Living in Peru : your everyday companion

(Provided by  Diego de la Torre – Partner, Aleteia Capital)

Over the last few years, Peru’s economy and international image have changed dramatically. The radical changes and open economic policies applied during the nineties put Peru in a sensible path of economic recovery. As a result, foreign investment into the country has been providing Peru with resources to sustain its economic growth rate. This clearly reflects international confidence in the country’s future, considering the social and political issues currently present in Peru.

The impressive results achieved by Peru’s economy brought back international credibility to the country. This is reflected in the reports of risk classification agencies. Peru is working hard to get the Investment Grade, which seemed a utopia not long ago. The stable macroeconomics policies, clear investment rules, new labour laws, and privatisation have attracted foreign investment. On the other hand, tight fiscal and monetary policies have also contributed to achieve extraordinary economic results. Peru’s 6.4% GDP growth rate in 2005 and 7.9% in 2006 were among the highest in Latin America. The annual average growth projected for 2007-2008 is 7.0%, which is well above the region average. Inflation is no longer a problem with an independent and very professional central bank management. There are still, however, other economic indicators that Peru has not yet developed to the desired levels. Despite the efforts made, infrastructure is still rudimentary and the stock market is still relatively small.

Peru’s international policy has been increasingly active. Peru has tried to get Peru involved in all international trade negotiations, including the Andean Pact and GATT, reflecting the interest of Peru for free trade. Peru has just signed a Free Trade Agreement with the United States (it is expected to be approved by the US congress in June) and it is actively searching for a similar agreement with the European Community. Nevertheless, international trade in Peru is still incipient, despite the export boom of the last three years and the positive commercial balance. Export and import mix give no sign of a significant change towards capital-intensive manufacturing or knowledge based product and services. Peru still seems to be focusing on exploiting its natural resources during this stage of its economic growth. Fortunately, this is starting to change.

Politically, Peru is starting to consolidate its main institutions such as the judiciary, electoral systems and political parties. The current political situation with the strong leadership of the renewed and economically literate Mr. García provides an attractive framework for investors. In one of his visits to the United States previous to his election, investment bankers commented that his economic approach was so sound and sensible that they thought they were listening to Alan Greenspan instead of Alan García. Democracy concerns have been considerably reduced with of Mr. Toledo government and the recent election of Mr. García, a proven democrat. A reasonably sense of security given the defeat of terrorism during the 90’s provides a good environment for foreign and domestic investment. However, security is one of the great challenges of the administration.

Socially, there are many things still to be done. One of these is unemployment, despite some progress made. We will also need a painful but unavoidable public restructuring. Another one is education, where investments made have not been sufficient to significantly improve the current situation. In addition, the gap in income distribution remains an important task for all Peruvians. To reduce the risk of social unrest and to avoid the election of a populist government in 2011, Mr. García must increase investment and concern for these issues. Despite the current problems, there is still a feeling of hope and security. More resources should be directed to solve these problems. It is hard to predict if improvements will be seen in the short term but politicians have to keep their promises and show progress.

Peru has been in a tricky situation: It has had to deal with too many internal problems, while always having to perform in a way acceptable to he IMF. Peru’s first priority was to get out of the critical condition by making it eligible for foreign investments and to gain back investor’s confidence. They have managed this turnaround stage reasonably well. Because of this and thanks to its sensible economic policies, Peru can and has to start to develop a strategy for the future. Currently Peru’s economy is still very resource oriented, mainly because of the technology, infrastructure and skill level. They have to decide where they want to head. To make the economy less vulnerable and to guarantee sustainability of growth, Peru will have to work towards a more industrialised and capital-intensive and knowledge based economy. They will have to do so, mainly by educating and training its work force, as well as by creating the necessary productive infrastructure. Peru will be able to make this switch and is already working on it. Despite the lack of a clear long-term strategy, Peru has initiated its development with a long-term approach. Never before in Peru’s history has this been the case. In all the previous booms Peru was only exploited. Thus they are finally able to pursue more strategic goals than the ones imposed by the IMF.

The final balance looks positive. Investment in Peru is attractive, especially in the privatised companies, which have shown great result so far. Attractive sectors at the moment are in mining and oil; while the construction, tourism and agriculture sectors promise good prospects in the near future.

Peru compares very favourable with the macroeconomic indicators of other Latin American countries given its low inflation, stable currency and an above average projected GDP growth for the next years.

About the author


Diego de la Torre – Partner, Aleteia Capital

Master of Business Administration, London Business School, England
Licenciado in Business Administration, Universidad del Pacífico

Mr de la Torre is Chairman and co-founder of La Viga S.A, the largest building materials distribution company in Peru. Mr. de la Torre has, in part, been able to achieve such considerable success because his ability to build cultural and business bridges between the Andean migrants from the highlands and the “western” sector of Peruvian society. He developed the intangible assets of his company that allowed the design of structure, culture and business processes that have become benchmarks in the industry. La Viga is ranked among the top 150 companies in Peru. He is also the founder of Quikrete Peru, a joint venture with an American company which has led and pioneered the production and development of dry ready mix concrete in the Peruvian market.

Mr de la Torre is also Professor of Business at the Universidad del Pacífico in Lima. His research interests include the dynamics of start-ups and how to foster trust, understanding and ethical business relationships. He is an international speaker in the subjects of corporate strategy and intangible assets management. He has been a main speaker on these subjects in many institutions in the United States and Canada. He was recently invited by the Canadian Government to make a presentation about intangibles at the Organization of American States in Washington D.C. Currently, he is researching about how good corporate governance practices can boost market capitalization. In July 2006, he was a speaker at the Global Leadership Summit in London, event sponsored by the Financial Times and Business Week.