Thomas White Global Investing
Peru
Peru stamp
March 22, 2013
A Postcard from the Middle-East & Africa
Peru: Sun God Smiles on the Modern Inca

Downtown Lima

Peru’s capital, Lima, once known for its poverty and destitution, is now growing quickly, reflecting the broad-based trend across the country.

Just like Peru’s varied geography, from arid plains to the snow-capped Andes Mountains, the country’s economic story has become a study in contrasts.

Some four decades ago, Peru’s economy, ravaged by civil war and ineptitude, was in shambles. The country’s capital, Lima, surrounded by shantytowns, was emblematic of acute poverty. Soldiers, instead of businessmen, occupied the central districts of the main city for fear of the next terrorist attack. When the discerning Mexican journalist, Enrique Krauze visited the country in the late 1970’s, even the Peruvians themselves joked that “the modern Inca is Incapable”.

But three decades or so later, it appears that the Inca Sun God of the ancients has decided to smile on the modern day Inca. Peruvians are now leaving the snow-clad Andean interiors in droves to seek a better living on the west coast. Investments from countries as far as China and as close as Brazil are flowing into a variety of resource industries ranging from fisheries to metals and into sectors from hotels to banking. Lima, the once destitute city known for its widespread poverty is swinging with construction cranes. Previously sleepy districts of Lima like La Victoria and Villa El Salvador are now brimming with life. White goods and durables are flying of the shelves of stores in the numerous shopping centers that have mushroomed up over the past 10 years.

Beginning in the 2000’s, Peru sowed the seeds of economic growth. According to the International Monetary Fund (IMF), Peru’s economic growth in the period between 2002 and 2012 averaged 6.3%, the fastest 10-year average growth in Peru’s recorded history. Thanks to strong economic growth, Peru has reduced poverty from 53% to 31% in the 10-year period.

Peru achieved most of its gain during this period through sound fiscal and monetary policy management, strong investments in the mining sector, and supportive trade stances. While China’s appetite for copper and gold helped lift export revenues for Peru in the past decade, now Peru’s domestic economy is likely to take over as the growth engine in the coming decade. The South American country is actively creating a middle class through strong spending initiatives in infrastructure and social security. As a result of such spending, nearly 57% of Peruvians consider themselves middle class today, almost twice as the 28% who were considered middle class eight years ago, according to a survey conducted by the market research firm Ipsos-Apoyo.

Still the, $200-billion economy has quite a bit more firepower left to propel itself higher. Peru’s debt-to-GDP ratio is just 23%, far lower than the 3-digit figures that even developed economies post these days. This means that the Peruvian government has leeway to spend in the future to maintain growth. And, taking advantage of a strong currency, Peru plans to repay its debt far ahead of schedule to maintain its finances in good health. Meanwhile, tourism, considered an unexplored industry in Peru, is promising even more riches. Some of the world’s premier hotel chains like Hilton and Marriott are lining up nearly $2 billion dollars aimed for Peru’s hospitality industry. With the country booming, businessmen in the region overwhelmingly favor Peru as a hospitable South American investment destination, second only to neighboring Chile.

Still, while the economic prospects in Peru are on the uptrend, some downside risks are too nagging to ignore. While the country has done a great job in reducing poverty, some parts of the rural Andean interiors still report that 50% of the population is poverty-stricken. And, for all the consumption-led growth, Peru continues to be significantly tethered to its mining sector for revenue, accounting for 15% of the country’s GDP. The risk of this dependency became glaringly apparent recently when violence erupted from strident opposition to some key gold and copper mining projects, leaving billions of investments earmarked for the mining sector sitting idly on the sidelines. Ballooning credit growth, a rising current account deficit, and strengthening Peruvian currency have also created headwinds for the government.

Nonetheless, the country is rather optimistic about its future. Shaking off all the ghosts of its past, the country is seeking to emerge as a nation on the fast track. Free of any major economic events, Peru is largely expected to grow at least 5% for the first half of the decade according to forecasts from the Economist Intelligence Unit. Having withstood the global financial crisis far better than most of its peers, Peru is preparing for a wide scale consumption-driven growth. That perhaps is what the country might exactly need in its effort to lift millions of more Peruvians out of poverty.

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