THE NUTS & BOLTS

Peru 2017 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

Paulo Pantigoso, Country Managing Partner at EY Perú, discusses investment potential in Peru and what to expect over the coming decade.

Over the past decade, Peru has had outstandingly good sustained development, becoming one of the leading countries in the region. On average, its GDP grew 5.2% in the last 15 years, far exceeding both regional and global averages.

The country's growth slowed in 2014, but picked up again in 2015, growing 3.3%. In 2016, it is expected to grow around 4%, one of the largest estimates of any Latin American country. If certain reforms are initiated and investment in infrastructure is accelerated, 2017 should be even more auspicious.
From a global economic outlook, Peru remains attractive and the fundamentals are all strong: macroeconomic stability, inflation control, and fiscal balance are all in place. It has a ratio of 6.6% of net public debt to GDP, compared with 38% and 45% in Brazil and Mexico, respectively.

Investment promotion

Peru is focused on attracting investment to all sectors of the economy, both domestic and foreign. That is why it has taken the necessary steps to establish an investment policy aligned with this objective that removes general obstacles facing investors.

In this line, Peru has adopted a legal framework that does not require prior authorization for foreign investment, and is thus considered one of the most open investment regimes in the world. To this we should add the legal stability that the state grants foreign investors regarding income tax and dividend distribution regulations. This benefit applies to those investors who are willing to invest in Peru in not less than two years, for minimum amounts of USD10 million in mining or hydrocarbons or USD5 million in any other economic sector.

Significantly, Peruvian laws, regulations, and practices apply the principle of non-discrimination between national and foreign companies. There are no restrictions on the distribution of profits or currency exchange practices. Foreign currency can be used to purchase goods or cover financial obligations, as long as the operator is in compliance with Peruvian tax law.

Economic Credentials

Peru is a diverse country, and three important sectors should be highlighted that can revive the national economy: mining, agriculture, and tourism. Mining represents 14% of GDP and Peru and the exploitation of minerals is one of the foundations of the national economy. Although investment has recently slowed down in—mainly due to metal prices not because of volume, which have increased—investment in mining in 2015 reached almost USD8 billion. On the other hand, agriculture and fisheries have grown considerably in recent years. Tourism, which has tripled in the last decade, is one of the most promising sectors.
Good projections from most of the best known rating agencies; diverse sources of growth; low inflation and strong macroeconomic fundamentals; and the fact that Peru has been declared investment grade each mean the country is getting plenty of positive international attention. Moreover, Peru has been the second lowest risk country in Latin America for years.

Peru is also second-place among South American countries and 50th of 189 worldwide in the ease of doing business. In early 2015, Peru ranked first in the Economic Climate Index in Latin America, an economic survey conducted by the IFO Institute in Germany and the Getulio Vargas Foundation of Brazil.

What to expect for Peru in the year 2025?

The country's future is promising but the need to reactivate the economy is vital to overcoming a number of crucial challenges and eventually joining the Organization for Economic Cooperation and Development (OECD), the club in which the countries with the best practices belong.
By 2025, Peruvian exports should reach US150 billion; today, it skirts USD40 billion. This is a major challenge in comparison to the last 10 years (2005-2014), when exports grew by 120%. Peru is currently in the beginning of its “demographic bonus" period in which the population reaches its highest levels of production, consumption, savings, and investment. Key to attracting more foreign direct investment, this period will be definitive to its consolidation and must not be missed. If all these goals are accomplished, by 2025 Peru should be one of the 10 countries with the greatest ease of doing business, increase its average annual productivity by 5%, and achieve an annual growth of 1.8% in the size of its workforce.

The following are some of the principal development goals Peru has for 2025:

Infrastructure: basis of development

While there are sectors that are more relevant for national development, their potential goes hand in hand with a much-needed increase in national infrastructure, which in and of itself offers great opportunities for investors. Peru has an infrastructure gap of USD159 billion for the period 2016-2025, with more than 50% coming from transportation and energy infrastructure needs. Between 2008 and 2015, 66 public-private partnership (PPP) infrastructure projects were agreed to for a total amount of USD22.9 billion. Energy and transportation projects accounted for more than USD10.6 billion and USD7.7 billion, respectively, representing one of the most important means to foster the country's economic development.
In line with these efforts, the Peruvian government has announced through its Private Investment Promotion Agency (ProInversion) that it will be awarding private investment contracts for an estimated USD40.1 billion during the period 2015-2017, at least USD5.2 billion of which corresponds to PPP infrastructure projects.
PPPs can be classified as (i) self-sustainable or (ii) co-financed, taking into consideration the limits established by the regulations of PPP law. In that order, it is understood that financial guarantees are the unconditional, immediately executable guarantees given by the government to support the obligations of the private sector, and are derived from loans or bonds issued to finance PPP projects or support the government's payment obligations. These financial guarantees are the ones established by the parties under the PPP contract.
Both types of PPPs can be executed in the form of a concession, management agreement, joint venture, shared risk contract, specialization contract, or another type of contract allowed by law.
PPPs are primarily implemented in the form of a concession. Generally, the concessionaire is expected to be responsible for the design, financing, construction, operation, and maintenance of public infrastructure works or public service provision.

This and more information can be downloaded from the website: ey.com/PE/EYPeruLibrary.