Business Opportunities for Investment and Trade in Peru: South America s Strategic Hub

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1 Economic Research Department Business Opportunities for Investment and Trade in Peru: South America s Strategic Hub Economic Research Department BBVA August

2 Index 1. Macroeconomic stability and high growth I. Why to invest in Peru? 2. Regional Hub 3. Committed to commercial integration process 4. Favorable climate for investment 1. Diversify exports and fiscal revenues II. Agenda for the next years 2. Reduce dollarization 3. Improve competitiveness 2 2

3 1. Macroeconomic stability and high growth Sustainable economic growth Economic Growth: World & Peru (y/y real % change) Peru World Peruvian GDP growth averaged 6,8% between 2002 and In 2009, a period where the world economic activity is in a recession, Peru will grow 1,4%. It is expected that Peruvian GDP growth surpasses international growth in the coming years. Source: BCR, IMF, ERD BBVA Banco Continental Prepared by: ERD BBVA Banco Continental 3 3

4 1. Macroeconomic stability and high growth Strong performance compared to Latin American peers Higher 24 GDP Growth and Inflation in Latin America Venezuela Inflation Lower Dominican Rep. Argentina Costa Rica 8 Brazil Mexico Colombia 4 Peru Panama Chile Lower Higher GDP Growth Source: IMF 4 4

5 1. Macroeconomic stability and high growth Possibility to apply countercyclical policies: Fiscal Policy 50 Public debt (% of GDP) 4 Fiscal Balance (% of GDP) Source: Ministry of Finance Prepared by: ERD BBVA Banco Continental In the last 4 years, the Peruvian Government reduced its debt (from 44% to 24% of GDP) and generated positive fiscal balances. Now that the economy is decelerating, there is room to apply countercyclical policies. 5 5

6 1. Macroeconomic stability and high growth Possibility to apply countercyclical policies: Monetary Policy International Reserves (% of GDP) Reference rate (%) Dic-03 Jun-04 Dic-04 Jun-05 Dic-05 Jun-06 Dic-06 Jun-07 Dic-07 Jun-08 Dic-08 Jun-09 Dic-09 Jun-10 Dic-10 Source: Central Bank Prepared by: ERD BBVA Banco Continental Peru accumulated international reserves during the last years. This allows Central Bank to increase monetary stimulus (reduce reference rate) as well as stabilize exchange rate. 6 6

7 1. Macroeconomic stability and high growth Strong FDI Inflows Investment projects: 2009/2011 Sector Amount (USD millions) Mining and Hydrocarbons 15,856 Electricity 2,262 Transport and Telecommunications 1,231 Singapur 2% Mexico 3% Colombia 4% Panama 5% Chile 6% Japan 1% FDI (% of total) Rest 10% EU 54% Manufacturing 3,177 Other sectors 4,690 USA 15% TOTAL 27,216 Source: Proinversion, 2008 Prepared by: ERD BBVA Banco Continental Large investment projects imply more than US$ 27 billion in the next three years, especially in sectors like Mining and Hydrocarbons. Looking backward, Japan accounted for 0,9 percent of FDI inflows (168 million dollars), concentrated in primary activities, such as Pan Pacific Copper Corp (mining). 7 7

8 2. Regional Hub Geographic location Peru is located in the center of the South American Pacific Coast, with over 2,500 kilometers of coasts. Because of its strategic position, Peru is being considered as a regional hub, integrating Asia and South America. 8 8

9 2. Regional Hub Peru as a connection between Asia and Western Brazil Connection Between Peru and Brazil Peru is building highways for US$ 2,000 million, that connect the western part of Brazil (market of 20 million people) with Asian markets, such as Japan and China. North Axis Ports involved expected to be franchised in Future opportunities in tourism, agriculture, woods and fuels. South Axis 9 9

10 2. Regional Hub Peruvian main ports and airports among the best in region Callao Port Lima Airport Biggest port in the South American Pacific Coast, handles over 1.2 million TEUs. Two cranes recently installed in North Deck (allows to handle 30 containers per hour). Dubai Ports plans to invest over US$ 700 million in the South Deck, to increase the port capacity in 850 thousand TEUs. Considered as the Best airport in South America in 2009 (Skytrax Ranking). In the last 7 years, LAP have invested over US$ 260 million in infrastructure. Some airlines such as TACA (El Salvador) and LAN (Chile) already uses Peru as a hub in South America

11 2. Regional Hub Companies all around the world invest in Peru Asia Pacific Canada United States European Union Mexico South America Australia South Africa 11 11

12 3. Economy commited to the commercial integration process Preferential access to CAN, MERCOSUR, USA and EU. Trade Agreements Source: PROINVERSION 12 12

13 3. Economy commited to the commercial integration process 33 investment agreements. * FTA Source: PROINVERSION 13 13

14 4. Favorable climate for investment Peru is among the best countries of Latin America in the last Doing Business ranking Ease of doing business Protecting investors Getting credit Registering property Paying taxes Trading across borders Starting a business Closing a business Dealing with construction permits Employing workers Enforcing contracts Peru: Doing Business Ranking 2009 * 19 biggest economies in Latin America Source: Doing Business 2009 Prepared by: ERD BBVA Banco Continental Ranking in LA*

15 4. Favorable climate for investment Attractive legal framework for Foreign Direct Investment (FDI), based on freedom and equality Legal Stability Agreements Guarantees recognized by the State: INVESTORS Non discriminatory treatment. Income tax rules applicable to dividends. Stability to freely use the most favorable exchange rate available in the market. Free availability and remittance of foreign currency, dividends and royalties. RECEIVING COMPANY Recruitment regimes. Regimes for the promotion of exports. Income Tax Regime Requirement: US$ 5 million in any economic sector except mining and hydrocarbons (US$ 10 million). Validity for 10 years

16 4. Favorable climate for investment Sound Legal Framework Tax Regime Source: PROINVERSION 16 16

17 4. Favorable climate for investment Country with Investment Grade (BBB-) Credit Ratings in Latin America Country S&P Fitch Moody's Chile A+ A A1 Mexico BBB+ BBB+ Baa1 Peru BBB- BBB- Ba1 Brazil BBB- BBB- Ba1 Colombia BBB- BB+ Ba1 Venezuela BB- B+ B2 Argentina B- B- B3 Bolivia B- B- B3 Ecuador CCC+ CCC- Ca Source: Standard & Poor s, Fitch Ratings and Moodiy s 1,600 1,400 1,200 1, Jan-01 Jul-01 Jan-02 Jul-02 EMBI+ Peru and Latin America (in basis points) Jan-03 Source: Bloomberg Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Latin America Jan-06 Jul-06 Peru Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Why Investment Grade?: (i) Sound macroeconomic policies, (ii) Lower fiscal and external vulnerabilities, (iii) Diversified exports S&P and Fitch Ratings have recently confirmed Peru s rating, with a stable outlook

18 Index 1. Macroeconomic stability and high growth I. Why to invest in Peru? 2. Regional Hub 3. Commited to commercial integration process 4. Favorable climate for investment 1. Diversify exports and fiscal revenues II. Agenda for the next years 2. Reduce dollarization 3. Improve competitiveness 18 18

19 II. Agenda for the next years 1. Diversify exports and fiscal revenues Country is still dependent on mining activities Peru: Mining Exports (% of total Exports) Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 Dic-02 Jun-03 Dic-03 Jun-04 Dic-04 Jun-05 Dic-05 Jun-06 Dic-06 Jun-07 Dic-07 Jun-08 Dic-08 Jun-09 Source: Central Bank Peru: Mining Revenue (% of Fiscal Revenue) Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 Dic-02 Jun-03 Dic-03 Jun-04 Dic-04 Jun-05 Dic-05 Jun-06 Dic-06 Jun-07 Dic-07 Jun-08 Dic-08 Jun-09 Source: SUNAT Exports and fiscal revenues still heavily concentrated in mining, and therefore vulnerable to commodity prices. Aware of this situation, Peruvian Government tries to diversify its exports, by: (i) maintaining a competitive exchange rate (not allowing Dutch Disease) and (ii) applying a higher drawback for nontraditional exports (mainly manufactured exports, 8% vs. 5% in mining exports)

20 II. Agenda for the next years 2. Reduce dollarization Dollarization still an issue for the authorities Financial Dollarization: Banking System (%) * * As june 2009 Source: SBS Loans Deposits Source: MEF Public External Debt (% of Total Debt) 02T4 03T1 03T2 03T3 03T4 04T1 04T2 04T3 04T4 05T1 05T2 05T3 05T4 06T1 06T2 06T3 06T4 07T1 07T2 07T3 07T4 08T1 08T2 08T3 08T4 09T1 More than 50% of bank loans denominated in USD, making debtors vulnerable to exchange rate depreciations. Also, in the public sector, 65% of its debt is not denominated in PEN. Nevertheless, dollarization has been reduced in the last 10 years, because of (i) Central Bank commitment to maintain price stability and (ii) Government efforts to create a long-term yield curve (Sovereign Bonds), making PEN more suitable for financial transactions

21 II. Agenda for the next years 3. Improve competitiveness Peru needs stronger and reliable institutions Institutions Ranking Chile Colombia Brazil Mexico Peru Argentina Peruvian institutions (ministries, judiciary, municipalities and other public companies and dependencies) are still characterized by inefficiencies in terms of money and time wasted, because of excessive or inadequate costs and regulation. In order to improve this situation, the Government recently launched a National Plan of Competitiveness, which contains several reforms to be implemented until Venezuela Source: Global Competitiveness Report (WEF) 134 The goal is that Peru escalates from 62 th to 40 th position in the 2011 Doing Business Ranking

22 II. Agenda for the next years 3. Improve competitiveness Still behind in Infrastructure Infrastructure Ranking Peru: Infrastructure Deficit (% of GDP) Chile Mexico Brazil Colombia Argentina Venezuela Peru Source: Global Competitiveness Report (WEF) Source: IPE, Ministry of Finance Peru still lacks of adequate infrastructure (highways, ports, airports), especially outside Lima. Nevertheless, public and private investment have reduced the infrastructure deficit, to 23% of GDP

23 II. Agenda for the next years 3. Improve competitiveness Human Capital Ranking 08-09* Argentina Chile Colombia Brazil Mexico Venezuela Peru * Index of health and education Source: Global Competitiveness Report (WEF) Peruvian workforce not very competitive Peru: Health Indicators Peru: Education Indicators* Malnutrition 95.5 Alfabetism Caloric deficit 88.5 School Attendancy * According to Millenium Development Goals methodologies Source: National Statistics Institute Peruvian workforce is not very competitive, due to low training and poor health conditions. Government social policies are working, improving health and education indicators

24 Conclusions Notwithstanding the global crisis, prospects for Peru are bright: Peru has a natural advantage because of its strategic location in the center of the South American Pacific Coast, positioning it as a regional hub, integrating Asia and South America. Trade and investment agreements, as well as a favorable climate for investment, are also a clear advantage. The agenda for the next year should focus on improving competitiveness, especially outside Lima. This implies much larger investments in infrastructure and human capital. Foreign investment in these areas is highly welcome. Institutional enhancement will also be crucial (it is ongoing but the faster the better) 24 24

25 Economic Research Department Business Opportunities for Investment and Trade in Peru: South America s Strategic Hub Economic Research Department BBVA August

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