Peru: A Stable Latin American Hub

“In recent quarters, Peru’s economy has been driven by the mining, manufacturing, construction and services sectors. At the start of 2024, we saw services including transportation, storage, mail and courier services, commerce and business services begin to recover, and we expect these sectors to be resilient until 2025,” says Julia Sinitsky, Peru country risk analyst at BMI. -Fitch Solutions.

Monthly data released through August supports BMI’s assessment that strong growth will continue through the end of this year. “We saw the economic activity figure for August settle at 3.5% year-on-year (0.6% month-on-month) compared to the very strong 4.5 % YoY (1.5% MoM) in July. With economic activity averaging 2.8% year-on-year through August, we expect growth to reach just under 3% this year, before closing in on 2.5% in 2025,” Sinitsky said. , warning that there could be some risks to this forecast due to a slowdown. in mining production caused by environmental disruptions, reducing growth in 2024 to less than 2.8%.

IMF data shows Peru is on track to end 2024 with an annualized inflation rate of 2.4% and forecasts an inflation rate of 2% by the end of 2025. Markets had been expecting a 0.25% drop in the country’s interest rate from 5.25% in October, but the BCRP has maintained current rates for at least another cycle citing stability – a term echoed in the revision to the Moody’s upgrade of Peru’s outlook last September from “negative” to “stable”. while confirming the Baa1 country rating for unsecured debt and the Aa3 rating for local/foreign currency national ceilings.

The Peruvian currency has also been following a stable trajectory, without extreme movements, for more than three years. Sinitsky attributes this to the rigorous management of the BCRP, which holds significant foreign exchange reserves ranging from 14 to 17 months of import coverage.

For Jonathan Kleinberg, director of asset management at Zest, a wealth technology company based in Lima, the BCRP’s independence in setting monetary and inflationary policy is behind Peru’s success in maintaining monetary stability despite the shortcomings of the political scenario.

“As a result, inflation has been largely in line with target since April and is the lowest rate in Latin America. Peru has also demonstrated that it can maintain its macroeconomic stability despite the political and social unrest of recent years,” he explains.

Mineral wealth

Peru’s trade balance remains positive thanks to its mining exports and the high price of metal products, which strengthen market liquidity, credit to the private sector and confidence in the entire system, according to Kleinberg.

Data from the US Geological Survey indicates that Peru holds 12% of the world’s copper reserves, 3.9% of gold, 15.3% of silver, 9.5% of zinc, 5.3% lead and 2.8% of the world’s tin. Peru is the world’s second largest producer of copper, silver and zinc as well as a major producer of gold, tin and molybdenum and, according to the Peruvian Ministry of Energy and Mines (PMEM), the sector is responsible for 62% of global production. the country’s exports and 9% of GDP.

Some of the biggest names exploring Peru’s mineral wealth include Grupo Breca, Antamina, Hochschild Mining, Cerro Verde, Minas Buena Ventura, Southern Copper and Canadian Barrick Gold Corp. According to PMEM, the sector is expected to attract $5.1 billion in investment by the end. of 2024, with positive prospects for the next two years.

“Peru can be a very attractive market for foreign investors, due to its vast portfolio of natural resources and a historically stable macroeconomic environment, a strong monetary policy and a well-regulated banking system with a central bank strong and independent – ​​all factors that increase investor confidence,” says Victor Oliveira, financial director for Peru and Bolivia of Havas Group, a French multinational advertising and public relations group owned by Vivendi.

“The country’s strategic location in northwestern South America, bordering the Pacific Ocean, makes it an excellent hub for facilitating trade with Asia and the United States, but this will still require vast investments in infrastructure,” he adds.

The Peruvian Ministry of Economy and Finance (MEF) estimates that the country will have to invest $150 billion, or 60% of its GDP, over the next five years, both in approved projects and those awaiting completion. approval.

“This includes construction, mining, electricity transmission network upgrades, ports and energy conversion projects – all extremely attractive investment opportunities,” says Kleinberg.

Among the most spectacular infrastructure projects in Peru is the new Chancay megaport, which will increase part of the country’s unit cargo capacity by 48%. The Chinese Cosco Group built the more than $3.6 billion facility, which opened on November 14.

“Once Chancay [fully] operational, it will be the largest private port in the world and will function primarily as a hub for the Pacific coast of the Americas. Only 15% of its capacity is expected to be used to meet Peruvian domestic needs,” explains Lucas Baptista, Peru country manager at Brazil Craft Group, a unit of LCL Logistics.

According to Baptista, Chancay will free up space at other ports, increasing Peru’s capacity to export its own products. “Exports represent 23% of the country’s GDP and, in addition to minerals, include fruits, fish by-products and textiles with major manufacturing centers for Lacoste and Tommy Hilfiger. Better infrastructure will also mean easier imports, including cars, rice and electronic devices,” he says.

Oliveira de Havas notes that Peru is also developing and improving its digital infrastructure, crucial for its services market. “Tourism has enormous potential and faces many bottlenecks that limit its growth potential. It is also the sector where the informal employment rate is the highest. Banking is another sector with huge potential,” he says.

“Financial inclusion represents a great investment opportunity in Peru,” recognizes Kleinberg. “Peru currently has a banking coverage level of 57%. This figure is lower than the 68% level seen in countries with similar GDP per capita. There is a real opportunity to integrate 2.5 million adults into this country’s banking system.

“FDI flows rebounded in 2022,” says Sinitsky, “before falling in 2023 due to protests of historic scale. While stability appears to have returned in 2024, the government estimates that inflows will be much greater and reach record levels next year. We think their projections are reasonable because we also expect fairly strong growth and relative political stability next year.

However, with elections due to take place in 2026, overspending and political disorder remain major threats.

“The Peruvian political space is incredibly chaotic, with more than 30 political parties registered to run in the 2026 elections. However, the country’s institutions and central bank are concerned about international investment and have managed to protect property rights foreign companies. We therefore believe that Peru will remain an attractive place to invest,” concludes BMI’s Sinitsky.