Latin Finance - March 2008 - 17

man of the year These are lofty goals that are unlikely to happen in a five-year government, but García is convinced that his administration can move ahead quickly. “In 2008 we are going to have to step a little harder on the accelerator in our effort to eradicate poverty. This country cannot grow by 8% while leaving millions of people behind. Think about it, 8% growth with two million people still illiterate. This is absurd,” he says. Last year the administration earmarked 3.8% of GDP for public investment and that should be higher this year. “Public investment is still small, but it has doubled from 2005 and we will continue increasing it,” says García. Finance minister Carranza says public investment will also help Peru counteract international economic turbulence, particularly the possibility of a recession in the US. “The last international downturn was worsened here by a drastic cut in public investment,” says Carranza. “We have the resources for a counter-cyclical plan, but we would run a deficit if necessary to maintain public investment.” Public investment includes the construction of roads, ports and other infrastructure to begin closing an infrastructure gap that some groups estimate to be bigger than $20 billion. Major outlays are also slated in rural electrification and telecommunications. “In 2011, Peru will be a country free of illiteracy and with universal health care,” says García. “There will important new public works, including three new ports and we will double the amount of paved highways. Electrification will be above 90% and we will have extended telephone and internet coverage to 400 new provinces. It is a lot in a few years, but we can do it,” says García. reduced. There is not a single example of country that has broken out of poverty based on raw material exports alone,” says Werner Cabrera, a member of Humala’s Nationalist Party (PNP). Werner and the PNP advocate the nationalization of strategic industries, especially mining and hydrocarbons, repeating the model put in place by Bolivia’s Evo Morales. García counters that this would destroy Peru’s economy. “Nationalization is an economic setback and eventually leads to a democratic setback,” he says. Peru’s economic boom may have started with raw material exports, but the economy has been evolved and other factors are now leading growth, says García. “Peru’s GDP five years ago began growing because of rising mineral prices and exports. Mineral prices are not rising as fast today, yet Peru is growing by more than 8%. This is due to internal dynamics and public investment. We have entered a virtuous cycle of growth,” says the president. “We like it,” says James Craige senior portfolio manager for EM debt at Stone Harbor, which has $15 billion in EM assets under management. “They continue to extend the maturity profile of their debt, external debt as a percentage of total debt is down significantly . . . There really aren’t a lot of negatives to Peru at this point,” Politics, Stretched Valuations Investors are, however, worried about politics. “It’s definitely something that on a medium term basis I do like to monitor and I do feel that that is a risk,” says Khan. “One thing to watch is President García’s popularity level, which is almost half where it was when he started his presidency.” This could become a serious longer term issue if it permits the rise of a radical leader who undermines the sustainability of the economy. Khan adds that Peru needs to have social goals of the government implemented so that the entire country feels included in the commodity windfall and strong GDP growth. Inflation, crime and poverty are all areas of potential conflict. “At this stage I don’t think it raises any red flags as far as governability is concerned, because polls are also implying that the majority of the country is not looking for change and is quite content with the direction of the economy,” says Khan. The biggest risk from a fixed income perspective may be lack of liquidity and stretched valuations. “The country does trade at the tighter end of the range for a double B rated credit,” says Khan. But overall, the Andean nation is a standout investment. “Peru is doing what some of the higher quality countries should be doing, which is retiring external debt and issuing locally,” says Craige. “We’d like to have more countries like Peru, certainly, in the market,” adds the investor. As long as the good times roll, García’s Peru will captivate investors and the president has the luxury of waxing lyrical. However, it remains to be seen how he fares in the event of a global slump that drags down commodity prices and saps export markets. The leopard appears to have changed his spots and for all the financial achievements of Peru, García is a worthy Man of the Year. But the president has to prove himself through bad times to ensure he does not tumble back into the scoundrels’ camp. LF Investors Want More Investors are happy with the credit and want to buy more. “We are positive on the fundamentals and the long term potential for the country,” says Shamaila Khan, managing director, and South American sovereign and corporate debt analyst at TIAA, which has more than $435 billion in total assets under management globally. “We would like to see more investment opportunities coming out of Peru,” says Khan, who predicts that the sovereign will grow faster than the average for LatAm for the rest of 2008. “The country will likely continue to post fiscal surpluses into 2008 and we would expect to see them continuing to reduce external debt and total debt as a percentage of GDP,” she adds. “I don’t expect to see them in a major way in the external market. They will continue to substitute local debt for external debt. That is definitely a vulnerability I would expect to be reduced in the medium term,” says Khan. According to Khan, the US FTA should help Peru diversify the export base away from commodities over the next few years. “They will be shielded by a strong external position and the fiscal surplus that they run if there’s a moderate decline in commodity prices,” she says. Commodity Dependence Opponents agree with increased spending but maintain that the economic boom, like so many in Peru’s past, could peter out because it relies on commodities. Exports in 2007 were $27.6 billion, another record and 16% above the previous year. Raw material exports account for close to 80% of the total, with minerals comprising the lion’s share. “Peru has experienced other economic bonanzas in the past because of raw materials, but poverty has never been March 2008 LATINFINANCE 17
Latin Finance - March 2008

Table of Contents for the Digital Edition of Latin Finance - March 2008
