by Lucien Chauvin
Peru’s economy has had a good run, but maintaining the positive tempo may prove more challenging as private flows shrink in the face of an uncertain external backdrop and heightened political risks at home.
This comes at a time when the administration of President Ollanta Humala anticipates needing close to $100 billion in private investment in the coming four years.
For now, prospects look positive as the country signs more trade agreements, emerging industries such as agriculture expand at a healthy pace, and a variety of Peruvian companies, as well as the sovereign itself, receive a warm welcome in the international capital markets.
The upbeat mood is hardly surprising given the country’s strong fundamentals. Finance Minister Luis Miguel Castilla said in early February that GDP likely grew close to 7% in 2011. “Peru continues to be one of the most solid economies, its growth one of the most dynamic in the region, and the challenge is to keep it that way,” Castilla said at an investment forum.
The Ministry of Finance forecasts GDP growth between 5.5% and 6% in 2012. And while year-on-year inflation in January hit 4.25% – outside the Central Bank’s 1%-3% band – shops like Goldman Sachs see no reason for monetary tightening at this stage, with long-term inflation expectations still in check.
Banks are also liquid – net profit in the financial system was approximately $1.5 billion last year – and private pension funds (AFPs) are flush with cash and looking for investment opportunities. Meanwhile, the country can boast some of the best debt dynamics in the region.
According to Fitch, Peru’s healthy fiscal positions and benign debt amortization schedule mean it has some of the lowest financing needs in the region, leaving it more room to implement counter-cyclical policies and at the same time stick to fiscal responsibility laws. This is good news for a government expected to embark on a stimulus plan this year to counteract slower growth and an expected deceleration in private investments.
The investment promotion agency, ProInversion, announced in early February a list of 22 projects that will be offered in concession this year and could generate more than $2 billion in new investment. “The concession program cannot stop, even less so in this current context” of international economic turmoil, said Castilla.
The Ministry of Finance is reviewing procedures for concessions and public-private partnerships to expedite the process. It also reported that public investment in January was close to $200 million, up 39% from the same month the previous year.
Private companies are taking advantage of this context to raise capital, with two IPOs launched in early February – one local and one ADR – and the potential for several others in the first half of this year. Credibolsa, the brokerage for Peru’s largest bank, BCP, estimates that $2.3 billion could be raised in IPOs and new bond placements this year.
Peru’s Andino Investment Holding, which operates airports and ports locally, raised $42 million with an IPO in early February. Cementos Pacasmayo, the country’s third largest cement producer, launched its first ADR on February 8, raising $264 million.
Also in early February, Peru’s Ferreyros SAA, a heavy machinery distributor, offered 75 million common shares. It is the company’s first offering since 1997 and raised slightly more than $60 million.
The Volcan mining company, the top lead and zinc producer, placed $600 million in international bonds in February. It followed the successful placement of $125 million in bonds, through the Luxembourg exchange, of Peru’s principal agro-export company, Camposol, in late January. Andino and its partner in Peru, Portugal’s Mota-Engil, also plan to launch a $110 million bond before April.
Monsante expects another three to four IPOs this year. “The IPOs will not be very large and there is room in the market to absorb several more placements,” he says. That’s not including offerings by the Peruvian state in public companies, such as state oil company, Petroperu, which is considering floating the equivalent of 20% of the company’s value in shares in the second quarter.
However, the country’s positive economic news and subsequent capital raisings could be dampened if Humala’s government does to deal properly with social conflicts, many related to the strategic sectors that have been targeted for private investment.
The Humala administration at the end of 2011 reported that $52.2 billion of investments were in the pipeline for mining, a massive jump from 2011, which was already a banner year for the country. Investment in mining between January and November, the last month for which official numbers are available, was $3.5 billion, up nearly 72% compared to the same 11-month period in 2010.
The numbers, however, fail to tell a broader story about how a series of social protests have already led to the suspension of several large projects and threaten to impact the appetite of local and foreign investors.
Humala’s predecessor, Alan García, cancelled in 2011 two projects, the $900 million Tia Maria copper mine planned by Mexico’s Southern Copper Corporation (SCC) and the $600 million Santa Ana silver project planned by Canada’s Bear Creek. Both moves are under appeal.
Anglo American has put on hold the $3 billion Quellaveco copper mine in the south while it sorts out water issues, and SCC is facing a backlash over a $1.6 billion expansion of the components that form its mining complex.
The conflict that has attracted the most attention, however, involves the $4.8 billion Minas Conga copper and gold project planned by Minera Yanacocha whose owners include Denver-based Newmont Mining, Peru’s Buenaventura and the World Bank’s International Finance Corporation.
Work on Conga was suspended in November during an increasingly violent anti-mining strike. The state government in Cajamarca, where Conga is located, has vowed to stop the mining from moving forward.
The Humala administration has farmed out to three international experts the task of reviewing the project’s controversial environmental impact study. Premier Oscar Valdes said the review would likely provide areas that need improvement, but he was confident Conga would go ahead, especially in light of several other projects already underway.
Yet, politicians outside the government are not as convinced and fear economic and political repercussions if Yanacocha, which operates Latin America’s largest gold mine also in Cajamarca, were to give up on Conga.
“Conga could create a chain effect that could set back the mining sector for years to come,” says Fernando Rospigliosi, a government minister early in the last decade.
Value Added Gas
This comes as the government anticipates approximately $15 billion in investment in oil and gas and other related industries. Peru is a minor player in the oil business, producing an average of 69,553 barrels/day in 2011. However, natural gas is more promising, with major investments in recent years in the Camisea gas fields and a liquefied natural gas plant, the first in South America.
The plant, operational since June 2010, required nearly $4 billion. Oil and gas exports, thanks to Peru LNG, topped $4.5 billion in 2011, and are now the second largest source of export income after mining.
The Peruvian government is pushing for the construction of a second pipeline and petrochemical complexes to add value to natural gas. Kuntur Gas Transport, a consortium formed by US investment firm Conduit Capital Partners and Brazilian builder Odebrecht, holds the concession for a 1,000-kilometer dual pipeline that would transport gas and liquids from Camisea to the southern coast.
The Peruvian Congress in December passed legislation declaring construction of the pipeline and a petrochemical complex on the southern coast in the nation’s interest. The legislation also calls for the state-run oil company to have a role in the project, which will require approximately $3.5 billion.
Petroperu will make a final decision in May on the upgrade of its Talara refinery, on the northern coast, that would increase production to 95,000 barrels/day, from the current 65,000 barrels.
“We do not believe it will be difficult to raise the capital for Talara,” says Petroperu President Humberto Campodonico, who estimates investment at $1.7 billion. “There are banks with resources available that are looking for opportunities. Peru is seen as an attractive and secure option for investment,” he says.
The rising star that could overcome oil and gas export earnings in the near future is agriculture, with Peru making great strides with a number of crops thanks to free-trade agreements. Combined agro exports, including traditional and non-traditional crops, in 2011 were close to $4.3 billion.
Coffee, which Peru exported only a few years ago at a discount for blending with other low-end beans, brought in $1.4 billion last year and the country has positioned itself as the leading producer of specialty gourmet coffees. The government plans to sell tens of thousands of hectares new farmland this year thanks to major irrigation projects recently completed or underway. The estimated investment would top $1.6 billion for the land, which would be used to plant crops that only a few years ago generated next to nothing in exports.
These include grapes, which brought in $301 million in 2011, avocadoes, $164 million, and mangoes, $153 million. In each case, Peru takes advantage of a window of opportunity in the southern hemisphere’s summer when few other countries are producing. The free-trade agreements with China and the United States have provided important stimulus.
Vladimir Kochera, who operates a consulting firm focused on China, sees China playing a major role in the development of Peru’s agro-export sector as China imports more food stuffs.
“We need to be more aggressive with China, because the Chinese market is changing very quickly and there are a number of fast-growing imports that recently had no market in China, such as wine and coffee, that we can exploit,” he says.
The private sector and government officials recognize that meeting investment targets also means attracting resources for infrastructure. AFIN, the association of private companies that operate public services, estimates that Peru needs $31 billion in investment in infrastructure if it hopes to sustain growth between 5%-6% annually.
The most significant need is in transportation. AFIN estimates that the country needs to invest $7.4 billion in roads, $3.6 billion in ports, $2.4 billion in railroads and $571 million in airports.
Transportation and Communications (MTC) Minister Carlos Paredes announced last December that investment would be even greater than the AFIN figure, with $20 billion coming from the treasury, private sector through concessions and in public-private partnerships (PPPs).
There are currently two infrastructure funds, one created by the government and the other by the country’s four private pension funds (AFPs). The government initiated a $400 million fund last year, which is managed by Canada’s Brookfield and Peru’s AC Capitales, has not yet made any investments. The AFP fund has invested $300 million so far in two water and sanitation projects in Lima.
The government’s investment promotion agency, ProInversion, plans to award long-delayed concessions for several deep-water ports, as well as a new airport in Cusco, the country’s prime tourism destination.
Gonzalo Prialé, head of AFIN, said the country does not have the luxury to continue putting off infrastructure investment. “Peru’s is in an exceptional position right now, but this will not last if there is not a strong focus to attract investment in infrastructure,” he says. LF