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Peru's Economic Rebound Makes It a Top Regional Performer

Peru's Economic Rebound Makes It a Top Regional Performer

Posted by Juan Gavasa on April 16, 2014

After a slight slowdown last year, Peru's economy is rebounding, leading to forecasts that it could be a star performer in Latin America this year. Peru's government said Tuesday that gross domestic product expanded 5.72% in February, led by strong gains in mining, fishing, banking, and construction.

Finance Minister Luis Miguel Castilla forecasts 2014 growth between 5.5% and 6.0%, with the pace picking up during the year as various base metals mines boost output. The World Bank says Peru will be the second-best-performing economy in Latin America this year, following only Panama, even as growth weakens in neighboring nations such as Brazil and Chile.

"The macroeconomics in Peru have been very well managed, and fiscal policy has been very good," said Andrew Powell, Inter-American Development Bank's principal adviser in the research department. He said that during the boom of the last few years the government didn't allow the local currency to overvalue, which would have hurt manufacturing, while it built up substantial foreign reserves as a war chest.

Among the potential risks facing the economy are a downturn in China, a major commodity buyer, and any undue tightening of monetary policy in the U.S., he added. Peru's biggest business organization, Confiep, said that Peru's economy is still benefiting from strong domestic demand, but warned that several overhauls are necessary to continue growth in the medium term.

Confiep President Alfonso Garcia Miro said in an interview that one of the main risks to Peru's economy is political uncertainty that has created "a climate of instability and confusion that has affected Peruvian consumers."

"The state has to be more aware to promote investments and not be an obstacle," he said.

Over the last decade investors have flooded into Peru, especially into mining but also into banking and retail. Shopping malls have opened as foreign retailers poured in. Vehicle sales have boomed, as have housing markets. Direct foreign investments were only $1.3 billion in 2003. This year FDI is seen at about $9.3 billion, according to government data.

Many companies are betting on Peru's rich deposits of copper, zinc, silver and gold. Late last week global warehousing and logistics company Impala, a subsidiary of Trafigura Beheer BV, inaugurated an $80 million expansion at a mineral concentrate warehouse at the port of Callao, and is looking at investing $45 million more.

"Commodity prices are a concern because that affects our clients, but we would rather have the infrastructure in place and not the clients, instead of the other way around," Impala Managing Director for Latin America Thomas Savage said in an interview.

This month, Glencore Xstrata GLNCY -1.92%  PLC announced the sale of the giant Las Bambas copper mine project to a Chinese consortium for $5.85 billion. That follows the coming on stream late last year of the large Chinese-owned Toromocho copper mine. Peru's government, meanwhile, recently awarded the concession for the construction of a $5.6 billion underground metro in Lima, and plans to move ahead with a $3.5 billion upgrade of a state-owned oil refinery.

"You have to take into account that we have been seeing an acceleration in the awarding of concessions, and this is going to help the growth of private investments," Central Reserve Bank of Peru Chief Economist Adrian Armas said.

Peru's finance ministry, meanwhile forecasts public-sector spending this year at 6.4% of gross domestic product, the highest level in 30 years. Scotiabank Peru economist Pablo Nano said that in the second half of this year many of the planned investments "will start to become a reality, but the majority of the positive impact will be felt in 2015."

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