Peru finance minister plots to stay ahead of Latam peers

Alonso Segura, the Peruvian economy and finance minister, is concerned that the economic slowdown and stock market volatility in China will start to have a negative effect on the South American country’s economy. While the EU is Peru’s biggest overall trading partner, the Asian giant is the largest importer of Peruvian minerals, explaining the minister’s unease. China accounts for 18% of the Peru’s total exports.

“Events in China are a cause of concern for us,” says Mr Segura. “There is a chance that commodity prices will drop even further. During the past few weeks, there has been considerable speculation by economists and analysts that Chinese growth could fall below 5%. At this stage, this is just speculation but it is possible that its stock market has started to factor this in. What’s happening in China is certainly not good news for Latin America generally.”

Growing pains

Peru used to be called the ‘Latin American tiger’ because it had the fastest growing economy in the region: between 2010 and 2014 it expanded on average by 5.7% a year, according to the IMF. 

Peru’s economic success during the past decade is largely down to the seemingly insatiable Chinese appetite for commodities. But even this has fallen over the past few years, resulting in a downturn in the ‘commodities supercycle’. This is the main reason the Latin American tiger has lost some of its power: last year the country’s economic growth came in at 2.4%, though this year Mr Segura forecasts it will expand by 3%.

“Currently, Peru and Colombia are competing to see which of the two economies grows closest to 3%,” he says. “But Peru has the bigger economic potential and eventually it should accelerate at a quicker pace than its regional peers.”

The minister believes that Peru’s long-term equilibrium growth rate now lies between 4.3% and 4.5%. A few years ago this figure hit 6.5%, but that was while China was experiencing galloping growth of more than 10%. Mr Segura maintains, however, that the potential is still there to keep Peru on the path to growth and reach the government’s important goal of reducing poverty further.

Mr Segura is slightly less concerned about China than he might have been a few years ago because Peru has managed to diversify its economy to some degree away from mining and the commodities sectors generally. Today, commodities including minerals and agricultural and fish products make up 57% of total exports, compared with 70% five years ago.

Weather forecast

Peru’s slowdown prompted the government to adopt a countercyclical economic policy in 2014. Mr Segura expects the country to show a fiscal deficit of up to 3% this year, the first time in 12 years that Peru has been forced into a deficit position. He further forecasts a deficit of about 2.7% for next year.

Mr Segura is also examining the potential impact on the economy of El Niño, the meteorological event that can cause severe flooding in northern Peru. So far its effect has been limited, but Mr Segura believes that could change if a particularly bad El Niño occurs during the Peruvian summer (whose height is during the months of January and February).

“We have already budgeted 50 times more than we normally do for El Niño’s economic impact,” he says. “We have not had to use these resources so far, so we have some spare money at hand if it is very bad during the summer. As a cautionary measure, owing to the potential impact of the Chinese slowdown and El Niño, we already undertook some debt management operations last year to put ourselves in a better financial position.”

Legal aid

Mr Segura adds that private concessions for infrastructure projects, commonly in the form of a public-private partnership (PPP), have been one of the main drivers of economic growth during the past decade.

“They are why Peru has been able to outperform its peers,” he says. “During the peak of the commodity supercycle, the country used its additional revenues wisely and – in association with the private sector – invested heavily in new highways, ports, airports and so on. However, there is still a vast infrastructure gap and the state’s resources are tighter now, so we will need a longer period in which to realise this type of project.”

Mr Segura explains that one of the main reasons some projects have been delayed by up to 18 months is the difficulty of expropriating land or enforcing a compulsory purchase order.

At the end of August the government implemented a new law – number 30327, approved by Congress in May – that will speed up the expropriation process in the case of major infrastructure projects. It removes a number of hurdles that state entities were able to impose, slowing down the compulsory purchase of state-owned land. The new law also allows for land to be expropriated once five working days have lapsed following its formal valuation.

“This law will certainly help in the execution of major PPP projects,” says Mr Segura. “But we also need a new framework for PPPs. Current concession contracts have too many addenda. It is not always clear from the start what are the responsibilities of the state and of the private sector. We have not been able to establish ‘best practice’ in this area.”

The minister says that the new legislation, expected to be approved by Congress within the next few weeks, should create the right framework for PPPs for the next 10 years, making the process faster and more transparent.

Cutting delays

He notes that many PPP projects now take the form of unsolicited bids from the private sector that require at least some degree of state financing, and that the government cannot approve too many lest they compromise state finances significantly (as has happened in some European countries).

“It’s also important that [investment promotion agency] ProInversion does not become overburdened by taking on too many bids of this kind,” adds Mr Segura. “Co-financed projects have a complicated design and there is only so much capacity.”

However, he adds that an important political consensus exists in Peru around PPPs, and that all the main presidential candidates support them. “In fact, some candidates who have never been in office are a bit too enthusiastic about their potential application,” says Mr Segura. “They have to realise that the state must slow down the whole process to some extent because of budgetary constraints.”