WHAT A YEAR

Peru 2017 | DIPLOMACY | YEAR IN REVIEW

Government spending is set to drive growth in the coming years as Peru leverages its stable fiscal position to shrug off pressure from low commodity prices.

Peru faces a number of challenges at present, including an economy that is overly reliant on mining exports and a cavernous infrastructure deficit estimated to be worth USD69 billion. Despite this, the IMF predicts that GDP will grow 3.3% in 2016, below the highs of the mid-2000s but ahead of much of Latin America, the overall economy of which is predicted to contract. Unlike Brazil and Argentina, which struggle with unemployment and inflation, Peru enjoys a stable fiscal situation and overall positivity. A number of large mining projects have come online of late, while the country's exporters have been buoyed by Peru's signing of the Trans-Pacific Partnership, a deal that will place the country within a bloc that accounts for 40% of world trade.

The country's public debt stands at 23.3% as of 2015, down from 44.3% in 2004. For the last few years, inflation has remained within the central bank's target range of 1-3%, with the sol also growing in popularity in an economy that has historically been highly dollarized. Drops in revenue as a result of falling commodity prices have created a fiscal deficit of 3.3% of GDP, yet international reserves stand at over USD60 billion as of June 2016. This equals 32% of GDP, or 20 months worth of imports.

With this solid fiscal position, new President Pedro Pablo Kuczynski, elected in July 2016, has made clear his desire to spend heavily on infrastructure, including public health initiatives. In some respects, the authorities are hoping that boosts in human capital and the attraction of more FDI can lead to a boom the kind of which was last seen in the mid-2000s.

Efforts are also under way to tackle informality, with the banking sector set for a boon of its own as more workers enter the formal economy. The World Bank estimates that only 20-25% of Peruvian adults have a bank account at a formal institution, well below the global average of 50%. On top of that, the level of banking coverage as measured by loans-to-GDP is at around 30%, one of the lowest figures in the region. With the percentage of total workers employed in the informal economy estimated at 74%, however, the sector could remain a large part of the economy until 2050.

While growth could come in the form of large infrastructure projects in the coming years, exports will continue to be headlined by Peru's mammoth mining setup. Peru is one of the 10 most mineral rich countries in the world, with 13% of the world's copper reserves, 4% of its gold, 22% of its silver, and 7.6% of its zinc. The sector has been highly popular with foreign investors, in contrast to neighboring markets such as Ecuador, which have struggled to convince multinationals to take the plunge. There is an estimated USD10 billion in FDI stock in the Peruvian mining sector at present, representing 13% of all FDI in the country. Foreign investors include MMG, BHP Billiton, Glencore, and Gold Fields. Recent large projects include an expansion of the Cerro Verde copper mine in Arequipa, making it one of the five largest copper mines in the world. The project is forecast to add USD5.4 billion to the economy. Construction is also under way at the Las Bambas mine in Apurimac. Operated by Australian-Chinese firm MMG, Las Bambas is a long-life copper mine that will also produce silver, gold, and molybdenum, and when complete will overtake Cerro Verde as the largest mine in the country. MMG has pumped over USD10 billion into the venture, which is expected to produce 250-300,000 tons of copper in 2016, then 450,000 tons in 2017. Copper is especially under the spotlight due to falling prices globally, with Peru's strategy to increase output to compensate. Production of gold was also up 5% in early 2016, as was silver (up 17%) and molybdenum (up 21.62%). All eyes are now on China, with conflicting reports suggesting its demand for copper—the Asian giant accounts for 45% of global copper usage—could either rise or fall. For now, Peru's mines are focused on efficiency, and looking to take advantage of the reality that mining firms are struggling to find high-quality deposits in other parts of the world.

Moving forward, Peru's newly elected president is keen to leverage the country's strong fiscal position to open up more of the country to formalization and development. Keenly positioned to take advantage of new trade deals, Peru is emerging as the country to watch in an otherwise depressed Latin American vista. While all eyes will be on commodity prices, sound fundamentals suggest that Peru can weather external pressures for a protracted period as other sectors and strengths are mobilized.