Peru Is Hoping To Turn Challenges Faced By Floods Into A Rebuilding Opportunity

Macro factors have had a major bearing on the stock market in Peru this year. Monthly economic growth in the country fell to near an eight-year low of 0.17% in April from a year ago as construction and manufacturing activity plummeted.

The country’s central bank also reduced the growth forecast for 2017 to 2.8% in June from 3.5% projected in March.

Floods in the first quarter of this year were the main reason for the sharp decline in economic activity, particularly in construction.

The country’s Ministry of Economy and Finance has held that the floods damaged infrastructure worth about $4 billion and has estimated that it may have shaved close to 0.5% of economic growth off the first quarter of this year with construction having nose-dived by 5.3% in the same period.

The other challenge is the corruption scandal.

The Odebrecht scandal

Brazil’s construction giant Odebrecht’s $800 million corruption scandal has engulfed countries across Latin America. Of the total sum, the company has admitted to paying $29 million in bribes to three Peruvian governments under presidents Alejandro Toledo, Alan Garcia, and Ollanta Humala.

Due to this, the country has witnessed a drop in investment confidence, which has resulted in an overall decline in investment. Current President Pedro Pablo Kuczynski has promised a clean-up, but it will take time for investors to regain confidence.

An opportunity?

As far as the damage from floods is concerned, President Kuczynski has said that reconstruction and new infrastructure will cost $9 billion over the next five years. This will undoubtedly push the country’s fiscal deficit up. Central Bank President Julio Velarde stated that the institution expects a higher fiscal deficit of 3% of GDP in 2017 and 3.5% in 2018.

However, the spending plan will be helpful in raising the country’s economic output. Though the impact was severe enough to slow down economic growth this year, the central bank expects GDP to grow by 4.2% in 2018 – a tad higher than previously estimated.

The challenge posted by the corruption scandal is a common thread across the region, hence it’s not a challenge for Peru alone. The government’s response so far has been swift, and given the robustness of the economy, the country stands a better chance of seeing investors return earlier than most of its Latin American peers. But this will also depend on the future course of action taken by the administration.

What do these and other developments mean for Peruvian equities going forward? Let’s look at this in the next article.

Peru’s New President Calls for Social Revolution in Search of the Next ‘Peruvian Miracle’

President Kuczynski is shaking up Peruvian politics with a roll-up-your-sleeves approach to reviving economic growth. His rhetoric could reverberate throughout a divided Latin America.

Peru’s new President, Pedro Pablo Kuczynski, hit the ground running — literally. Before his first cabinet meeting, PPK (as he is popularly known) took his cabinet to a fitness workout session in front of Palacio de Gobierno, seat of the country’s executive branch. He intended to show the commitment of his administration to sports and health, but also to send a very graphic message to the political establishment: Peru is ready to shake things off.

A few days earlier, Kuczynski made his inaugural address calling for a social revolution. With 23% Peruvians now living below the poverty line, he vouched to modernize the country, fight corruption, reduce income inequality and provide access to basic services for all. To support his ambitious social program, he intends to improve the country’s business environment, boost foreign investment and increase public spending. Nevertheless, he will have to face fierce political opposition and a sluggish economy after a decade of the Peruvian Miracle. He aims to put economy back on the 5% GDP growth mark by 2018.

The Kuczynski Reforms

Kuczynski defeated Keiko Fujimori — daughter of former president Alberto Fujimori, who is now serving a 25-year prison sentence for corruption and crimes against humanity — in a run-off by a 39,000 vote margin. With Fujimori winning the first round, he had to mobilize the left and the anti-fujimoristas, which he successfully did by harnessing the widespread dissatisfaction with old fashioned politics.

Yet, his party, Peruvians for Change, obtained a meager 18 seats in the parliament, while Popular Force, Fujimori’s party, will control the house with an overwhelming majority of 78 out of 130 seats. In a unicameral parliament, the new government will have to find a happy medium with an embattled opposition to enact its reforms.

After a remarkable growth burst (an average 6.4% between 2003 and 2013) largely fueled by the commodity boom, the country’s economy seems to be losing pace. The slowdown is due to the falling prices of gold and copper (half the country’s exports), but also, in a large part, a result of Peru’s inefficiencies. To start growing again and reduce the country’s reliance on volatile commodities, the new president has proposed bold reforms to unleash a new cycle of growth.

Kuczynski plans to tackle endemic corruption and red tape, two of the most pressing issues hindering investment and growth. Moreover, he will concentrate on changing rigid labor laws — a business-sector complaint that has led to nearly two-thirds of Peru’s workforce being hired informally. The crackdown on informality is one of PPK’s main platforms to curb tax evasion, increase income, and pay for tax breaks aimed at attracting foreign direct investment. He has set a bold deadline: by the end of his term in 2021, 60% of jobs will be on the books.

Together with the tax cuts, he also plans to increase public spending on strategic infrastructure projects to stimulate the economy. Kuczynski says he will unlock some $20 billion in investments in mining and energy. He also intends to spend another $15 billion on projects to achieve his goal of providing access to water and sanitation to all Peruvians. To that end, he created a new Ministry of Regional Support focused on improving the efficiency and increasing control over public spending. Additionally, the Peruvian investment promotion agency, ProInversión, will be decentralized to reduce project time frames and make them more adapted to local needs.

Kuczynski and the future

To finance all this, PPK will rely on the country’s low public debt— which will give him room to spend — and a solid credit rating. During the campaign, Kuczynski had already garnered support from foreign investors eager to finance his plans. Furthermore, the country has accumulated a remarkable stock of foreign currency during the golden days of commodity bonanza, which could also be used to pay for the projects.

Getting the parliament on board may be easier than predicted, since raising public spending is one the few policies where PPK and Fujimori’s opinions converge. To speed up the process, the administration will very likely favor public-private partnerships, increasing the opportunities for foreign investors.

Kuczynski’s victory over Fujimori has been widely applauded by international markets — mainly because he represents the maintenance and improvement of the business-friendly policies implemented by his predecessor. Yet, most of the public — and many analysts — remain skeptical about the viability of his minority government and his capacity to unite Peru, criticizing him for being an out-of-touch representation of the country’s upper-class.

Indeed, PPK is an outsider, and his biography epitomizes a cosmopolitanism which very few Peruvians can relate to. He was educated at Oxford and Princeton, worked for the World Bank and Wall Street, and has close family ties with Jean-Luc Godard and Jessica Lang. More tellingly, he had to renounce his American citizenship to run for president.

Nevertheless, his genial and spontaneous style seems to be pleasing the public and bringing new life to a job normally seen with contempt and disregard by Peruvians. Despite the remarkable economic performance of recent years, presidents have been consistently rated poorly. Recent president Ollanta Humala left office with an approval rating of 19%, even with an expected GDP growth of around 4% for this year.

More importantly, Kuczynski’s victory is mainly due to an unexpected alliance with the country’s left — something unseen in Latin America — and the possible birth of a new non-partisan approach to a continent rapidly plunging into polarized politics. How he will conduct negotiations with the opposition and if he will eventually succumb to traditional patronage remains to be seen.

Still, his resolve to get things done, decentralization push, and anti-corruption rhetoric could reverberate among the continent’s increasingly restless and discontent population. Beyond a mere antithesis to the declining leftist reign in Latin America, Kuczynski might well be the leader the region so badly needs.

Caio Pizetta Torres is the Chief Institutional Relations Adviser – Department of International Relations, Government of the State of Rio de Janeiro

As originally appears: http://globalriskinsights.com/2016/08/power-broker-kuczynski/

Biggest Winner of Peru’s Election Will Be Foreign Retail Investors

No matter who prevails in yesterday’s presidential runoff in Peru, the big winners are the population as a whole and the foreign retail investor. The two leading contestants, Keiko Fujimori, the daughter of the disgraced former president, and Pedro Pablo Kuczynski, are both viewed as market-friendly and center-right politically. For the first time in many years there was no leftist candidate on the ballot.

There is a wide age gap between the two candidates, with Fujimori at 40 and Kuczynski at 77, but both come with their own baggage. The fear with Fujimori is that she will return the country to the days of her father’s rule and all the corruption that came with that. On the other hand, Kuczynski still has a U.S. passport, was a member of the World Bank, and has close ties to Wall Street.

For some, the Wall Street connection is viewed as a negative. Another difference could be in governing styles, with the concern that Fujimori would re-impose her father’s authoritarian governing style, though she has signed a pledge promising to respect human rights and fight corruption. Kuczynski has a very high favorability rating and as he is a newcomer on the scene, there really is no benchmark other than he is viewed as being a pragmatist.

 As far as investing is concerned, if you, like me, believe that commodities are on the edge of a bull market, then Peruvian stocks may be a good bet. The country has the second largest copper deposits, the fifth largest gold reserves, and is in the top five worldwide producers of lead and zinc. All these commodities have recently had good run-ups and may continue.

The iShares MSCI All Peru Capped ETF (EPU) has a year to date return of 48.49%. But stocks involved in the mining and processing of gold, zinc, and silver will be a better investment, such as Cia de Minas Buenaventura SAA (BVN) with a year to date return of a whopping 151%, or Hochschild Mining PLC (HOC:LN), up a dramatic 212% year to date.

For a little diversity an investor can take a look at Cementos Pacasmayo SAA (CPAC), a construction company that also sells quicklime for use in mining operations and is up 18.81% year to date. And lastly, Grana y Montero SAA (GRAM), a holding company involved in infrastructure and energy that is also up nicely year to date at 125% return.

GDP growth in the first quarter of 2016 came in at 4.4% which is down slightly from the previous quarter; however, with the election over, I believe the economy is well positioned because of the rally in commodities.  I for one am a buyer, because Peru and South America are successfully turning back the pink tide and I believe that this will continue for many decades to come.

 Peter Kohli, CEO of emerging market specialist DMS Funds.