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By Jason Simpkins
Thanks in part to the economic policies of President Alan Garcia, the Peruvian economy finds itself moving in the right direction. Its economy grew at a rate of 8% last year, the eighth consecutive year of economic expansion. Meanwhile inflation is running under 2%. The international community has begun to take note of Peru’s progress, and the country is on the verge of securing a free trade agreement with the United States.
It is likely the free trade agreement with the U.S. will be ratified by congress by October, with the first votes coming this month, but that’s no guarantee. Should the agreement make it over its final hurdle, it would give an even bigger boost to the Peruvian economy. Once the agreement is ratified, 80% of consumer and industrial products will immediately become duty free, as will more than two-thirds of current U.S. farm exports to Peru.
The International Monetary Fund has raised its estimate of Peru’s economic growth this year from 5% to 6%, the third largest increase in Latin America. This estimate is conservative by many standards, as others anticipate a growth rate of 7.5% this year and at least 6% for the rest of the decade.
, Peru scores high in fiscal, monetary, and government freedom. The global community has taken note of Peru’s recent improvement as well. According to the U.S. Department of State, “the registered stock of foreign direct investment (FDI) is over $15.4 billion, with the U.S., Spain, and the United Kingdom the leading investors. FDI is concentrated in telecommunications, mining, manufacturing, finance and electricity.”
The value of annual exports has increased as well, reaching a record $27 billion. Much of that increase can be attributed to a boom in commodities – particularly metals, which Peru has in abundance. Peru is the world’s second-largest producer of silver, the third largest of copper and zinc and fifth largest of gold. However, agriculture, textiles, manufacturing and construction have all expanded and are showing no signs of slowing down.
Just this week, President Garcia said that the country would seek to cut its debt to 10% of gross domestic product in a bid to qualify for an investment-grade rating.
According to Bloomberg News, Peru, which pre-paid $1.5 billion of its $5.75 billion debt to the Paris Club group of investors in July, said that it intends to pay off more debt in a bid to attract more investment.
"Our goal is to reduce the ratio of debt to GDP," President Garcia said in a Sept. 9 interview at the Asia-Pacific Economic Cooperation forum in Sydney. "This will enable us to attain an investment- grade rating faster." Peru's external debt-to-GDP level has fallen from 50 percent in 2002 to 29 percent at the end of March 2007, according to Peruvian central bank reports.
Even an earthquake is being viewed as an opportunity to improve the country’s economy. The government will employ thousands of townspeople to rebuild their homes destroyed by the country's worst earthquake in more than 30 years.
According to a Civil Defense Agency report, roughly 80,000 people were left without shelter by the magnitude-8, Aug. 15 quake that killed more than 500 and left 1,600 injured on Peru’s southern coast.
The reconstruction of roads and half a dozen towns on the south coast will create at least 8,000 jobs, Labor Minister Susana Pinilla told Bloomberg. The government has set up a $95 million fund to finance the reconstruction efforts.
Oil and Gas Reserves Offer Even More Potential For Growth
Currently 39 active oil concessions are being operated in Peru, while 37 companies have expressed their intention to bid for the rights to 19 new oil and gas fields. SK Energy, South Korea’s largest oil refiner, was the latest company to win a bid. It will develop an oil field in Peru's offshore Trujillo basin.
Oil reserves have also been discovered at the foothills east of the Andes Mountains and in areas throughout the Amazon jungle. In an article by Insight Publications, Perupetro Chairman Daniel Saba has been quoted as saying that “this discovery means that within the next five years we will produce 100 million barrels day … Peruvian demand is 150,000 barrels a day, so the country will be able to export the remainder.”
Peru's production of natural gas has greatly increased as well. Perupetro reported that, when compared to last year, the natural gas production for the first six months of 2007 has shown a 55.47 percent increase over the first six months of 2006.
The largest contributor has been Camisea Block 88. It is operated by the Pluspetrol Peru Corporation and produces over 70% of Peru's natural gas. The Camisea block is the biggest natural gas reserve in Latin America. It is expected to add a percentage point to Peru’s GDP growth rate every year for the next 30 years, according to the Inter-American Development Bank.
What all of this adds up to is an influx of foreign investment capital, thousands of jobs for impoverished Peruvians, and an even higher growth rate for Peru’s rapidly evolving economy. And there couldn’t be a better time for all of these things to arrive. That’s because even though Peru’s economic success has meant a rise in wealth and a decline in poverty, some of the most impoverished Peruvians have been left out of the bonanza.
Peru Looks to Solve Its Poverty Epidemic
Apparently while Peru’s new economic direction, which is credited with the wide-scale reduction in poverty, hasn’t been quite effective enough. According to the government’s statistics agency, poverty fell more than 4% last year, but most of that decline came on the Peruvian coastal region and the capital city of Lima.
As a result, the country was riddled with protests and demonstrations last year as the nation’s impoverished organized. Thousands of protestors used slingshots to fire rocks at police in Apurimac, located in the southern Andes. Thousands more from another Andean province, Ayacucho, marched on the capital. In the past month demonstrators have commandeered railway stations and blocked roads.
In the provinces of Apurimac and Ayacucho, poverty rates have increased by 10% since 2004. A poll by Ipsos Apoyo revealed that only 32% of respondents approved of Garcia’s administration and 47% thought that poverty had worsened in the past year. The protests certainly got the government’s attention and not a moment too soon. They’ll be looking to immediate action to keep the U.S. congress from having any second thoughts regarding the pending free trade agreement.
The Minister of Economy and Finance, Luis Carranza, has estimated that poverty can be reduced by an average of 2% each year, if growth benefits are channeled correctly. He has also acknowledged that the rural areas of Peru have not shown the improvement seen in urban areas. In response, he has pledged to spend money where it is needed most.
Approximately $3.5 billion will be transferred to local governments this year for investment in infrastructure, healthcare, and education. Programs have been established to aid Andean farmers and social programs have been consolidated to run more efficiently.
Some good news came late last month, when Peru's National Statistics Institute (INEI) reported that Peru's poverty level was at 44.5% at the end of 2006 and not 50%, as previously estimated by the government. The National Statistics Institute also reported that poverty levels in 2006 have gone down by 4.2 percent when compared to Peru's poverty level in 2005 (48.7%).
President Garcia has apologized for any neglect the rural areas of his nation have suffered and vowed that increased public investment will “change the social face of Peru” by slashing the poverty rate to 30%. Garcia may or may not follow through on this promise but he has until 2011 to achieve his goals and win back the lower class.
Right now, Garcia just has to hope that his social and economic reforms will placate the angry mobs outside his door; at least until potential oil deposits are more fully developed. But so long as that is accomplished, little stands between the commodity-rich nation and economic prosperity. If the free trade agreement with the U.S. gets the green light from Congress in coming months, the door will be blown wide open and Peru will be a prime location for ground-floor investment.
News and Related Story Links:
- Bloomberg News:
Peru Plans to Cut Debt to Secure Investment Grade.
- Bloomberg News:
Peru's Post-Quake Reconstruction to Create 8,000 Jobs.