Thomas White Global Investing
Peru
Peru  Stamp
December 19, 2008
A Postcard from the Americas
Peru : Embracing the World for Trade and Growth

Inter-Oceanic Highway Peru A segment of the Inter-Oceanic Highway in the Peruvian Andes. This ambitious road project will connect Brazil to the Peruvian Pacific Coast and act as a major transit route for exports to Asia, besides giving a boost to intra-regional trade.

When world leaders gathered recently at the Peruvian capital of Lima for the Asia-Pacific Economic Cooperation summit, the global financial crisis and the risks of a global recession were at the top of their agenda. Yet, many of them would have been somewhat puzzled by their host’s optimism and the absence of any signs of a slowdown in that city of more than 8 million people. Despite the demand slowdown for its resource exports, the global economic slowdown is yet to reach Peru. In fact, Peru is the fastest growing economy in South America and probably the only one globally where this year’s growth forecast has been revised upwards.

For a relatively small economy, Peru is surprisingly bold and eager to engage the rest of the world for trade opportunities. Peru is not deterred by the economic might of its trading partners either. In 2006, the country signed a Trade Promotion Agreement with the United States, which is Peru’s biggest trading partner. This year, there has been a flurry of trade agreements, and deals were struck with China, Canada, and Singapore. Peru is also negotiating trade agreements with the European Union, Japan, and Mexico, which are expected to be formalized over the next year. The openness extends to allowing foreign investors into the country. Peru actively seeks private investment to develop its energy reserves when other countries are nationalizing their energy assets.

The benefits are there to show. Exports added up to nearly $28 billion last year and the trade surplus was a healthy $8.4 billion. Annual bilateral trade with the U.S. now exceeds $9 billion and with Canada it is nearly $2.5 billion. Peru has ambitious plans to boost trade with China, whose insatiable demand for metals and other resources in recent years has pushed up two-way annual trade between the countries to over $5 billion. Overseas investment flows into Peru totaled $5.3 billion last year as compared to $3.5 billion during the previous year. The recently concluded trade pacts may help sustain the investment inflows, despite the global financial crisis.

Peru is not content with promoting its own products and services either. In the long run, the country wants to become a major transit route for other countries in the region to access global markets. Large regional economies like Brazil will find it faster and cheaper to export goods to Asian markets from Peruvian ports on the Pacific coast than from their own ports on the Atlantic coast. Peru is also pitching itself as a bridgehead for Asian countries like China to access the South American markets. Many regional markets in South America have trade barriers against foreign goods, but foreign manufacturers can gain easy access to these markets by setting up manufacturing facilities in Peru.

For these long term ambitions to be fulfilled, Peru needs to upgrade its infrastructure in a big way. The first step is the Peru – Brazil Inter-Oceanic Highway project, often called the most important road project in South America. The highway will connect the Brazilian region of Acre to the southern coast of Peru. Launched in 2005, parts of this $1.1 billion project are already functional. Another project to build a 5,600 km rail link to connect the Brazilian Atlantic coast and Peruvian Pacific coast is under consideration. Until that comes up, Peru is considering extending its railway network to the Brazilian border at a cost of nearly $1 billion.

Just as well, there are detractors too. Some Peruvian businessmen fear that free trade agreements with large economies will lead to a flood of cheaper consumer goods and large scale job losses at home. Recent success stories like the Peruvian textile and garment exporters have the most to worry as countries like China are way ahead in these industries, both in scale and cost of manufacturing,. There are also concerns that the large road, railway, and other infrastructure projects which are designed to facilitate foreign trade will also upset the delicate ecological balance in the Peruvian Amazon region.

While it is very likely that the global economic slowdown will impact Peru’s economy in the medium term, the country’s openness to foreign trade and capital will help it outperform most other economies in the region. Over the long term, when the global economy recovers, the payoff will be even more substantial.

 

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