Economy set to grow 5% by 2020

Peru has experienced a great turnaround in fortunes over the past decade as economic policy has helped to create an affluent middle class, which is now using its increased purchasing power to bolster prospects.

This virtuous circle is driving the South American country’s future and delivering demand to sectors that had previously laid dormant such as housing, health care, investment markets, and insurance. Over the past decade annual growth of around 7% was commonplace and while the more recent commodities downturn has undoubtedly proven a challenge, plans to instill a sustainable economic framework mean the country’s prospects are still widely considered positive.

“Nowadays we have a good middle class, with a much greater purchasing power than that which citizens had 10 years ago,” explains Rafael Venegas, CEO of insurance group Rimac Seguros y Reaseguros S.A.

The result has been growth across these new sectors, with Mr. Venegas’s insurance outfit expanding at a rate of between 12% and 16%. This has slowed more recently, however, as the onset of the global economic downturn hit Peru harder than others, largely because of its heavy reliance on the mining sector.

Policy difficulties have also affected some market sectors and Mr. Venegas admits that an “excess of regulations” hampered development in some quarters although more recent political changes appear to have set Peru’s economy back on a course for growth, using the likes of Chile and Mexico as comparisons.

Part of Peru’s growth over the past decade has been made possible thanks to the considerable spur provided by the country’s pension fund administrations that operate widely, an unusual occurrence for the region. The market is estimated at around $40bn - equivalent to around 20% of the country’s GDP - and it has proven to be a highly attractive aspect of Peru’s economic make-up, as Renzo Ricci Cocchella, general chief at AFP Prima, explains.

“It’s been extremely positive because it’s also a fund for individual accounts, not a distribution system and therefore it’s the actual savings of the more than 5.7 million Peruvians who are in the AFP system,” he says.

Mr. Cocchella adds that groups such as Prima do not simply invest in domestic markets but spread their interests, providing boons for investors based on international fortunes as well as those at home. That’s not to say local investments are ignored however, he adds, with the majority of the company’s interests residing within the country’s borders.

“Most of our portfolio is local, we are very interested in long-term projects, such as infrastructure or private equity. In that sense we have also been a leverage for growth, the AFPs have participated in a number of infrastructure investments that represent about 10% of the portfolio and they are increasing,” he adds, reflecting on reforms to the pension system in 2012 that sought a more efficient investment model allowing for an increase in the limits for investment in alternative funds.”

Such economic developments have enabled Peru to outpace its regional rivals in terms of growth: the International Monetary Fund forecast a regional rate of growth around 1% for this year and approximately 3% over the next five. Peru, meanwhile, is set to grow nearly 4% this year and by 5% by 2020.

Julio Velarde, Governor of the Central Reserve Bank of Peru

Such figures led IMF president Christine Lagarde to note the Peruvian economy as one of the “brightest” in the world and it’s this growth that has helped entice the IMF and the World Bank Group’s annual meeting to the country. Yet Julio Velarde, Governor of the Central Reserve Bank of Peru, says much of the success has been based on previous experiences - and not necessarily all positive.

“We’ve had hyperinflation and irresponsible fiscal policies with huge deficits, we were one of the few countries where the economy had been stagnant for almost 30 years,” he explains. Today, however, it is this recent history that is helping to forge such a strong economic future.

“Those problems meant we could also learn, in the last 25 years we’ve adopted prudent, sensible macroeconomic policies that let us maintain monetary stability and deal successfully with the effects of the worldwide financial crisis. Therefore, as soon as fiscal or monetary policies are regarded to be going beyond prudency, the government’s popularity starts going down,” he adds.

“There are many other countries that suffered hyperinflation, but our advantage is that we’ve learnt from that; other countries have not always done that. I believe we’ve created an essential basis for growth - macroeconomic stability - which encourages investors, providing them with clarity and transparency at the markets they want to invest in. Once the idea of a transparent market is generated, the economy grows.”

An open economy is helping propel prospects and Mr. Velarde says the country is “absolutely open to capital markets,” which have all helped sustainable growth. This is evidenced by the fact that growth is not simply being driven by Peru’s capital, Lima. Cross-sector success is clear, such as the agricultural growth being experienced on the country’s northern coast.

“Currently, the economy of Peru is undergoing a significant change in its pattern of development and growing on a regional, decentralized level, which affects various sectors,” says Daniel Moisés Schydlowsky Rosenberg, Superintendent of Banking, Insurance and Private Pension Fund Administrators.

“The fact that at least one part of Peru is facing a labor shortage is a great achievement, enabled by 15 years of sustained growth,” he continues, “but the question and challenge that arises is how to apply this to the Peruvian economy in its entirety.”

According to Luis Felipe Castellanos, CEO of Interbank and Intercorp Financial Services, the real challenge is incorporating more people into the financial system. “In Peru 60% of people still don’t have access. In other countries we’ve observed a significant advance through e-money,” he says.

Indeed decentralized growth in Peru is by no means easy because of the country’s mountainous geography, but technological advances are being used to mount such obstacles, including improving communication links and considering the use of e-money to avoid having to physically visit banks or ATMs.

Mr. Rosenberg adds that he considers Peru to be a “star of microcredit” which has been in play in the country for more than six years. “We seek to get closer and closer to the lower end of the pyramid, making credit accessible for the people there. Our objective is to facilitate inclusion, but we want to grant this type of financing in a secure and regulated manner, without sacrificing control or security.” To do this new regulatory policies are being put in place to ensure those receiving finance are unlikely to default.

Challenges certainly remain, including the country’s informal employment rate, while a reliance on the mining and commodities sectors is also an obstacle to Peru, with Mr. Velarde adding that a fall in the price of exportable products has affected investment in some sectors.

“Our investment in mining fell around 8% last year and it’s expected to fall again this year. Obviously, this has implications, and secondly, when you observe your prices falling 25%-30% you look to adjust your costs and if you can adjust your providers, you’ll adjust them.”

Yet technology and diversification are providing new avenues, with companies such as Prima looking to offer more widespread insurance policies to the country’s burgeoning middle class, many of whom are not aware of the value of such services. The firm is also investing in medical centers that incorporate modern tech such as remote doctor services.

Adjusting to international pressures will be key for Prima, Mr. Velarde, and Peru’s wider economic prospects, but with free trade agreements with markets such as the USA, and participation in the Trans-Pacific Partnership (TPP), along with Mexico, Chile and Canada, the Andean nation is well placed for further growth.