Country Risk Analysis – Peru
Country Risk Analysis – Peru
Peru is a country blessed with natural resources. In 2010 its exports reached some 23 billion GBP, which was mainly made out of minerals, petroleum and agricultural products. Its mining industry is the largest in Latin America, accounting for 7,7 billion GBP of its total exports in 2010. The climate is also favourable for agriculture, representing 13% of GDP, and employing 30% of the population. In addition, sites like Machu Picchu, Cuscu and Sacsayhuaman make Peru a popular tourist destination for millions of people every year.
Although an advantage when the business climate is favourable, Peru’s heavy dependence upon natural resources and agriculture can prove to be an Achilles heel. Volatile commodity prices and low productivity and fragmented land ownership in agriculture makes the economy susceptible to economic fluctuations. What’s more the country lacks vital infrastructure such as high quality roadways, bridges and flight routes. And as with so many other Latin American countries, high unemployment* threatens the economic and political stability, which in turn affects investor confidence.
*Despite a fairly low unemployment rate of 7,9%, the underemployment rate is above 40%, which causes similar effects.
In the period between 2000 and 2005 the number of visiting tourists to Peru doubled, and the figure has grown by approximately 11% annually, a trend that is expected to continue. Enforcing the rise in tourism is the announcement that there will be eight long weekends in Peru in 2012, generating some 500 million GBP in extra tourism revenue this year. In 2005, the US and Peru signed a free trade agreement enabling a non-barrier trading relationship between the two countries, which is a huge opportunity as the U.S accounts for 16.3% of Peru’s exports, and 19.5% of its imports annually.
Almost 50% of Peru’s population is poor. This is mainly caused by the extraction industry, where people are oppressed in mining villages and remote communities. Income distribution is extremely skewed, as the richest 10% controls 35.4% of the wealth, and the poorest 10% only control 1.6%.
Peru is a quite democratic country, after the election of Fernando Belaúnde in 1980. However the political environment has been troublesome at best, with several attempts on overthrowing the government, last in October 2000. Alan Garcia, the same man who ran the country into the ditch with four-figure inflation rates in the 1990s, has in his second reign as president (2006-2011) witnessed an amazing economic recovery and growth. Corruption has long been a big problem in Peru, but counteraction was taken in February of 2010 when a dedicated commission was created to deal with the problem, which is especially brought on by the drug cartels. Peru also has a stable relationship with most of its neighbour countries, although their ongoing border conflict with Chile keeps that relationship tense.
The economic environment in Peru has gone from hyperinflation (1991) to deflation (2002) to what appears to be stable growth since 2006. Being an exporting nation they where hit hard by the financial crisis, but kept the growth figure above 0, unlike many other Latin American countries. It regained GDP growth of 8.8% in 2010. In 2011 the credit rating agency Standard & Poor raised Peru’s credit rating from BBB- to BBB. In general, Peru has one of the most prosperous economies in Latin America, having tripled in size in the past 11 years. In addition of being a member of the WTO, they also have a non-tariff trade agreement with the US, which has proven most advantageous as the US represents some 30% of both imports and exports. It is worth mentioning that Peru’s economic growth is very much aided by growth in private investment of 13% annually. This is acknowledged by the government, and has led to minor barriers to entry for foreign firms.
Since the early 21th century the conditions for Peruvians has improved in many measures. Life expectancy has increased by 4 years to 73 since 2004, and the literacy rate is stable at 90%. However, there is a big split between the rural areas and big cities such as Lima, with 8.5 million people. While people in the cities are lifted out of poverty due to the economic growth, the people living in the rural areas are subject to underemployment and bad infrastructure. The main language used is Spanish. Although some speak Quechua or Aymara, these are mainly spoken by people living in the Andes Mountains.
Peru is known for its substantial bureaucracy and inefficiency, much of which is due to its low amount of technology available. However, more and more people now possess a mobile phone, and Internet usage is increasing steadily. This said these number should be growing as only 10% owns a personal computer, and there are only 3,7 internet subscriptions per 100 people. (http://devdata.worldbank.org/ict/per_ict.pdf)
Although the legal system in Peru appears to lack both independence and efficiency, it has been severely altered to attract foreign investors and aid business. Through removing the requirement for small enterprises to deposit start-up capital in a bank before registration they have made it easier to start a business, and investors are protected through a new law that allows minority shareholders to request access to non-confidential corporate documents. The tax-system has been made electronic, which not only makes it work more efficient, it also makes taxing a lot easier for both parts. It is also legislated that eight-hour days and 48-hour weeks are the maximum working hours, with a minimum wage of $128 a month.
In August 2010 Peru obtained the Third Programmatic Environmental Development Policy Loan. This money is dedicated to “strengthen environmental governance, including regulation & enforcement, and mainstreaming of environmental sustainability in the mining, fisheries, urban transport and energy sectors.” The funds will also be used to improve parts of the health sector, especially for those exposed to health risks from environmental degradation. This illustrates Peru’s awareness and concern about the environmental issues and their ability to handle them in a way that draws the World Bank’s attention.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 7 January 2017
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