Living in Peru : your everyday companion

by
Juan Diego Angulo Ljubicic, Economist and Editor

While the world has been shaken by a financial crisis, and the uncertainty this has caused has directly affected the growth of Peru, it stands out in the region and the world as one of the countries best prepared to face these times of economic slowdown or even contraction thanks to good management of the economy during the last decade.

Thus, despite expectations to the contrary, the State confirmed that Peru achieved a growth rate of 2.02% during the first quarter of 2009, and forecasts a 3-to-4% increase in real GDP for this year. Despite of the negative forecasts for April, this reinforces the good moment Peru is going through, and adds further credence to its favorable conditions for development.

In public policy, the State provides legal protection for its domestic and foreign investors through legislative guarantees that certify consistency in the rules of the game. Moreover, monetary policy has been wise, resulting in low inflation and maintaining the New Sol as one of the world’s currencies since the crisis erupted. In turn, the improved fiscal apparatus is reflected in increases in both tax revenues and the country's international reserves.

With respect to public investment, numerous infrastructure projects have progressed in many sectors. For example, the Peru-Brazil inter-oceanic highway will not only encourage and facilitate trade, but will integrate Peruvian regions into large-scale South American and overseas economies. In energy, there has been progress in the introduction of Camisea gas as a viable and cheaper alternative fuel. In turn, major hydroelectric centers have been built in the provinces that also contribute to ensuring the energy security of Peru and its industries.

However, an analysis of the repercussions of the proper actions of the State and of the economy itself affirms the global acceptance and welcome of Peru’s performance. Proof of this is the series of Free Trade Agreements (FTA) signed with countries such as the U.S., China, Canada, Singapore and Chile, as well as progress in negotiations with other major trading partners like the European Union, South Korea, the European Fair Trade Association (comprising Switzerland, Norway, Iceland and Liechtenstein) and Mexico. While it is true that all the major rating agencies have been criticized for endorsing a number of companies that have been sunk by the crisis, in July of last year, Standard and Poor's granted Peru the transcendental “investment grade” for its financial strength, good fiscal policy and reduction of its external debt. It should be noted that only 3 other countries in the region have this rating (Chile, Mexico and Brazil).

Progress also continues in the decentralization of the country and its investments. Cities such as Arequipa and Trujillo, which have grown tremendously through trade, tourism and construction, are the cities with the highest economic growth in the continent during recent years, according to America Economia magazine (May 2009). Likewise, Lima has again improved its status in the ranking of the best cities for doing business in Latin America, rising up 2 steps to the 7th position.

As already mentioned, the global crisis is slowing the country down. Thus, the State has fostered an anti-crisis plan that to date has a nominal S/. 7,319 million to stimulate economic activity, construct infrastructure and protect those most affected, the poor. Up to now, it has had a positive effect on the expectations of numerous investors, which is at least one of the reasons for the increase in the confidence in the financial system and in the stock market. Nonetheless, the Minister of Economy and Finance, Luis Carranza, has recently acknowledged that this plan has had some problems in its implementation, and that so far this year, less than one-third of its budget has been spent.

Despite there having been progress in many respects, this implementation problem highlights the difficulty that Peru has in the implementation of projects and the lack of efficiency in its public spending. Similarly, although the State’s social development projects have helped to decentralize the country, they are not yet accessible to all people and all regions. This translates into the usual protests, marches and road blocks in marginal areas where social dissatisfaction increases as a result of their belief that they are not a priority for the State. It is important to warn that, no matter how much importance is given to the official figures of 110 months of continuous growth and the government’s affirmation that poverty has declined, there is no doubt that social unrest threatens political stability and represents a latent risk for the country. Recent governments have done an excellent job of contributing to the nation’s economic performance - although much remains to be done - but they must also strive to achieve the consolidation of their institutions, which are so important to the continued growth and to attracting new capital.

Peru finds itself in an advantageous position compared to its peers in the continent and in the world. The crisis has hurt the country, but has found it in a better position and with skills and resources to deal with a situation that few people expected. There are still problems to resolve and matters for improvement, but against all odds, the country is able to highlight and is showing, now more than ever, that it represents a real option as a destination for investment.