Peru is one of the fastest growing economies in South America and is making strong progress in developing its infrastructure to establish itself as a gateway between Asia and Latin America. However, its finance minister is still focused on boosting the country's prosperity and eradicating poverty.

Sitting in his office, at the Peruvian ministry of finance’s understated building in Lima’s historic centre, a Unesco’s World Heritage site, Luis Castilla is more interested in talking about Peru’s planned reforms than he is pondering the country's recent successes, which include a sustained economic growth and some large international investments. It is, however, the modernisation of Peru's civil service, which is intended to introduce a meritocracy and improve efficiency, that Mr Castilla wants to discuss.

“We have a state that really hasn’t upgraded or modernised itself at the same pace as the economy,” he says. “We have been [suffering] in terms of government efficiencies because of lack of appropriate human capital. We are trying to put a bill through congress – a reform that has been postponed several times – but there is the will to undertake it from the president and we now have the resources to fund it.”

Luis Castilla the Finance Minister of Peru at the 2012 Felaban meeting 


Peru’s government is also working on developing public-private partnerships (PPPs) in the education and health sectors, as well as modernising procurement processes through the use of the internet and electronic tendering, and reducing bureaucracy throughout public services, at both a local and national level.

Impressive growth

The public sector machine may be excused for not keeping up with Peru’s rapid economic development. In 2011, Peru's gross domestic product (GDP) grew by 6.9%, and even though its projected growth for 2012 and 2013 is lower, at 6% and 5.8%, respectively, according to International Monetary Find (IMF) figures, this still puts Peru among the fastest growing economies in South America. Even more impressively, this growth has been achieved while maintaining an inflation rate within the central bank’s 1% to 3% target, with 2.8% estimated for 2012 and 2% for 2013.

Peru has also recently hosted or been announced as the host of a series of high-profile international meetings, from the leading Latin American banking event, Felaban, which was held in Lima in November 2012, to the World Economic Forum on Latin America to be held later this year, and the annual meeting of the World Bank and IMF in 2015, the first time in decades that this event will take place in Latin America. Attracting such events is widely viewed as further indication of the country’s progress, and it is hoped that this will spur further development.

“[These events force us to] improve our infrastructure,” says Mr Castilla. “It is unusual for so many top international events to be hosted in Lima. We have to build a convention centre, which we are going to start building next year through a public-private initiative.”

International attention

It is not only international organisations that have been paying attention to Peru. International investors have been increasingly directing funds towards the country, generating a record $7.66bn in foreign direct investment (FDI) in 2011, almost seven times the figure a decade earlier, according to Peru’s central bank. Foreign capital expenditure for 2012 was a similar $7.34bn – representing 7% of GDP, a historical high for the country – and is projected to be much higher this year, when $8.77bn is expected to be invested from abroad.

“In the midst of very uncertain global conditions, and despite some internal conflicts associated with mining projects, it is telling that we are experiencing such strong inflows of FDI,” says Mr Castilla.

Peru’s rich natural resources, expanding middle class and open market policies are the cause of this investor interest. “We have a very pragmatic and very open trade policy, not only with the countries in the Asia-Pacific basin, but also with our Latin American neighbours and with European countries,” says Mr Castilla, who has just completed negotiations for a free-trade agreement with the EU, in conjunction with Colombia.

“Peru’s geographic location and negotiations on free-trade agreements mean that you can have flows of trade and investment between South America and the Asia-Pacific region, and have our neighbours, such as Brazil, using us as a gateway to Asia.”

The Latin American infrastructure development programme, IIRSA, is rolling out some 6000 kilometres of road connections between the ports of Peru and Brazil, which help to strengthen Peru's claim to be Latin America’s gateway to Asia. Its busiest port, Callao in Lima, is being run and modernised by Dubai Ports World and APM Terminals – two international leaders in this field – and is expected to have surpassed all demand projections for 2012, according to Mr Castilla.

The capital’s Jorge Chavez International Airport, operated by a consortium led by Frankfurt’s airport operator, Fraport, has also reached capacity and will soon be expanded. “All this infrastructure development enables more trade and investment flows in the future,” says Mr Castilla. It also highlights the country's openness towards foreign investment.

Much of this development is being carried out through PPP projects and Peru's government is keen to encourage larger private sector participation, both local or international, to help fund the country’s expansion. On a microeconomic level, financing options available to local businesses are also being widened.

Capital markets boost

Peru's economic growth needs to be complemented by better financial markets to improve business plans and households’ ambitions. Currently, the country's banking system provides the main source of financing. Its banking sector has gone from strength to strength and the country's largest lenders have grown their loan portfolios and closed 2011 with an average loan-to-assets ratio of almost 70% for the top four banks – Banco de Credito del Peru, BBVA Banco Continental, Scotiabank Peru and Interbank – and a ratio of 21.92% for Banco de la Nacion. Tier 1 capital, assets and pre-tax profits have also significantly grown, with 2011 averages of 20%, 11.4% and 17.6%, respectively, for the top five groups.

Peru's capital markets, however, have not developed at as quick a rate, though there have been recent initiatives to change this. The integration of its stock exchange with those of Colombia and Chile – and with Mexico’s stock exchange observing for the time being – under the so-called MILA project will give Peruvian listed companies a broader investor base, while new corporate governance rules will help bring more issuers to both equity and debt markets. Mr Castilla says the government wants to improve governance standards, reduce the cost of issuance for smaller firms, and modify heavier taxation on issuances to create a level playing field between banking and capital markets. “We have a limited supply of instruments in the capital markets so we need to enable more special vehicles or instruments that can be used to improve liquidity,” he says. 

All of these reforms, from developing the financial sector to improving its infrastructure, Mr Castilla is keen to point out, are aimed at reducing poverty in Peru and bringing the benefits of economic development to the country’s most remote areas.

“Despite these improvements, we still have asymmetries between urban and rural areas,” he says. “Lima and the main urban areas in the country, which house 70% of the population, are progressing, but 30% of the population, which live in the rural areas, the islands, the jungle, are not benefiting from economic growth as much. It is a matter of having access to services and infrastructure and improving human capital as well. These are the two big pillars of our social policies.

“Growth is a must to eradicate extreme poverty, halve the poverty rate from 30% to 15% and generate employment. That is a target for this government has for the end of its administration, in 2016.”


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