The
Booming Economy You Never Heard About:
Peru Makes Its Way
In South America
Caretas
Planta
procesadora de gas Pacaras de Pluspetrol, en el corazón
de la bahía
de Paracas, Peru.
By
Jason Simpkins
Thanks
in part to the economic policies of President Alan Garcia,
the Peruvian economy finds itself moving in the right
direction. Its economy grew at a rate of 8% last year, the
eighth consecutive year of economic expansion. Meanwhile inflation
is running under 2%. The international community has begun
to take note of Peru’s progress, and the country is on
the verge of securing a free trade agreement with the United
States.
It is likely
the free trade agreement with the U.S. will be ratified by
congress by October, with the first votes coming
this month, but that’s no guarantee. Should the agreement
make it over its final hurdle, it would give an even bigger
boost to the Peruvian economy. Once the agreement is ratified,
80% of consumer and industrial products will immediately become
duty free, as will more than two-thirds of current U.S. farm
exports to Peru.
The International
Monetary Fund has raised its estimate of Peru’s economic
growth this year from 5% to 6%, the third largest increase
in Latin America. This estimate is conservative
by many standards, as others anticipate a growth rate of 7.5%
this year and at least 6% for the rest of the decade.
On
the Heritage Foundation’s index of economic freedom,
Peru scores high in fiscal, monetary, and government freedom.
The global community has taken note of Peru’s recent
improvement as well. According to the U.S. Department of State, “the
registered stock of foreign direct investment (FDI) is over
$15.4 billion, with the U.S., Spain, and the United Kingdom
the leading investors. FDI is concentrated in telecommunications,
mining, manufacturing, finance and electricity.”
The value
of annual exports has increased as well, reaching a record
$27 billion. Much of that increase can be attributed
to a boom in commodities – particularly metals, which
Peru has in abundance. Peru is the world’s second-largest
producer of silver, the third largest of copper and zinc and
fifth largest of gold. However, agriculture, textiles, manufacturing
and construction have all expanded and are showing no signs
of slowing down.
Just this week, President Garcia said that the country would
seek to cut its debt to 10% of gross domestic product in a
bid to qualify for an investment-grade rating.
According to Bloomberg
News, Peru, which pre-paid $1.5 billion
of its $5.75 billion debt to the Paris Club group of investors
in July, said that it intends to pay off more debt in a bid
to attract more investment.
“Our goal is to reduce the ratio of debt to GDP,” President
Garcia said in a Sept. 9 interview at the Asia-Pacific Economic
Cooperation forum in Sydney. “This will enable us to
attain an investment- grade rating faster.” Peru’s
external debt-to-GDP level has fallen from 50 percent in 2002
to 29 percent at the end of March 2007, according to Peruvian
central bank reports.
Even an
earthquake is being viewed as an opportunity to improve the
country’s economy. The government will employ thousands
of townspeople to rebuild their homes destroyed by the country’s
worst earthquake in more than 30 years.
According
to a Civil Defense Agency report, roughly 80,000 people were
left without shelter by the magnitude-8, Aug. 15
quake that killed more than 500 and left 1,600 injured on Peru’s
southern coast.
The reconstruction of roads and half a dozen towns on the
south coast will create at least 8,000 jobs, Labor Minister
Susana Pinilla told Bloomberg. The government has set up a
$95 million fund to finance the reconstruction efforts.
Oil and Gas Reserves Offer Even More Potential For Growth
Currently 39 active oil concessions are being operated in Peru,
while 37 companies have expressed their intention to bid
for the rights to 19 new oil and gas fields. SK Energy, South
Korea’s largest oil refiner, was the latest company
to win a bid. It will develop an oil field in Peru’s
offshore Trujillo basin.
Oil reserves
have also been discovered at the foothills east of the Andes
Mountains and in areas throughout the Amazon jungle.
In an article by Insight Publications, Perupetro Chairman Daniel
Saba has been quoted as saying that “this discovery means
that within the next five years we will produce 100 million
barrels day … Peruvian demand is 150,000 barrels a day,
so the country will be able to export the remainder.”
Peru’s
production of natural gas has greatly increased as well.
Perupetro reported that, when compared to last year,
the natural gas production for the first six months of 2007
has shown a 55.47 percent increase over the first six months
of 2006.
The largest
contributor has been Camisea Block 88. It is operated by
the Pluspetrol Peru Corporation and produces over 70% of
Peru’s natural gas. The Camisea block is the biggest
natural gas reserve in Latin America. It is expected to add
a percentage point to Peru’s GDP growth rate every year
for the next 30 years, according to the Inter-American Development
Bank.
What all
of this adds up to is an influx of foreign investment capital,
thousands of jobs for impoverished Peruvians, and
an even higher growth rate for Peru’s rapidly evolving
economy. And there couldn’t be a better time for all
of these things to arrive. That’s because even though
Peru’s economic success has meant a rise in wealth and
a decline in poverty, some of the most impoverished Peruvians
have been left out of the bonanza.
Peru Looks to Solve Its Poverty Epidemic
Apparently while Peru’s new economic direction, which
is credited with the wide-scale reduction in poverty, hasn’t
been quite effective enough. According to the government’s
statistics agency, poverty fell more than 4% last year, but
most of that decline came on the Peruvian coastal region and
the capital city of Lima.
As a result,
the country was riddled with protests and demonstrations
last year as the nation’s impoverished organized. Thousands
of protestors used slingshots to fire rocks at police in Apurimac,
located in the southern Andes. Thousands more from another
Andean province, Ayacucho, marched on the capital. In the past
month demonstrators have commandeered railway stations and
blocked roads.
In the
provinces of Apurimac and Ayacucho, poverty rates have increased
by 10% since 2004. A poll by Ipsos Apoyo revealed
that only 32% of respondents approved of Garcia’s administration
and 47% thought that poverty had worsened in the past year.
The protests certainly got the government’s attention
and not a moment too soon. They’ll be looking to immediate
action to keep the U.S. congress from having any second thoughts
regarding the pending free trade agreement.
The Minister of Economy and Finance, Luis Carranza, has estimated
that poverty can be reduced by an average of 2% each year,
if growth benefits are channeled correctly. He has also acknowledged
that the rural areas of Peru have not shown the improvement
seen in urban areas. In response, he has pledged to spend money
where it is needed most.
Approximately $3.5 billion will be transferred to local governments
this year for investment in infrastructure, healthcare, and
education. Programs have been established to aid Andean farmers
and social programs have been consolidated to run more efficiently.
Some good
news came late last month, when Peru’s National
Statistics Institute (INEI) reported that Peru’s poverty
level was at 44.5% at the end of 2006 and not 50%, as previously
estimated by the government. The National Statistics Institute
also reported that poverty levels in 2006 have gone down by
4.2 percent when compared to Peru’s poverty level in
2005 (48.7%).
President
Garcia has apologized for any neglect the rural areas of
his nation have suffered and vowed that increased
public investment will “change the social face of Peru” by
slashing the poverty rate to 30%. Garcia may or may not follow
through on this promise but he has until 2011 to achieve his
goals and win back the lower class.
Right now, Garcia just has to hope that his social and economic
reforms will placate the angry mobs outside his door; at least
until potential oil deposits are more fully developed. But
so long as that is accomplished, little stands between the
commodity-rich nation and economic prosperity. If the free
trade agreement with the U.S. gets the green light from Congress
in coming months, the door will be blown wide open and Peru
will be a prime location for ground-floor investment.
Original
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Jason
Simpkins is a staff writer of Money Morning.Its views
are not necessarily those of PETROLEUMWORLD.
