Uncertainty reigns in Peru as the country enters the final stretch of the 2016 presidential elections. But whoever is chosen to replace President Ollanta Humala at the end of July will take over an economy on the mend.
Voters go to the polls on April 10 with more than a dozen candidates on the ballot paper. None is expected to receive the 50% of the vote required to win outright, so a run-off between the top two finishers will be held on June 5. Humala is barred from seeking a second consecutive term.
Keiko Fujimori, daughter of former president Alberto, is well ahead of her rivals but has been stuck at around 35% in opinion polls for the past year. A field of four candidates is fighting for second place and the right to face off against her in June.
Bashing Humala has been a constant theme of the campaign — something made easy by his political blunders and an approval rating below 20% — but his administration is working to take advantage of opportunities amid a gloomy world economic scene, to give the next president a running start.
“We want the transfer to be orderly and responsible,” Alonso Segura, Peru’s economy and finance minister, tells Emerging Markets. “This should encourage the markets because Peru is basically shielded, financially speaking, so the next government can focus on the growth agenda.”
Among Segura’s recent moves was a late February decision to tap international markets for a €1bn ($1.1bn) bond. The 14 year paper had a yield of 3.77%. While there was some criticism of the issue, mainly that Peru could have got a better deal in dollars, the finance ministry’s wish to get ahead of its funding needs was well received.
“The government is committed to maintaining its fiscal policy,” says Kelli Bissett-Tom, associate director at Fitch Ratings in New York. “I think it is important that they took advantage now to pre-finance the 2017 budget.”
The government also finalised in late February an agreement with the World Bank for two contingency loans totaling $2.5bn — one for fiscal support and public-private partnerships and the other for productivity and human capital. The money is not part of the 2017 budget but is there in case the next government needs it to deal with greater external pressure, especially a hard landing in China or stalled recovery in the US — Peru’s two largest trading partners.
“I think we are in a comfortable position,” Segura says. “I don’t know if there is another country in the region in a similar position regarding the budget.”
GROWTH RAMPS UP
The next president will inherit an economy recovering from heavy external hits that knocked growth down from 7% in 2011 to 2.4% in 2014. The economy bottomed out in the last quarter of 2014 when it expanded by only an annualised 1.1%.
Growth crawled back in the first three quarters of 2015 but jumped to 4.7% in the fourth. December’s growth was 6.4%, meaning the economy expanded by 3.3% last year, well above market forecasts.
A stronger recuperation is expected in the coming months. The authorities have been ticking off promising numbers including a fiscal deficit of 3%, among the smallest in Latin America, low inflation (0.17% in February) and foreign currency reserves around $61bn. Also helping is last year’s 3.3% uptick in remittances to $2.73bn and stronger revenue from tourism. It generated $3.3bn in 2015, up 8% from the previous year.
“We are seeing upside risk to our growth projections for the first time in years,” says Segura. “This does not mean that there are no downside risks but the economy is on a good footing.”
This is not just a finance minister talking up the economy. “The December growth was the best news in two years, especially if you look at the external factors facing the country,” says Alejandro Santos, senior resident representative for the International Monetary Fund in Peru.
Local and international banks as well as rating agencies are thinking about raising their growth forecasts for this year. BBVA lifted its prediction in early March from 2.8% to 3.6%. After Peru beat its forecast of 2.7% growth in 2015, the IMF reckons Peru will expand by 3.3% this year, the most among South America’s larger economies. It is the more impressive when the IMF forecasts Latin America’s output as a whole to shrink in 2016 because of problems in Brazil and Venezuela.
SEEING RED
There are several engines for growth but the spark in late 2015 was copper and it will continue fuelling the economy.
Peru is set to surpass China to become the world’s second biggest copper producer after Chile, according to the US Geological Survey. It is expected to nearly double production to about 2.6m tonnes a year by the end of 2017.
Output was up 23.5% year on year in 2015 and it will increase much faster this year. Production in January was 40.6% above the previous January’s haul.
Two new mines came on line in 2015: Constancia, operated by Canada’s Hubday, and Toromocho, run by China Aluminum Corp (Chinalco). Another two huge projects are set to be fully operating this year. The $10bn Las Bambas project, owned by Chinese-controlled MMG, shipped its first concentrates in January. Output should be close to 400,000 tonnes/year when it is fully operational.
The $4bn expansion of Cerro Verde, controlled by US company Freeport McMoRan, was completed at the start of the year and production is ramping up. It will eventually produce close to 600,000 tonnes/year, making it the second largest copper mine in the world after Chile’s Escondida. Las Bambas may be third. Cerro Verde was the largest producer in January, turning out nearly 37,000 tonnes of copper, according to the Ministry of Energy and Mines.
The MEM lists several large projects with combined investments above $25bn, either under development or in a holding pattern. A similar amount could be invested in projects that have been announced but still require permit approval.
While output is booming, copper prices are depressed and Peru’s export earnings are shrinking. The government is eyeing a trade deficit close to $3bn this year, caused mainly by lower commodity prices. Peru brought in $1.6bn from copper in January 2015, according to the Central Reserve Bank (BCR), but that was down to $1.3bn a year later for nearly 50,000 extra tonnes of the metal.
Low commodity prices are definitely hurting and moving really fast growth out of Peru’s reach, Segura admits. “We have a lower potential GDP growth rate,” he says. “We were at 6.5%-7%, now we are three points lower. I think we can grow sustainably by 4% with these external shocks.”
DOWNSIDE TO OUTPUT
While the big mining projects reaching completion are keeping the economy going, the corollary is that investment is dipping. Mining investment was just over $8bn last year but is trending lower. Cerro Verde’s investment in January was down by 72% year-on-year, that at Las Bambas by 38.5%. The National Mining, Petroleum and Energy Society expects investment to fall to close to $5bn, around half its 2013 high point.
Low commodity prices are keeping some companies from ramping up projects but it is not the whole story. Investors continue to watch several projects that have been stalled by social protests, including the $5bn copper-gold Minas Conga, spearheaded by US firm Newmont Mining, and the $1.5bn Tía María copper mine planned by Mexico’s Southern Copper Corp.
Conga has been on hold since violent opposition at the end of 2011, while Tía María was “suspended” last May after months of community protests. The mining sector has been holding out for more clarity once a new government is seated but it might be disappointed.
Keiko Fujimori said in early March that Conga would have to gain public support before going forward — and that right now that did not seem possible.
Candidates battling for the second spot, including former finance minister Pedro Pablo Kuczynski, have not been too enthusiastic. He has said low international prices and community opposition would likely keep some big projects, like Conga, on the backburner for the time being.
INVESTMENT PUSH
While the market has been bullish about the recovery of primary industrial sectors, Peru-watchers are worried that the other growth motors are sputtering.
“The improvement in primary sectors was expected — now we have to see if there is a recovery in other engines,” says Erich Arispe, director for sovereigns in Latin America and the Caribbean at Fitch Ratings. “There needs to be a recovery in public investment, which is important, and private investment, which contracted in 2015.”
Public investment has been hampered by the election cycle. Peru held local and regional elections in 2014, with new leaders taking office in January 2015. The change led to a precipitous drop in investment at the subnational level last year.
This year, the central government is hemmed in by the general election and rules limiting what the administration can do close to an election.
Segura is upbeat, however, about subnational investment recovering. Investment by the 25 regional governments was up 14.2% in February while that by local governments jumped nearly 92%.
“Public investment is accelerating at the subnational governments,” says Segura. “It dropped last year but we said 2016 would see them catch up and they would fly. There was double digit growth in local governments in the first two months of the year and investment should grow at twice the rate of GDP this year.”
Private investment shrank by around 5% last year and the outlook is still sketchy, but there do seem to be some positive signs. Imports of capital goods in January grew faster than in the previous 25 months.
Santos at the IMF expects Peru’s stable, open economy to attract more investment in the medium and long terms. “Peru has a lot to offer,” he says, “and I think we are going to see more private investment coming in to take advantage of its solid fundamentals.”
Peruvians have reason to hope that whoever becomes their new president can perceive what is going right for the country and at least does not steer it off course.