Now that Peru has elected a new president, the key questions that multinationals operating in this market have are: Will Peru be able to continue to sustain growth in the face of ongoing external headwinds? And, secondly, what will be different under President Kuczynski?
At FSG, we believe that Peru will continue to be among the most resilient markets in Latin America. This is mainly because, regardless of the election outcome, the country will continue to benefit from robust institutions, historically solid adherence of macroeconomic orthodoxy, commitment to continuing social welfare policies implemented under President Humala, and openness to private investment as an engine of growth.
Moreover, under Kuczynski, FSG expects Peru’s growth to accelerate to 4.2% in 2017 from 3.5% this year, as his administration is expected to double down on countercyclical public spending, increased foreign investment in order to fuel infrastructure and healthcare development, and basic social services initiatives. To the extent that Kuczynski is able to successfully diversify the country’s mining-heavy economy by encouraging tourism and attracting investment to other sectors (e.g., agriculture), Peru could see an additional boost to its growth.
Kuczynski’s government signals policy continuity in Peru
Kuczynkski has inherited a fundamentally sound economy, already conducive to structural reforms and friendly to the interests of the private sector. Although Kuczynkski has publicly advocated for more flexible public spending ceilings, which could question his commitment to fiscal responsibility, the reality is that Peru has plenty of room to increase public spending without compromising fiscal stability and inflation targets. He also does not plan to unravel any of the key policies that his predecessors put in place to foster macroeconomic stability, namely, the privatization of state-owned companies, relaxation of private sector price controls, free trade, and free movement of capital.
Furthermore, Kuczynski is expected to continue many of Humala’s social initiatives that have already helped to drastically reduce the country’s inequality, such as increased public investment in water, sanitation and electric power, while placing much greater emphasis on reducing corruption and crime.
Having pledged 5% economic growth by 2019 through a comprehensive policy agenda consisting of market-oriented policies, Kuczynski is expected to implement a combination of orthodoxy and Keynesianism to improve the country’s investment environment and leverage fiscal policy to stabilize domestic demand. One of his key policies will be to convince Congress to allow for higher deficits, so the government can have a more active role in financing social initiatives to reduce inequality and improve the country’s quality of social services, heavily prioritizing water, sanitation, healthcare and education. He aims to advance large infrastructure projects, simplify (and thus attract) private investments, and encourage Public-Private Partnerships, while adjusting the tax regime, shrinking the country’s informal sector, and collaborating with Congress to pass fiscal and social reforms.
Peru’s business environment will remain favorable for foreign investment
In efforts to seek high growth post-Peru’s commodity boom, Kucyznski’s government has vowed to create investment incentives and reduce bureaucratic obstacles for investing in the country, which will favor MNCs, as they will benefit from opportunities to grow in the market. Not only is Peru already considered an attractive location for foreign investors, as it has among the lowest country risk of doing business in the region, but this year alone, Kuczynski aims to unlock an existing pipeline of nearly two dozen infrastructure projects worth US$25 billion currently stalled by red tape, which will provide opportunities for partnerships in a variety of industries.
Despite some inherent depreciation given external market conditions, the nuevo sol has been experiencing low currency volatility compared to currencies in neighboring countries, which entails reduced risk for investors and less noticeable impact on balance sheets. Continued intervention by the central bank in pursuance of exchange rate stability, which is likely to continue in the short-term, will prevent distortions in production and consumer decisions, and foster investor optimism regarding growth prospects.
Furthermore, in addition to easing investment restrictions for companies by allowing untaxed reinvestment of corporate profits, the government aims to pass reform favoring small and medium enterprises, including lower tax rates and amnesty on payment delays, with the hopes of encouraging formalization and furthering opportunities for business growth. A combination of both actions by the central bank, as well as tax and labor reforms, aim to attract investment into Peru, with the ultimate goal of boosting growth.
Consumer spending has begun to accelerate after months of continued decline
The election of a market-friendly president in Peru has begun to restore consumer confidence and improve consumer expectations of market conditions, which has favored the slow recovery of consumption that is expected to continue to accelerate through the rest of 2016 and into 2017. A steady decline in inflation this year (expected to converge to the central bank’s target range by early 2017), combined with the improved quality of services for Peruvians that the new administration has promised, demand is expected to continue to recover.
Additionally, Kuczynski’s government has promised to gradually decrease the country’s value-added tax 1% annually, from 18% to 15%, starting next year, which is expected to further favor private consumption. Peru, which already has one of the lowest tax burdens in the region, will see incentivized consumption. As such, some MNCs have already started to revise growth targets in Peru as domestic demand is expected to become more dynamic.
Implications for Multinationals
Peru is expected to continue to accelerate under Kuczynski’s market-friendly administration, which will promote stable investor confidence and opportunities for multinationals in new or untapped markets as he seeks to diversify the country’s economy through a variety of incentives. Given the government’s commitment to heavy investment in infrastructure and spending on social services, multinationals could see an increase in the number of public tenders and social stimulus measures, particularly in the healthcare and infrastructure sectors.
It will be important to work with market intelligence teams to identify potential tenders and government partnerships. In addition to reconsidering top-line growth targets in both the short- and long-term, multinationals could consider a subnational prioritization plan for expansion outside of Lima as increasing investment and domestic demand will open new business opportunities in new sectors, and a customer segmentation plan in order to adjust product offering and pricing strategy according to new consumer groups.
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