Peru’s government is pressing ahead with a series of measures aimed at preventing the economy from flagging as external headwinds gather pace, finance minister Luis Miguel Castilla told a LatinFinance forum Tuesday night.
A landmark capital markets reform bill – submitted to lawmakers last week – and new regulations to speed up infrastructure projects are among the measures Castilla said would keep growth at high levels.
He expressed confidence that private capital inflows would not diminish in the short term. “Peru, due to its fundamentals, will continue to attract investment,” Castilla told LatinFinance’s 7th Andean Finance & Investment Forum in Lima.
His comments come as Peru registered its weakest quarterly growth since 2009 in the first three months of the year, when gross domestic product expanded by just 4.8% compared to the same period last year.
The lackluster expansion in the first quarter raised fears that Peru’s economy is coming off the boil after years of rapid growth, driven by a commodities boom that has seen investment soar.
But Castilla said the economy would nevertheless rebound, with low inflation, thanks to more than a decade of sound macroeconomic policies, integration through trade agreements, improved productivity and policies to attract investment.
The finance ministry has said the economy will likely expand between 6% and 6.3% this year as the country’s trade surplus shrinks to $644 million on weaker mineral exports. It expects the economy to grow between 6% and 6.5% in 2014.
FDI saw the fastest increase in the region last year, jumping 49% from 2011 to $12.94 billion, with absolute flows placing Peru fifth in the dollar amount of investment, according to the Economic Commission for Latin America and the Caribbean, ECLAC.
Castilla said reforms were needed to make investment easier, to sustain capital inflows and guarantee growth.
A major step came last week with submission of a bill, under discussion for over a year, to reform the county’s capital markets.
“This is important opportunity to make capital markets a leverage for future growth,” he said.
The thrust of the bill is to provide opportunities for small companies and micro enterprises to access capital markets. It should also make it easier for Peruvian firms to raise capital locally instead of having to turn to the international markets when issuing paper.
The country’s banking system continues to be the primary source of funding, covering around 70% of the investment requirements for local firms.
Tackling the infrastructure deficit
Stronger capital markets could also help Peru close its infrastructure gap, which is widely seen as one of the principal drags that could keep the economy from growing at a sustained rate for the coming decades.
The government has pushed other reform measures, Castilla said, noting that congress is debating legislation to reform the country’s civil service.
The administration also published three executive orders in May that should go a long way to speed up approval of extractive and large-scale infrastructure projects. The new regulations call on state agencies to streamline processes for approval of environmental impact assessments, hopefully getting through the state’s bureaucracy in less than 100 days. The government expects the steps to eliminate obstacles on approximately $15 billion in investment.
While Peru performs well in international rankings on macroeconomic performance and government efficiency, its scores plummet when it comes to infrastructure: it ranks 89th out of 144 countries for infrastructure in the World Economic Forum’s latest Global Competitiveness Report, while it comes in 21st for macroeconomic environment.
AFIN, the organization that groups together private companies operating public services, estimates the infrastructure gap at $88 billion. The government’s investment promotion agency, ProInversión, currently has projects ready for tender for approximately $12 billion.
“We need to close the infrastructure gap,” said Castilla. LF