jtla trends+views peru final_0613

EXECUTIVE SUMMARY

Over the last several years, economic growth in Peru has

performed at China-type levels, and its expansion has been

Latin America’s most impressive over the last decade. Even

after the change of government to a more left-leaning Ollanta

Humala, in 2011, growth has remained robust.

• While the global backdrop has not been particularly

favorable during the last couple years, Peru continues to

expand at a 6-7 percent pace, and with the exception of

2009, has achieved 6-10 percent growth for seven of the last

eight years.

• In contrast to the middle of the last decade, when export

performance drove economic growth, overall economic

activity has been led by domestic demand.

• Additionally the country is enjoying an investment boom,

with billions of dollars directed into mining, energy and

infrastructure/transportation projects.

• Economic growth, rising incomes and stable inflation rates

have increased demand for residential housing.

POPULATION: 29.8 million

2012 TOTAL GDP:

$200 billion

(global ranking: 49)

GDP PER CAPITA:

$10,719

(based on purchasing power

parity, global ranking: 83)

2012 GDP GROWTH RATE:

6.3%

2012 UNEMPLOYMENT:

5.6%

2012 INFLATION: 2.7%

PEN / USD: 2.72

COUNTRY SNAPSHOT

Peru Economic Update – June 2013TRENDS + VIEWS

JAMESTOWN LATIN AMERICA

Real Estate Private Equitywww.jamestown-latam.com

Contact:

Bret Rosen – Managing Director, Research+1 [email protected]

Rio de Janeiro • Bogotá • Atlanta • New York

Lofty GDP growth rates expected to continue in 2013-14

In 2012, Peru’s economy grew by 6.3 percent, and the

Peruvian central bank, the Banco Central de Reserva

del Perú (BCRP), expects similar growth rates in 2013

and 2014. Notably, domestic demand has been the

major driver of economic activity recently, with internal

demand having risen 7.4 percent in 2012. The pace of

export growth has fallen off substantially, however, due

to worsening terms of trade. In fact, in 2012, exports

fell from 2011 levels - although total exports have risen

from USD 27 billion in 2009 to USD 46 billion in 2012.

Meanwhile, as domestic demand surges, imports

continue to rise, and are now double 2009 levels. As a

result, Peru’s trade surplus, which notched 5.3 percent of

GDP in 2011 fell to 2.2

percent for 2012.

Offsetting this weaker

trade performance

is a consumption

and investment

boom in the country.

Investment as a percentage of GDP has risen from 23

percent to 2009 to a projected 28 percent in 2013 - among

the highest levels in Latin America. Public investment

has taken off of late, and according to local consultant

Apoyo Consultoría, is expected to increase by twenty

percent in 1Q13. During the change of government,

public investment slipped, falling 18 percent in 2011, but

is now a main priority of the government, and is forecast

to increase by 15 percent in 2013. As recently as 2006,

public investment accounted for just 3.1 percent of GDP,

but should reach nearly 6 percent of GDP this calendar

year. Meanwhile, private investment has surged.

Announced private sector investments alone across

mining, energy, infrastructure, electricity and industry

are forecast to total approximately USD 30 billion in

2013-14. Total private investment in 2012 surpassed USD

39 billion, double the amount realized in 2007. Private

investment grew by 15 percent last year, and could

expand by double digits again in 2013. As a percentage

of GDP, foreign direct investment (FDI) into Peru is the

second highest in the region behind only Chile.

PEN appreciation likely to continue

The strength of the sol (PEN) has been a major issue

for officials within the Ministry of Finance and Central

Bank. The PEN has been amongst the best performing

currencies in emerging markets over the last half

decade, enjoying steady appreciation. The BCRP has

accommodated this appreciation, but intervenes in

the foreign exchange market to prevent excessive

strengthening or volatility. It has accomplished this via a

strategy of reserve accumulation by purchasing dollars

primarily in the spot market. Central Bank reserves have

surged nearly USD 20 billion since the end of 2011, due

to the currency interventions of the monetary authority.

In fact, reserves as a percentage of GDP are by far the

highest in the region.

The authorities also have moved beyond pure USD

purchases to weaken the PEN. Namely, reserve

requirements on

foreign currency have

been lifted on several

occasions, most recently

in late March. This policy

is designed to reduce

demand for dollar credit

amidst a backdrop

where locals believe the pace of PEN appreciation would

continue leading to faster growth in dollar credit vis-à-

vis USD deposits. Additionally, the authorities have

lifted the limits on foreign investments that the country’s

pension funds can hold, which will increase purchases

of foreign currency. On three occasions this calendar


GDP growth is being driven by domestic consumption and an investment boom

The PEN has been one of the best performing currencies in Latin America

PAGE 2TRENDS + VIEWS JUNE 1, 2013

year, most recently in April, the BCRP increased the limit

by 2 percent of total assets. The limit now stands at 36

percent, and the 6 percent incremental amount could

lead to USD demand totaling over 2 billion dollars. The

Ministry of Finance has also announced its intentions

to prepay several billion in USD obligations. Taking

the aforementioned

measures into

account, the straight

line appreciation

trend on the PEN

appears to have

subsided, with more

two-way volatility now introduced into the currency.

Nonetheless, the steady inflow of FDI combined with

portfolio capital flows primarily into the local currency

fixed income market should keep the PEN at a relatively

strong level.

Authorities and Central Bank earn investor respect

The authorities have managed the country’s fiscal

situation well, even as the markets originally questioned

the intentions of President Humala after he was elected.

The country registered a fiscal surplus of 2.1 percent

GDP for 2012, surpassing the total amortizations of

public debt in marked contrast to most of the developed

world, which has been plagued by vast fiscal problems.

We would expect smaller surpluses in the upcoming

years as the government aims to deploy resources on

social expenditures. Peru country risk as measured by

credit default swap (CDS) spreads or USD bond yields

is amongst the lowest in emerging markets due to the

strong fiscal performance, responsible track record

of this government, and robust central bank reserves.

Local currency bond yields meanwhile are at record

lows; the benchmark 2037 PEN bond yields slightly

below 5 percent. Foreigners have piled into the local

currency bond market: 57 percent of PEN government

bonds are held by non-residents, as opposed to 19

percent in 2009. This also represents a risk, as sudden

outflows from non-residents could occur should global

liquidity conditions and risk tolerance shift abruptly.

Turning to monetary policy, the BCRP has maintained the

benchmark rate at 4.25 percent since May 2011. Inflation

in Peru is volatile, as food items represent a larger share

of the inflation index when compared to other emerging

markets countries. As food prices are more susceptible

to supply shocks, inflation in Peru can vary greatly

depending on weather cycles and other one-off events.

Nonetheless the BCRP has done a commendable job in

taming inflation in Peru. Forecasts for 2013 and beyond

are for inflation to rise by approximately 2.5 percent,

within the BCRP target range of 1-3 percent, but slightly

above the middle of this band. The overall balance of

risks to inflation appears to be neutral according to the

BCRP especially when one considers the subdued global

environment. Meanwhile, credit growth is expanding

at healthy levels, at around 15 percent year-on-year,

and the authorities appear generally comfortable with

this pace of expansion. Credit to individuals, which is

increasing at 18 percent year-on-year, is growing at a

slightly higher level than for the overall financial system.

Policy mix contributes to Peru’s economic success

President Humala enjoys a decent level of popularity

especially when compared to prior Peruvian Presidents

at this juncture in their terms. Ironically his support

has improved the most within the higher economic

strata, which generally rejected his candidacy in 2011.

A March survey by local pollster Datum put Humala’s

support level at 51 percent, although this was down

from 57 percent in the prior month. His popularity

has fallen somewhat in recent months due to worries

about public security and some feelings amongst the


PAGE 3TRENDS + VIEWS

Prudent policies have led to a fiscal surplus and low inflation

JUNE 1, 2013

lower economic classes that he hasn’t lived up to his

campaign promises. Also weighing on the political

backdrop are the ongoing worries about social unrest

in certain rural areas, which halted the Minas Conga

mining project, the largest FDI planned commitment

in Peruvian history, and rumored plans for first lady

Nadine Heredia to succeed Humala in office. Working

in Humala’s favor however are the country’s strong

economic backdrop, solid business confidence, healthy

job market, and disjointed opposition. Finally, it doesn’t

appear as if Humala will reverse his so-far responsible

economic policy mix, a key point on which investors are

focused.

Defining the middle class opportunity

Peru’s middle-class has grown tremendously over the last

decade in conjunction with the country’s strong rate of

economic growth. Peruvian officials divide the country’s

class segments from A to E, with Class A representing

the country’s wealthiest and Class E representing the

poorest. Within these categories, Classes B and C have

grown the fastest. According to local consultant Apoyo,

within urban Peru, 2.2 percent percent of the population

are classified in class A, followed by 10.5 percent in B,

28.8 percent in C, 37.5 percent in D and 21.1 percent in

E. Another survey carried out by APEIM for Lima only,

defined that 5.1 percent are considered class A, 17.5

percent as Class B, and so on. Meanwhile, an Ipsos/

Apoyo poll puts 35 percent of Limeños into class C and

notes that this is the country’s fastest growing economic

class. Despite different methodologies used in these

studies, for all of urban Peru, roughly 43.5 percent of

the population is considered to be classes A-B-C. If we

extend this analysis to the rest of the country, 33 percent

are in classes A-B-C.

Meanwhile poverty alleviation has been an achievement

of the current and previous administrations. According

to national statistics institute INEI, the total incidence of

poverty in all of Peru has fallen from 42 percent to 26

percent since 2007. Rural poverty rates have fallen from

74 percent in 2007 to a current level of 56 percent.

Some other data help demonstrate the rise of the middle

class in Peru:



2004 2011/12

URBAN POPULATION IN POVERTY 48.2% 18.0%

URBAN POPULATION IN EXTREME POVERTY 5.7% 1.4%

POPULATION IN PRECARIOUS HOUSING 10.4% 7.4%

HOMES WITH INTERNET 2.1% 16.4%

HOMES WITH AT LEAST ONE CELL PHONE 16.4% 75.2%

HOMES WITH AT LEAST ONE COMPUTER 8.1% 25.4%

HOMES WITH WASHING MACHINE 10.2% 19.9%

UNEMPLOYMENT RATE - URBAN 7.3% 5.1%

APOYA DATA PERU MINISTRY OF FINANCE AEPIM (LIMA ONLY)

INCOME SEGMENTS

MONTHLY INCOME PER HOUSEHOLD (SOLES)

% OF HOUSEHOLDS

% OF HOUSEHOLDS

% OF HOUSEHOLDS

% OF HOUSEHOLDS

2004 2011 2012

A 8,000 2.2% 1.1% 2.2% 5.1%

B 4,200 10.5% 29.8% 2.1% 17.5%

C 2,700 28.8% 29.9% 41.6% 37.1%

D 1,700 37.5% 20.9% 30.0% 30.9%

E 800 21.1% 18.3% 9.8% 9.4%

TABLE 2: ECONOMIC DEVELOPMENT INDICATORS

TABLE 1: HOUSEHOLDS BY INCOME SEGMENT

JUNE 1, 2013

While a monthly income of $1,000 per month might

strike some as impoverished, in Lima and indeed in all

of Peru, this salary would allow a middle-class style of

living. For example the current minimum wage in Peru

is 750 soles per month or just shy of 300 US dollars. In

contrast, minimum wage in New York is $7.25 an hour.

Over a 40 hour work week, this adds up to almost $1,250

or four times the minimum wage in Peru.

Note that cinema tickets in Lima cost five dollars, a

haircut around two dollars, and public transport is

especially inexpensive, with bus prices running one sol,

or around forty cents – prices substantially below those

of more developed economies. Lima’s tren eléctrico

(train service) runs 1.50 soles versus $2.50 for a subway

ride in New York.

Mortgage interest rates continue to fall while issuances increase

Mortgage rates have fallen gradually in Peru, and

should continue to decline even further as inflation

falls. Mortgage growth is running at around 25 percent

on a year-on-year basis, and the pace of mortgages

is growing faster in local currency than in dollars. As

recently as 2009, 58 percent of outstanding mortgages

were denominated in USD as opposed to 44 percent

currently according to the most recent data.

Within the more affluent areas of Lima (La Molina,

Miraflores, San Borja, San Isidro, Surco), prices are up

15 percent year-on-year on a per square meter basis. We

also note that the average price of a home in Lima is

transacting at approximately 16x annual rental income

based on data provided by the BCRP. This multiple is

on the higher end of the historical range and has led to

some worries that prices may be inflated in the higher

end neighborhoods of Lima.



0

5,000

10,000

15,000

20,000

25,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CHART 1: AGGREGATE MORTGAGE DEBT OUTSTANDING

Millions of Nuevo Soles

Source: ASBANC

0

50,000

100,000

150,000

200,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CHART 2: AGGREGATE NUMBER OF LOANS OUTSTANDINGNumber of Mortgages

Source: ASBANC

JUNE 1, 2013

Employment growth expected to remain robust

Urban employment is expected to increase by 4.5

percent in 2013. Meanwhile, we note that from 2007-12

in metro Lima real wages per hour rose by 20 percent.

The unemployment rate in Lima was 6.4 percent in

1Q13 compared to 8.7 percent the year prior. For 1Q13

the average income for an individual rose 3.7 percent,

which is above the rate of inflation, whereas the total

wage mass for last 12 months grew 8.8 percent year on

year.

Businesses’ main complaint relates to a lack of qualified

labor from industry to industry, and according to

Apoyo, one-third of companies surveyed expect to

have problems hiring capable employees in the next

six months. Additionally, three-fourths of companies

surveyed expect to raise wages for their workers over

the same time period.

% of total loans denominated in $

CHART 3: DOLLAR DENOMINATED CREDIT; PERU


JUNE 1, 2013 PAGE 6TRENDS + VIEWS

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: ASBANC

Total Credit

Mortgage Loans