GUIDING LIGHT

Peru 2015 | ECONOMY | INTERVIEW

TBY talks to Paulo Pantigoso, Managing Partner of Ernst & Young Peru, on energy and commodity costs, infrastructure, and what makes Peru unique as an investment destination.

Paulo Pantigoso
BIOGRAPHY
Paulo Pantigoso is the Managing Partner of Ernst and Young Peru. He began his career in 1993 at Arthur Andersen, and was named the leading associate of consultancy and a member of the executive committee at Ernst and Young, a position that included responsibilities for the firm’s operations in Colombia, Venezuela, Ecuador, and Peru. He is the editor of Ernst and Young’s Business and Investment Guide, which is published annually in cooperation with the Peru’s Ministry of Foreign Affairs. He has been Managing Partner since 2014.

What's your economic outlook for Peru for 2015?

We will have a better year than 2014, especially in terms of improving Peru's GDP. At the beginning of 2014, we anticipated a 6% GDP growth and we finished the year with 2.4% growth. One of the main reasons was the drop in commodity prices of traditional exports, which represent 75% of Peru's exports. However, I foresee positive trends in 2015, because 2014 was also a tough year for sectors such as mining, manufacturing, and fisheries. In the latter, we expect two peak moments in terms of exports throughout 2015. Peru faces the challenge of becoming more competitive and diversifying its economy and industry, and we also must become more dynamic with our traditional and non-traditional exports. In my opinion, GDP growth for 2015 will register around 4%. It will be difficult to reach that, but tax incentives, public expenditure, and non-traditional exports can help to reach the goal. The speed with which we implement such actions and strategies will drive our growth this year. Overall, I am optimistic for 2015 and 2016 and I anticipate rapid growth in the second half of the year, despite 2016 being an electoral year. We also need to put this in context, because 2015 is a difficult year for Latin America in general, with Brazil experiencing slow growth rates and many other countries are being hit by scandals or low oil and commodity prices. Latin America has an expected 1.3% growth for 2015. Oil and mineral prices will have an impact on the region's economy and their development. In this context, Peru is a leading regional copper exporter and in two years time, it will become a more powerful international exporter. We are a country with vast reserves of tin, silver, zinc, and gold. Each of these metals has particular behavioral trends and that has an impact on our economy. In the past couple of years, Peru has seen high levels of investment in the mining industry and this trend will continue with projects such as Tia Maria. We will soon start seeing the results of such investments already. We expect the US to have a strong economy through 2015-16, and that should drive up demand again, especially for Peruvian copper. Our challenge here is to provide the volumes needed, as well to better control the cash costs. On the other hand, energy costs in Peru are 50% lower than in Chile for example, and labor costs are 20-40% less expensive. These are two of Peru's competitive advantages. Nevertheless, our rugged geography makes transport costs higher. Overall, we have certain efficiencies and advantages, but at the same time inefficiencies based on infrastructure and transport, which need to be tackled and improved in the next two years.

In terms of infrastructure, how would you assess the overall development of the economy?

The Association for the Promotion of National Infrastructure has calculated the infrastructure gap in the country to be approximately $87 billion. This includes all types of infrastructure, but the main problem has to do with road infrastructure. This sector has a lot of potential and it has been labeled as a strategic sector. However, we have to be more dynamic and provide investors with more advantageous conditions. Peru should be completing infrastructure projects every year at a rate of $15 billion in order to close this gap faster. However, we need to assess the capabilities of the government and the industry, and assess the kind of bureaucracy investors will have to deal with. We need to evolve to meet our potential. For example, we need to build bridges between the public and private sectors. The development of this sector will boost other strategic sectors for the country.

What are the competitive advantages of Peru as an investment destination?

The country offers macroeconomic and political stability, and it has a very favorable business environment for foreign investors. There are some things that need to be addressed such as bureaucracy and the licensing process. We need more outreach towards foreign investors too, because many only get to find out about our culture and our particularities once they are here.

What is the potential to boost exports in Peru?

Agriculture has huge potential. In fact, agricultural exports increased by 19% from 2013-14, reaching $5 billion. For 2015, we expect them to reach $7 billion, which is on par with Chile's 2014 output. Agriculture is attractive for foreign investors as well. Peru has vast amounts of prime agricultural land, all over the country that have the capacity to boost agribusiness. However, investors need to know how to choose. Retail and poultry are two sectors with huge potential for investment and export. Tourism also has great potential. I think we need to boost cooperation between the public and the private sectors, as the state and the private sectors should develop the national agenda and main projects for the country in collaboration with one another.

How will the Peruvian sol perform in the coming years?

It is not easy to make a solid prediction, but I would say that the sol would continue to devalue because the US economy is growing and the dollar is getting stronger. The challenge is to strike a balance between these currencies in a way that benefits both importers and exporters. I am talking about US dollars, which play a very important role in our economy. In 2008, Peru had 52% of its economy dollarized. Today, this figure has decreased to 38% and the government wants to further reduce it to 33%. This makes our economy more attractive in the international arena. In general terms, I think the country will become stronger with the further de-dollarization of our economy, especially if we do it gradually. In my opinion, the secret for success is that changes are gradual and sensitive to economic realities.

What are your expectations for 2015 for Ernest & Young?

We are the leading business services company in Peru, and we are thankful for the trust of our clients. Our challenge is to continue growing and to develop knowledge in the areas in which we operate, including auditing, consultancy, taxes, and corporate finance. We develop business guides that provide technical knowledge for those who need it. We also have teaching tools and initiatives in place with workshops, round tables, and university courses. Our aim is to be close to businessmen at that moment when they need us the most. Our growth in the last few years has been three to four times the rate of growth of the Peruvian economy, which is our economic segment standard. In 2015 growth will continue at this level.