Economic Environment of Peru
In recent years the economy of Peru has been showing an excellent performance and was regarded as one of the most fast growing economies both in the Latin America and all over the world. Even in 2009 when most of the countries registered the fall of major macroeconomic indicators due to the international financial crisis, Peru still demonstrated a slight GDP growth at a rate of about 1% (Memoria 2009,13). The Ministry of Economy and Finance of Peru in its economic and social outlook published in October 2010 claimed that “Peru overcame the global financial crisis relatively unharmed, maintaining GDP growth, employment generation and poverty reduction” . In particular, by the second quarter of 2010 the rate of quarterly GDP growth returned to the pre-crisis level (2011-2013 Multiannual Macroeconomic framework, 2).
Despite the mentioned favorable economic indicators demonstrated by Peru currently one of the most substantial barriers for realizing fully its economic growth potential is relatively poor infrastructure facilities especially outside the Great Lima zone.
In 2010 on the territory of Peru there were registered 211 airports (The World Factbook) about 20-25 of which are of national and international importance from commercial standpoint. The major national flows of passengers, cargo and mail are distributed among Lima, Ucayali, San Martin, Arequipa and Cusco airports whether about 97-99% of the international traffic is centered in Lima (based on 2009 data provided by the Ministry of transportation and communication of Peru).
The network of water ways and water transport contributes significantly to the development of local and international trade in Peru with the steady annual increase of cargo exported and imported via sea ports. In addition to the marine transport system the network of Peruvian waterways also includes about 8,600 km of navigable tributaries on Amazon river system and 208 km on the Lake Titicaca (the World Factbook). The largest and most equipped sea ports are Callao (Lima), San Martin (Ica) and Salaverry (La Libertad). Iquitos and Yurimaguas are also the ports of substantial commercial importance located on the upper reaches of the Amazon and its tributaries.
Peru national road network is the main transportation facility for passengers and domestically traded goods. Aiming to attract private investments into the industry and to promote the construction and modernization of national road system the Ministry of Transport and Communication of Peru (MTC) recently has entered into a number of concession programs with private companies (Estadisticas de transportes). The Ministry expects that such measures insure the improvement of road infrastructure within a short time period.
Currently the total length of road networks amounts to approximately 102 887 km (including national, department and local roads). All the roads are categorized into the highways (more than 1000 km), paved roads (about 51% of the total coverage) and unpaved roads (about 48% of the total coverage). The Ministry claims that the significant extension of the highways roads in recent years represents the positive result of cooperation with the private investors via concession programs.
The railroads are not so widely used in Peru as the auto transport and mainly serve to transit minerals from production centers to the points of exportation primarily located in the sea ports. The railroad coverage of Peru territory (in kilometers of rail lines) remained unchanged since 2000 and constitutes about 1737 km, 1549 km of which are operated by the private companies. In addition, in 2008 – 2010 the turnover of passengers and cargo transported via railroad system has slightly decreased due to the reallocation of the part of flows to the air and water transports (Estadisticas de Transportes).
Notwithstanding the above in October 2009 the Minister of transport of Peru (Dr. Enrique Cornejo Ramirez) presented a report summarizing the future plans of the Ministry in respect of further development of the national transport infrastructure. In the above report he mentioned the crucial role of the rail transport being one of the most environmentally friendly and declared that the Ministry aims to apply the concession schemes of private investment attraction similar to those currently used for the purpose of auto roads development.
2. Major industries
In the recent two years the most substantial growth is observed in the sectors of construction and services (Memoria 2009, 19) while the Peruvian Government is trying to overcome the country’s dependence on the export of mineral recourses and, as a result, its vulnerability to fluctuations of world prices on minerals and other raw materials.
The main agricultural items cultivated for domestic consumption are potato, rice and bananas whether of the high demand on the export markets are coffee, sugarcane and corn (Memoria 2009, 20). Fishing industry also plays significant role in the economy of Peru.
Although as it was mentioned Peru strives to become independent on the raw materials extraction and further export, as of today metal and hydrocarbon mining still are crucial sectors for the country’s economy in terms of their contribution to the annual GDP amount. In particular, Peru is the international leader in silver mining, ranks second worldwide in the production of copper and zinc, forth in lead production and is among the top world producers of gold, iron and molybdenum (Memoria 2009, 28-35).
The manufacturing sector accounts for more than 20% of GDP (Memoria 2009, 17) with the emphasis on the development of agriculture (comprising the production of sugar and corn flour), construction and textiles. Speaking about construction it should be mentioned that this sector proved to be the most resistant to the international financial crisis of 2009 and in that year demonstrated the substantial growth of 6,1% (Memoria 2009, 31). The decrease of activity on industrial construction market was easily compensated by the developments of residential construction, offices and road infrastructure.
3. Major trading partners and investment climate
Starting from 2003 till now Peru ended the financial years with the trade balance surplus (Statistical Tables). The key trading partners of the country are the United States and China which together stand for about one third of external trade turnover. These two leaders are followed by Brazil, Switzerland, Canada and Japan (Memoria 2009, 58-59).
The export portfolio is presented by the items belonging to the group of minerals (gold, copper and zinc taking the leading place), crude oil and its derivatives, textiles, fish and agricultural products (Memoria 2009, 60).
Currently Peruvian Government actively seeks to remove the obstacles for external trade and capital movement, and, therefore, to improve the investment climate of the country and facilitate the attraction of foreign capital. With this purpose in 2006 Peru and the United States signed the Trade Promotion Agreement which came into force on January 1, 2009. In subsequent years it was followed by the similar agreements with China, Canada and Singapore.
Partly owing to these measures in the last couple of years the Central Bank of Peru registered that the amount of investments both public of private as a percentage of GDP reached the highest level in 30 years (2011-2013 Multiannual Macroeconomic framework).
4. Macroeconomic indicators
As it was mentioned above, during the first decade of XXI century Peruvian social and economic indicators have shown positive trend notwithstanding the general downfall of the world economy in 2009. In particular, in 2009 when the significant risk of inflation was past the Central Bank of Peru dramatically reduced the refinancing interest rate within a short period of time from 6,5 % in January 2009 to the lowest in history level of 1,25% in August 2009 (Memoria 2009, 119). These actions stimulated the consecutive reduction of the market interest rates which made the loans cheaper and more flexible during the economically turbulent period.
In 2009 Peru registered the budget deficit of 1,9% of GDP after 3 consecutive years of surplus. The total deficit balance resulted from the decrease of income (-2,3%) and the increase of public expenses (+ 1,8%). Though the mentioned increased in expenses mainly accounted for additional governmental spending on socials special-purpose programs in health, education, etc, and the input of the state government to the concessions aimed at infrastructure modernization as described above (Memoria 2009, 89-90)
Speaking about external debt, its volume in absolute figures increased from USD 32 894 mln in the end of 2008 to USD 34 838 mln in 2009 which comprised about 21% of GDP. However, in comparison with the debt amount attributable to the other countries of the region the level still appears to be respectively low (Memoria 2009, 74-76).
The steady annual growth of GDP (both in absolute terms and per capita) against the background of relatively low inflation rate (about 2-3%) has also created sound basement for improvement of socio-demographic situation in the country. Although the problem of poverty still remains critical for Peru we could observe the gradual increase of average lifespan (from in 69,53 in 2004 to estimated 72,47 in 2011) and reduction of infant mortality rate (from 36,97 in 2003 to estimated 22,18 in 2011). Continuous economic growth and special-purposed governmental programs also contribute to the tangible reduction of population living below the poverty line as well as the population suffering extreme poverty conditions. For example, the ratio of population below poverty line is expected to decrease from 44,5 % to 34,8 (Peru Demographic Profile).
Please refer to the Table 1 and Table 2 for detailed consolidated information regarding macroeconomic and social indexes characterizing the economy of Peru in general and its investment climate in particular covering the period 2008 – 2010.
Summarizing the above, Peru takes significantly strong economic position for a considerable time period being the leading economy of the Latin America in terms of economic growth along with the law inflation and unemployment rates. The main drawbacks slightly darkening the investment climate of Peru are relatively poor transport infrastructure and political and administrative obstacles. However, in recent 5 years the Government of Peru has successfully tackled these problems via attracting private investments to the construction and modernization of the road network and concluding treaties facilitating the trade with the key partners.
“Memoria 2009” (Spanish), Central Reserve Bank of Peru, Republic of Peru. Web. 17 March 2011 <http://www.bcrp.gob.pe/docs/Publicaciones/Memoria/2009/Memoria-BCRP-2009.pdf>
“2011-2013 Multiannual Macroeconomic framework (Revised)”, Ministry of Economy and Finance, Republic of Peru. Web. 17 March 2011 <http://www.mef.gob.pe/contenidos/english/bulletin/MMM_2011_2013_Revised.pdf>
“Statistical Tables”, Ministry of Economy and Finance, Republic of Peru. Web. 17 March 2011 <http://www.mef.gob.pe/contenidos/english/bulletin/Tables_Forecasts.pdf>
“Peru: Economic and Social Outlook”, Ministry of Economy and Finance, Republic of Peru. Web. 17 March 2011 <http://www.mef.gob.pe/contenidos/english/bulletin/Peru_Economic&Social_Outlook.pdf>
“Estadisticas de transportes” (Spanish), Ministry of Transport and Communication (Peru), Republic of Peru, Web. 17 March 2011 < http://www.mtc.gob.pe/estadisticas/index.html>
Cornejo Ramirez, Enrique, “Impacto de la inversion en infraestructura de transportes sobre el crecimiento economic sostenible”, Ministry of Transport and Communication (Peru), Republic of Peru, Lima, 1 October 2009, Web. 17 March 2011 <http://www.sunass.gob.pe/fiar/presentaciones/exposicion7_enrique_cornejo.pdf >
“Transportation: Peru”, The World Factbook, Central Intelligence Agency, Washington DC, 16 March 2011, Web. 17 March 2011 <https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html>
“Peru Demographic Profile 2011”, Index Mundi, Web. 21 March 2011 <http://www.indexmundi.com/peru/demographics_profile.html>