Peru: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: B

Risk Assessment²

Strong growth in 2011
After a marked slowdown in 2009, Peru achieved economic growth that was among the strongest in Latin America. The growth was driven by domestic demand, underpinned by the upturn of prices for raw material exports and the increased confidence of private consumers and investors. It was also bolstered by fiscal and monetary measures implemented in 2009 as evidenced by the rebound in demand for credit. The economy slowed somewhat in the second half as the incentive measures were gradually phased out and credit was tightened. Foreign trade, however, made a negative contribution to growth attributable to the acceleration of imports after their sharp decline in 2009.
Despite the uncertainties surrounding the presidential elections, the economy is expected to grow strongly in 2011. The entire economy will likely continue to benefit from the steadiness of prices for exported metals, which has contributed to maintaining a good climate of confidence among companies and consumers alike. Retailing, construction, and mining are expected to remain buoyant. The large projects engaged in the mining industry, energy production and infrastructure remediation should continue to attract foreign direct investment, but uncertainties about the new administration orientation may create a wait and see stance of investors.
Inflation will likely remain under control as a result of the pursuit of suitable monetary policies. But prices for food products will nonetheless stay subject to shifts in weather conditions.

Satisfactory financial position
The increase in fiscal revenues enabled by the economic growth recorded in 2010 and the gradual phase-out of the countercyclical measures implemented in 2009 have contributed to reducing the fiscal deficit. It should remain contained in 2011. Although public sector debt is moderate, the proportion denominated in foreign exchange is still, however, relatively large. The authorities remain engaged in a reform programme under IMF auspices. Healthy overall, public finances are moreover underpinned by Peru's fiscal stabilisation fund.
After the rebound of foreign demand in 2010 - particularly from China, now Peru's main trading partner ahead of the United States - and the upturn of raw material prices, the growth of exports will likely be more moderate in 2011. The growth of goods and services imports, however, is expected to remain strong in response to domestic demand and, in view of the increase in profits repatriate, thus contribute to the widening of the current account deficit. Financing needs are expected to be covered by foreign direct investment and borrowing abroad. The high level of Peru's foreign exchange reserves significantly reduces the risk of a foreign exchange liquidity crisis. The banking system, meanwhile, remains solid despite the extent of dollarization.

Uncertain evolution of economic policies
President Ollanta Humala, invested 28 July 2011, comes from the nationalist- leftist coalition "Gana Peru". His election has raised strong concerns in the business sector, fearing increased state interference in the economy and less market-friendly stance towards the private sector. The new administration has no majority in Congress and will therefore have to deal with other political forces, which should reduce, at least in the short term, the risk of a brutal break with prudent economic and market orientated policies previously followed. The social divide and resistance of indigenous peoples in the exploitation of mineral wealth and oil, are sources of recurring unrest. The election of President Humala has raised in this respect, high expectations, which, if not met, could lead to new social conflicts.

Strengths

• Natural wealth ranging from mining (world’s second largest copper exporter) to energy, agricultural and fishing resources
• Highly developed tourism underpinned by an exceptional national heritage
• Careful management of public finances
• External financial position in satisfactory state
• Increasing number of free trade agreements signed
• Open to foreign direct investment

Weaknesses

• Vulnerability to external shocks
• Economic contrasts following ethnic lines, with a relatively modern sector in the coastal plains and mining areas and a subsistence sector in the interior
• Insufficient infrastructure (roads, electrification, water supply and treatment), reinforcing the social and geographical inequalities
• Regional disparities and high poverty rate in the Andean regions
• Narco-guerrillas led by remnant “Shining Path” groups
• Large informal economy