru’s capital markets continues apace, driven by the growing number of increasingly sophisticated local institutional investors. Though the Lima Stock Exchange (Bolsa de Valores de Lima, BVL) started 2014 off poorly, with stock prices falling significantly on the gradual withdrawal of monetary stimulus by the US Federal Reserve and the effect of geopolitical tensions surrounding the conflict in the Ukraine, it began showing signs of recovery in the second quarter. The Federal Reserve’s decision to postpone interest rate hikes, along with a further cut to interest rates by the European Central Bank and the announcement of economic stimulus measures by the Peruvian Ministry of Finance, helped produce a rally in the market. Mining, banking and utilities were the strongest performers on the BVL in the first nine months of 2014. The long-awaited IPO of state oil firm Petroperú, expected in 2015, is the big prize financiers are looking for to accelerate the development of the equities market.

This chapter contains interviews with Christian Laub, President, Lima Stock Exchange (BVL) and José Antonio Blanco, CEO, BTG Pactual.

Insurance

With net insurance premium growth of 16% in 2013, the Peruvian insurance sector continues to outperform regional neighbours such as Mexico (11%) and Colombia (8%). Double-digit growth is expected to continue through 2015, propelled by small businesses and the modernisation of mature industries and infrastructure. However, gross premiums to GDP, which stood at 1.5% at the end of 2012 (half the regional average of 3%) demonstrate the weak penetration in Peruvian market. Following the passage of significant domestic regulatory reforms in 2012, Peru’s insurance industry now faces the challenge of modernising its practices in preparation for the Solvency II standards, while also coming up with novel ways to engage first-time customers.

The sector’s broader economic significance will persist, with insurance companies collectively constituting the second-largest institutional investor in Peru with approximately $9bn in assets under management.

Energy

Peru’s energy sector is undergoing a period of rapid transformation. Ten years ago energy demand was low and the country depended almost entirely on hydroelectric power in addition to petroleum imports to meet its needs. At that time, Peru had limited oil production, no production of natural gas and little to speak of in terms of energy exports. Today, by contrast, the country is among the leading producers of natural gas in the region, an oil production hub and an important target of investment by foreign energy firms. Though oil production in May 2014 stood at 69,000 barrels per day (bpd) – having declined from 87,500 bpd in 2003 – production of natural gas has grown quickly, reaching 430.8bn cubic feet (bcf) in 2013, compared to 17.7 bcf in 2003. The government is now focused on developing the infrastructure that would be needed to add value to hydrocarbons resources through refining and petrochemical manufacturing.

This chapter contains an interview with Eleodoro Mayorga, Minister of Energy and Mines.

Mining

The growth of the mining sector, driven by a sharp rise in commodity prices, spurred Peru’s economy to the fastest sustained growth rate in Latin America during much of the past decade. The recent fall in commodity prices, however, has led to a significant drop in the value of Peru’s mining exports, and consequently, a slowing of GDP growth in 2014. The central bank lowered its outlook on mining growth for 2015 from an estimate of 9% to 6.5%. The sector is not expected to get an immediate boost in the form of rising production or commodity prices; however, in 2016 and beyond, several large-scale copper projects are expected to come on-line that could double Peru’s production of the mineral and add as much as 1-2% to the country’s GDP growth. The sector is also set to get a boost from zinc, silver and tin, other metals of which Peru has substantial reserves and for which global demand is expected to grow.

This chapter contains an interview with José Picasso, Chairman, Volcan Compañía Minera.

Construction & Real Estate

Accounting for around 5% of GDP, the Peruvian construction sector continues to see expansion at several levels. The sector grew by 8.9% in 2013 before slowing down to 3.1% year-on-year in the first half of 2014. Activity in the construction sector is being led by the burgeoning need for housing, as well as commercial real estate, both resulting from improved living standards in Peruvian cities. As the country strives to resolve a pending housing deficit, the stable growth of the economy is prompting a new dynamism in the higher segments of the real estate market. This is supporting continued sales of new homes, as well as efforts by builders and promoters to continue to satisfy demand. As the sector matures, rising land prices encouraging a greater concentration of homes, and a lack of available space in Lima and other growing cities throughout Peru, are set to become some of the sector’s most important challenges.

This chapter contains interviews with Jesús Blanco, CEO, InGroup; Ernesto Tejeda, President, Obrainsa; and Gonzalo Sarmiento Giove, CEO, Inversiones Centenario.

Industry & Retail

Accounting for around 15% of GDP, the manufacturing sector has recorded strong growth over the past decade. Between 2004 and 2013, value added from manufacturing grew at a compound annual rate of 5.8% in real terms. While growth is uneven among the various manufacturing activities, the sector has been buoyed by strong growth in basic metal products and in non-metallic minerals. The government of President Ollanta Humala is attuned to both the importance that manufacturing will play in Peru’s economic future and to the sector’s shortcomings. In 2014, the government laid out the National Plan for Productive Diversification that aims to promote investment and innovation in manufacturing, and scale back burdensome industrial regulations. As the government attempts to steer the economy towards a more diversified mix of activities, an increased focus on more sophisticated goods with higher added value and less exposure to commodities price volatility should be expected.

This chapter contains an interview with Piero Ghezzi, Minister of Production.

Transport

In an effort to close the transport infrastructure gap, estimated to reach $20.9bn by 2021, Peruvian authorities are implementing heavy investment plans and making extensive use of public-private partnerships. With economic growth increasingly exposing the current limitations of Peru’s transport channels, efficiency and progress are key to ensuring sustainable growth in the future. Due to the economy’s heavy reliance on mineral exports, Peru’s links between its hinterland and export gateways on the coast remain essential, and this is encouraging expansion work in major road connections. Private management of port facilities is allowing for fresh investment in new equipment to increase capacity and shorten service times. Growth is also driving development of aviation infrastructure to raise capacity for domestic and international traffic. By land, water and air, the revamping of transportation infrastructure seems set to determine the country’s growth prospects over the medium term.

This chapter contains an interview with José Gallardo Ku, Minister of Transport and Communications.

Agriculture & Fisheries

Increased domestic consumption, exports and investment have led to consistent growth in the agriculture sector for more than a decade. From 2003-12 growth averaged 4.14%, according to the Ministry of Agriculture and Irrigation. However, a decline in production volumes of key crops, in particular coffee, saw growth slow to 2.2% in 2013. The development of industrial and export-oriented agriculture, concentrated on the Peruvian coast, is leading sector growth and diversification efforts. The government has supported growth in this segment with a number of large-scale irrigation infrastructure projects that are quickly expanding irrigated land. Meanwhile, the fishing industry is facing a second year of troubled waters as supplies of anchovies, the sector’s prime catch, have fallen to a record-low. In a climate of instability, the sector is increasing diversification efforts to reduce dependence on the delicate resource.

This chapter features an interview with José Chlimper, CEO, Agrokasa.

Tourism

With the Peruvian government intent on diversifying the economy away from mineral resources, the tourism sector is slowly becoming a strategic economic contributor. The sector has experienced unprecedented development in the past decade. According to the Ministry of Foreign Trade and Tourism in 2013 international arrivals increased 11% to 3.16m, a growth rate above the regional (5.1%) and world averages (4.6%) as measured by the World Travel and Tourism Council. Peru hopes to reach 3.5m foreign visitors in 2014. Sector revenues also rose by an impressive 28% in 2013, from just over $3bn in 2012 to $3.9bn, making tourism the third-most-important source of revenue to the national economy. Government efforts to bridge the transport infrastructure gap are set to improve connectivity significantly, while rising demand for accommodation and services, in large part fuelled by a growing meetings, incentives, conferences and events segment, is driving investment in the hotel industry.

This chapter contains an interview with María del Carmen de Reparaz, Vice-Minister of Tourism.

Telecoms & IT

The telecoms and IT sectors, which combined make up a market of around $8bn, have seen substantial growth in recent years. Recent regulatory changes, large-scale investments, and the emergence of new players are effectively shaking up the telecommunications sector, which saw sales reach $5.5bn in 2013, according to the Supervising Organisation for Private Investment in Telecommunications (Organismo Supervisor de Inversión Privada en Telecomunicaciones, OSIPTEL). New regulations imposed by OSIPTEL, the sector’s watchdog, are putting pressure on operators to provide better service, while the entrance of a fourth mobile operator is set to see competition increase. Though the market is still largely dominated by the leading operator, Telefónica, regulatory changes aimed at opening the market to other competitors should lower entry barriers for smaller players. Meanwhile, government efforts to establish a country-wide fibre-optic network is also driving growth in the IT market, which is expected to expand by 14.8%.

Education & Health

Public spending on education and health is set to increase significantly in coming years as the government attempts to address one of the biggest challenges facing both sectors; a sizeable infrastructure gap that continues to perpetuate a significant urban-rural divide. In the process, opportunities for the private sector through public-private partnerships (PPPs) should abound. In the education sector, the government’s most recent effort to improve quality came in the form of a new university law which will increase oversight and requirements for students and professors. Meanwhile, in the health sector, a reform package passed in 2013 and the allocation of $8.4bn to address the infrastructure gap in the public health system are indicative of the government’s commitment to raising sector standards. A new emphasis on PPPs to boost public health infrastructure is expected to generate opportunities for an already dynamic and fast-growing private sector.

This chapter contains interviews with José Dextre Chacón, President, Federation of Private Institutions of Higher Education and Elsa Del Castillo, President, University of the Pacific.

Tax

As part of an overview of the Peruvian tax regime, this chapter covers areas of particular interest to investors such as corporate and individual income tax, stability agreements, tax exemptions and pension fund contributions.

This chapter contains an interview with Esteban Chong, Senior Partner, PwC Peru.

Legal Framework

As the commodity supercycle comes to an end and economic growth eases, the Peruvian government has introduced legal changes to promote foreign investment and stimulate growth. This chapter highlights the most important recent changes in Peru’s legal framework, including measures to expedite permits, public-private partnerships, pensions and the Work for Taxes regime.

This chapter contains an interview with Pablo Berckholtz, Managing Partner, Estudio Echecopar, a member firm of Baker & McKenzie International.

The Guide

This chapter contains information on hotels, government agencies and other listings, as well as useful tips for visitors on a range of topics such as visa requirements, currency, communications, dress codes and business hours, among others.

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