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Peru looking solid but susceptibility to external factors worrying

Peru has become one of the best investment destinations for foreign investors in Latin America. Although the outlook for the country’s economy is improving, Peru’s over-reliance on mining means the it is very susceptible to external factors such as a global economic slowdown or US rate hike.

Aug 22, 2016 // 5:16PM

Peru is one of the fastest growing economies in Latin America. The country’s economy grew 4.4% in Q1 2016 according to data from Trading Economics, up from 1.7% the previous year.

This strong economic performance has attracted investment, but the country is also benefitting from because of the global search for yield that many EMs have reaped the rewards of according to Andres Correa, associate at Greylock Capital Management.

“The country is viewed as a safe bet even amongst many EMs.”

The election of market friendly president Pedro Pablo Kuczynski on April 10 has further cemented the country’s position as one of the more favourable investment destinations in Latin America.

“The fact that there were two market friendly candidates running for the presidency, the other being Keiko Fujimori, signalled relative stability and soothed investor concerns,” Correa said.

The outlook for the country now looks relatively stable on the political front, a fact that the markets have reacted to.

Since the April elections, yields on Peruvian 9-year government bonds have fallen from around 6.75% to just over 5.5% at present.

The country’s currency has also performed relatively well since the elections, falling from 3.3421 in April to 3.3210 against the US dollar at present according to Bloomberg.

Peru’s relative stability will be maintained by internal policies, especially regarding the implementation of structural reforms that are likely to drive foreign investment. The government is looking at facilitating a number of mining projects over the next two years that are likely to drive foreign investment.

Mining growth across the country has already increased substantially, and in Q3 2015 stood at 16%, the highest level since 2002.

“Large mining projects will be funded through foreign investment, but this is where the country’s problems lie, as Peru is overly-focussed on mining,” Correa noted, adding that there needs to be a stronger emphasis placed on diversification in the country.

The fact that Peru has a heavily commodity-dependent economy means that any slowdown in global economic growth or demand for commodities from China could significantly impact the country’s propsects.

Correa stated that although Peru will see increased foreign investment going forward, and that there are few signs at present that investment in the country could be derailed, the level of investment will not be huge given the global economic climate and available liquidity.

“Peru’s future and investment towards the country depends much more on external factors. There would be a significant impact on the country if the Fed were to hike interest rates for example.”

Americas Mining Macro Policy & Government

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