In a league of its own

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Despite its relatively small population of less than 30 million and turbulent past, Peru is now regarded as one of the stars of the developing world. The country was blighted by the threat of terrorism - a situation that only ended a decade ago - and high inflation. More recently, however, a lowering of the public debt and a focus on providing a more market-based business environment has drawn in foreign investors.

Assisted by a wealth of natural resources, from mining to fishing, Peru's economy has been growing at one of the fastest rates in the world: 10% in 2008 and a lower, but still positive, 1% during 2009, as a consequence of the global financial crisis and economic recession. Exports account for more than 27% of Peru's gross domestic product (GDP) and have been steadily growing for the past 10 years. According to analysts, the country's GDP per capita now stands at about $6000, twice the value of five years ago. And while poverty still affects the country, the percentage of its population living in such conditions went down from 50% of only three years ago to 35% today, according to local research.

Peru's Ministry of Economy and Finance has recently raised the GDP growth projection from 5% to 5.5% for 2010. Officials expect exports to grow to $31.5bn this year, which is 17.4% more than 2009 and similar to pre-crisis levels.

Bank of America-Merrill Lynch reported in a research paper at the end of May that Peru is in a "growth league of its own" and expects its economy to expand by a much higher margin of 6.1% this year and 5.8% in 2011, during which time the Peruvian sol should remain undervalued.

The International Monetary Fund (IMF) is also optimistic about Peru's immediate prospects. It estimates growth of between 6% and 7% in 2010, which would mainly be driven by expansionary fiscal policy, as evidenced by a 24% increase in current public investment. However, the IMF warns that if the current fiscal stimulus is not curbed, Peru runs the risk of overheating its economy.

Such doubt being cast upon the sustainability of the country's growth has caused concern in some circles. However, Julio Velarde, governor of the Central Reserve Bank of Peru, is confident that the country is making the right investments and policy decisions to maintain Peru's growth.

Real estate boom

Peru has embraced the open-market mentality in a way that has eluded all but a few Latin American countries. This has brought advantages for even the lower-earning members of the country's population, bringing with it, for example, cheap housing built by construction companies as opposed to self-builds by individuals.

The appeal of Peru's business climate and higher returns are certainly not news to investors. "I think that Peru, and specifically Lima, offers high-quality, solid returns for long-term investors, returns that can be above 10%," says Conor McEnroy, founder of Abbeyfield Holdings, a real estate investor in the country.

And it is not just the real estate market that is performing impressively. The fast-growing economy is pushing the development of the country's banking system, too. In line with Peru's economy, the country's banks have performed well during the crisis. The top banks in the country, Banco de Credito del Peru, BBVA Banco Continental, Scotiabank and Banco de la Nacion, have all grown in size and closed 2009 with healthy returns, while the top three locally owned players averaged $350m in pre-tax profits.

"We have not suffered any significant negative effects [from the global financial crisis] in 2009," says Eduardo Torres-Llosa, chief executive of BBVA Banco Continental in Peru. "Our return-on-equity ratio remains above 38%, our delinquency ratio is below 1.6% and our liquidity ratios are substantial. The whole Peruvian financial system is performing pretty well too. In 2010 we expect to keep on growing."

Delinquency levels are very low throughout Peru's banking system and the top lenders' non-performing loans (NPLs) make up an insignificant percentage of their overall loan portfolios, at 1.8% - only a small increase from the pre-crisis percentage of 1.2%.

Such figures are all the more impressive in a country that classifies insolvent loans as anything that is eight or more days overdue. At the same time, provisions are quite high, averaging at 220% of NPLs, which highlights the level of caution exercised in the sector.

Banking expansion

As Peru's economy expands and its middle class becomes larger, the country's banking system is growing in tandem. Despite acquiring a total of 1.5 million new clients in 2009 - which brought the total of banking clients to 6 million - there was a flat growth in terms of business generated last year. By way of contrast, the first quarter of 2010 saw a year-on-year growth in new clients of 15% for the whole of the banking system.

"The banking and financial systems have been growing at a lower rate compared with previous years, but still at more than 15% [for the first months of] this year," says Juan Antonio Jenssen, head of business strategy for Scotiabank Peru. "We expect growth to be closer to 20% in 2011."

Economic growth and the reliability of Peru's banking system is also changing the population's attitude towards saving. The creation of new investment instruments, such as mutual funds, has produced an increase in saving, while the recent history of low inflation and the strengthening of the local currency have driven savings increasingly towards the Peruvian sol rather than the US dollar. Experts believe this trend will continue.

In addition to this, a new law will soon be implemented that means an employer can no longer decide into which bank its employees receive their salaries. Public servants, for example, have always had to use Banco de la Nación. It is hoped that this new law will create more dynamism and competition among the country's banks.

Partly as a consequence of the new law, Banco de la Nación is now embarking on a major branding campaign to increase customer loyalty and to boost its appeal to the younger generations.

Capital market development

On the corporate side, the government's intention to develop local capital markets will provide new funding opportunities for growing businesses. It will also bring opportunities for banks, who will be able to take on underwriting roles for these businesses.

International attention on Peruvian issuers received a boost at the beginning of this year, when an encouraging and groundbreaking deal took place. In a first of its kind, a Peruvian fish company issued on the international capital markets. Fishmeal producer Corporación Pesquera Inca, known as CopeInca, attracted about $750m of interest for its $175m issue. This represents the country's first high-yield bond since 2007.

The deal attracted strong demand from US buyers in particular, which accounted for two-thirds of orders, and the seven-year issue had to be increased to $175m from the initial size of $150m. It was priced to yield 9.125%, with Credit Suisse and Santander managing the sale.

Investors were interested in the Peruvian credit for its rarity, and for the company's close export links to China.

It seems that international investors are finally latching on to what locals have known for a good few years: that Peru is an exciting proposition. Feelings within Peru's business communities are summed up by Gonzalo Echeandía, country head for Grupo Santander in Peru, who says: "Peru has found a new feeling of self-confidence and pride."