Lima: Growth and the Social Agenda

Days after the U.S. House of Representatives approved a bilateral free-trade agreement with Peru by an overwhelming majority, Americas Society and Council of the Americas (AS/COA) held the second annual conference in Lima, Peru. The conference, jointly organized with the Ministry of Foreign Relations, convened over 200 senior-level private and public sector representatives for presentations and panel discussions on Peru's investment climate, energy and mining policy outlook, trade policy, and prospects. The November 13 conference was held as part of AS/COA’s 2007 Latin American Cities conference series.

“Growth and the Social Agenda” featured expert keynote speakers and three panel discussions.  Speakers included:

• Jorge del Castillo, President, Council of Ministers
• Luis Carranza Ugarte, Minister of Economics and Finance
• Mercedes Araoz, Minister of External Commerce and Tourism
• Rafael Rey, Minister of Production
• Gonzalo Gutiérrez, Vice Minister of Foreign Relations
• Ambassador Michael McKinley, U.S. Ambassador to Peru
• Luis Oganes, JPMorgan Chase & Co
• Franco Uccelli, Bear Stearns & Company Inc
• David Ramirez, Mizuho Bank
• Juan Carlos Huyhua, Doe Run Peru
• José T. Letelier, Barrick Gold
• Hector Gutiérrez, Duke Energy Egenor
• Craig Duncan, International Mining Corporation
• José Miguel Morales, President, CEO APEC Business Forum
• Juan Francisco Raffo, Peru delegrate of ABAC

Background

Peru has historically been a country of exports, with mining of minerals and metals serving one of its leading industries. Recently the country experienced a surge of economic growth, built on macroeconomic stability, increased investment, and favorable trade conditions. Rising commodity prices and membership in the Asia-Pacific Economic Cooperation (APEC) have also boosted Peru’s economy. The country, which joined APEC in 1998, will celebrate ten years of membership by hosting APEC’s 2008 Leaders Week. Peru’s rising global trade profile received another boost on November 8 when the U.S. House of Representatives passed the Peru Trade Agreement by a vote of 285-132. The U.S. International Trade Commission predicts the agreement will lead to a $1.5 billion bilateral trade increase. Canada and Peru are also in the fourth round of bilateral free trade agreement negotiations.

This conference analyzed Peru’s current economic situation, forecasting its growing participation in the global panorama. Panelists, expressing confidence in Peru’s continuing economic growth, highlighted strength in traditional industries such as energy and mining, as well as diversification in exports and trade partners. Peru has experienced growth in foreign investment, which corresponds to its economic growth and political stability. A panel on the country’s role as APEC host in 2008 focused on rising trade between members and Peru as an intermediary between APEC and Andean nations.

Peru’s measurable bump in economic growth over the past several years has created a favorable investment environment. The Peruvian economy grew by more than 4 percent between 2002 and 2006, hitting a GDP growth rate of 8 percent in 2006. Finance Minister Luis Carranza Ugarte highlighted investment as an important step toward the government’s goal of reducing poverty. He noted the rising rate of private and public investment and GDP growth serve as signs of macroeconomic stability. Ugarte cited Standard & Poor’s upward rating change of Peru as evidence of growing foreign confidence in the country. Using Chile’s period of supercharged growth from 1990 to 2001 as a model, Ugarte showed that Peru’s economy appears to be following a similar path, demonstrated by economic indicators such as inflation and interest rates. Based on that evidence, Ugarte estimated Peru’s growth surge, beginning in 2001, could continue until 2011, when it will slow to more moderate rates. The administration’s priorities for 2008 are to create an economic environment for reducing poverty to 30 percent by 2011.

Panelist Luis Oganes of JPMorgan Chase predicted that Peru is globally well-positioned to withstand any future international market volatility. While Oganes noted that global financial turbulence has not yet ended, he emphasized that Peru finds itself less dependent, having diversified its exports and trading partners. In 2008, Peru will only need to rely on its internal market to cover its financial requirements. This, paired with the country’s reduction of external debt and accumulation of internal reserves, supports arguments that economic growth and stability will continue.

Fellow panelist Franco Uccelli of Bear Stearns & Company, Inc, highlighted developments that may affect current economic predictions: rising inflation, currency appreciation, the free-trade agreement (FTA) with the United States, and positive rating actions. Uccelli expressed confidence that U.S. Congress will pass the bilateral FTA, increasing trade and investment flows to Peru. This, he said, could boost Peru’s chances of earning investment grade. Like Brazil and Colombia, Peru is close to meeting the requirements for investment grade and, with a rating of BB+ as measured by Standard & Poor’s, stands one notch away from achieving it. Receiving investment grade is crucial to increase the value of Peru’s outstanding bonds and lower financing costs for both the sovereign and corporate issuers. However, the current situation of global financial uncertainty may delay upgrades until 2009.

Energy and Mining Politics: Where are We Heading? 

Historically, Peru’s mining sector has been strong and is poised for further growth due to rising international and domestic demand. Hector Gutiérrez of Duke Energy Egenor projected that energy demand within Peru will continue to grow, and noted that supply remains comfortably in line with demand. He added that several large energy projects are in place to be developed in the next five years. Juan Carlos Huyhua of Doe Run Peru highlighted growing global demand–particularly from China--for resources such as raw steel, silver, and copper. Peru serves as one of South America’s leading mineral exporters; it is the world’s largest exporter of silver and ranks within the top five global exporters for other important metals. Huyhua predicted that, with commodity prices rising, Peru has an opportunity to attract private investment and spur professional training and job growth.

Both Huyhua and José T. Letelier of Barrick Gold drew attention to the “new era” of responsible mining, which incorporates environmental and socially-conscious goals. Barrick Gold has launched several community development projects focusing on health and education, said Letelier. He noted that several factors hinder investment in Peru, including a lack of state presence, an overly bureaucratic system, and a climate of growing regional protests and environmental opposition. Letelier concluded that Peru’s strengths in the field of mining include an experienced labor pool, the mining industry’s institutional history, and substantial geological reserves.

2008 will provide Peru with a window of opportunity to capitalize on serving as a member and host of APEC, according to José Miguel Morales of the APEC Business Forum and Foreign Relations Vice Minister Gonzalo Gutiérrez. Juan Francisco Raffo of Raffo Group noted that 58.4 percent of Peru’s exports were sent to APEC region countries; in turn, 48.3 percent of Peru’s imports came from APEC countries. Furthermore, the Andean country experienced one of the highest 2006 growth rates among APEC members, outpaced only by Vietnam and China. Raffo also drew attention to increased investment from APEC member countries in Peru. As the only Andean Community member country in APEC, Peru serves as an intermediary between the two economic blocs.