Peru: Recent developments, pending

agenda and opportunities

Piero Ghezzi Minister of Production

September 2014

Outline

1. Outstanding macroeconomic performance in recent years

2. Pending agenda

3. Short-term economic deceleration and government responses

4. Development strategy and the National Plan for Productive Diversification

5. Conclusions

2

1. Outstanding macroeconomic performance in recent years

3

Average annual GDP growth 2002-2013

Source: IMF. *End of period.

Peru: regional leader in growth and inflation

Average annual inflation* 2002-2013

6.3%

5.4%

4.5% 4.4% 4.2%

3.5% 3.4%

2.3%

0%

1%

2%

3%

4%

5%

6%

7%

Pe

ru

Arg

enti

na

Co

lom

bia

Ch

ile

Uru

guay

Ve

ne

zue

la

Bra

zil

Me

xico

Ave

rage

an

nu

al G

DP

gro

wth

rat

e

4

26.5%

11.5%

9.2%

6.4% 4.6% 4.3%

3.2% 2.8%

0%

5%

10%

15%

20%

25%

30%

Ve

ne

zue

la

Arg

enti

na

Uru

guay

Bra

zil

Co

lom

bia

Me

xico

Ch

ile

Pe

ru

Ave

rage

an

nu

al in

flat

ion

*

Public debt* 2013

Sources: BCRP and World Bank. *Gross government debt. **(Short-Term External Debt+Currently Maturing Long-Term External Debt +Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves).

Peru: Strong balance sheet

Foreign exchange reserves 2013

667%

431% 394%

213%

155% 150% 121%

86% 81%

28% 13%

0%

100%

200%

300%

400%

500%

600%

700%

Bo

livia

Pe

ru

Bra

zil

Co

lom

bia

Me

xico

Arg

enti

na

Uru

guay

Ch

ile

Par

agu

ay

Ve

ne

zue

la

Ecu

ado

r

Exte

rnal

vu

lne

rab

ility

ind

ex**

5

66.3%

59.4%

49.8% 46.9% 46.5%

31.8%

19.6%

12.2%

0%

10%

20%

30%

40%

50%

60%

70%

Bra

zil

Uru

guay

Ve

ne

zue

la

Arg

enti

na

Me

xico

Co

lom

bia

Pe

ru

Ch

ile

Pe

rce

nta

ge o

f G

DP

Evolution of poverty rate in Peru 2004-2013

Peru: regional leader in poverty reduction

Reduction of monetary poverty rate 2004 - 2011

Sources: Centro de Estudios Distributivos Laborales y Sociales (CEDLAS) and INEI.

58.7% 55.6%

49.1%

42.4%

37.3%

33.5% 30.8%

27.8% 25.8%

23.9%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Pe

rce

nta

ge o

f p

op

ula

tio

n

30.9

20.6

16.9 15.9 13.6

11.2

7.7

0.7 0

5

10

15

20

25

30

35

Pe

ru

Arg

enti

na

Bra

zil

Ve

ne

zue

la

Co

lom

bia

Uru

guay

Ch

ile

Me

xico

Pe

rce

nta

ge p

oin

ts

6

Moody’s credit rating

Excellent improvement in credit ratings

Source: Bloomberg. *Foreign currency long-term bonds rating.

02

/19

96

08

/19

97

02

/19

99

08

/20

00

02

/20

02

08

/20

03

02

/20

05

08

/20

06

02

/20

08

08

/20

09

02

/20

11

08

/20

12

02

/20

14

Rat

ing

B3

B1 Ba3

Ba2

Baa3 Baa2

A3

1996-2014 August 2014

7

Aa3

A3 A3

Baa2 Baa2 Baa3

Ba3

B3 Caa1 Caa1

Ch

ile

Pe

ru

Me

xico

Bra

zil

Pan

ama

Co

lom

bia

Bo

livia

Arg

enti

na

Ecu

ado

r

Ve

ne

zue

la

Rat

ing

Forecasted GDP growth rates

Sources: Consensus Forecasts, august 2014; World Bank. *Gross capital formation. **Datos correspondientes al año 2012.

Promising expected growth rates

2013 2014-2015

8

Investment*

29.8% 28.3%

26.6% 24.2% 23.9%

21.1%

18.2% 17.9% 17.7%

14.9%

0%

5%

10%

15%

20%

25%

30%

35%

Ecu

ado

r

Pe

ru

Ve

ne

zue

la**

Co

lom

bia

Ch

ile

Uru

guay

**

Arg

enti

na

Bra

zil

Bo

livia

**

Par

agu

ay

Pe

rce

nta

ge o

f G

DP

4.3% 4.8%

2.5%

3.1%

2.3%

1.0%

5.3%

4.6%

3.8% 3.6% 3.5%

1.4%

0%

1%

2%

3%

4%

5%

6%

Pe

ru

Co

lom

bia

Me

xico

Uru

guay

Ch

ile

Bra

zil

An

nu

al G

DP

gro

wth

rat

e

2014 2015

2. Pending agenda

9

High labor informality despite recent employment growth

Sources: ECLAC, ILO.

Urban labour informality 2011

10

33.6%

35.5%

38.4%

39.3%

46.9%

50.0%

52.2%

54.2%

56.8%

65.7%

65.8%

68.8%

70.7%

30% 35% 40% 45% 50% 55% 60% 65% 70% 75%

Costa Rica

Uruguay

Brazil

Panama

Argentina

Dominican Republic

Ecuador

Mexico

Colombia

El Salvador

Paraguay

Peru

Honduras

Percentage of urban occupied workforce

Perú: lagging in education (big time)

PISA test results 2012

Source: OECD.

Mathematics Reading

11

423

413 409 407

391 388

378

368

350

360

370

380

390

400

410

420

430

Ch

ile

Me

xico

Uru

guay

Co

sta

Ric

a

Bra

zil

Arg

enti

na

Co

lom

bia

Pe

ru

Sco

re

441 441

424

411 410 403

396

384

350360370380390400410420430440450

Ch

ile

Co

sta

Ric

a

Me

xico

Uru

guay

Bra

zil

Co

lom

bia

Arg

enti

na

Pe

ru

Sco

re

Inequality in opportunities persist

Human opportunity index* 2010

Source: Molinas et al. (2010). *Index measures the impact of a country’s context over the chances that a child will have enough access to basic services in order to gain an adequate personal development.

12

95 92 90 89 89 82 81 79 75 73 73 71

57 56 54 51

0102030405060708090

100C

hile

Uru

guay

Me

xico

Arg

enti

na

Ve

ne

zue

la

Ecu

ado

r

Co

lom

bia

Bra

zil

Do

m. R

ep

ub

lic

Par

agu

ay

Pan

ama

Pe

ru

Gu

ate

mal

a

El S

alva

do

r

Nic

arag

ua

Ho

nd

ura

sHu

man

op

po

rtu

nit

y in

dex

Despite high investment, infrastructure gaps remain

Internet access per 100 persons 2012

Sources: World Bank and World Economic Forum. *Index extracted from Global Competitiveness Report, which considers infrastructure quality and access. It takes values from 1 to 7, where a higher value represents better infrastructure.

4.89 4.54

4.14 4.02 3.92 3.81 3.52 3.50 3.50

3.14 2.98 2.66

0

1

2

3

4

5

6

Pan

ama

Ch

ile

Me

xico

Bra

zil

Co

sta

Ric

a

Ecu

ado

r

Arg

enti

na

Pe

ru

Co

lom

bia

Nic

arag

ua

Bo

livia

Par

agu

ay

Infr

astr

uct

ure

ind

ex

Infrastructure index* 2013

13

61

56 55

50 49 48 45

38 38 35

27

20

25

30

35

40

45

50

55

60

65

Ch

ile

Arg

enti

na

Uru

guay

Bra

zil

Co

lom

bia

Co

sta

Ric

a

Pan

ama

Me

xico

Pe

ru

Ecu

ado

r

Par

agu

ay

Pe

rso

ns

wit

h In

tern

et a

cce

ss

Institutional weaknesses have not been solved

Source: World Bank and World Economic Forum. *Indicator obtained from World Governance Indicators. It takes values from -2.5 to 2.5, where a higher value represents better institutional aspects. **Indicator extracted from Global Competitiveness Report, which considers various institutional aspects of a country. It can take values from 1 to 7, where a higher value represents better institutions.

Control of corruption* Institutions index**

14

4.9 4.6

4.0 3.7

3.6 3.6 3.5 3.4 3.4

3.1 2.9

2.8

2.3

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Ch

ile

Uru

guay

Pan

ama

Bra

zil

Ecu

ado

r

Me

xico

Nic

arag

ua

Pe

ru

Co

lom

bia

El S

alva

do

r

Par

agu

ay

Arg

enti

na

Ve

ne

zue

la

Inst

itu

tio

ns

ind

ex

-1.5

-1

-0.5

0

0.5

1

1.5

2

Ch

ile

Uru

guay

Co

sta

Ric

a

Pu

erto

Ric

o

Bra

zil

Pe

ru

Me

xico

Co

lom

bia

Arg

enti

na

Ecu

ado

r

Bo

livia

Par

agu

ay

Ve

ne

zue

la

Sco

re

Significant under-investment in innovation R&D expenditure index*

2013

Source: World Economic Forum. *Indicator taken from Global Competitiveness Report. It takes values from 1 to 7, where a higher value represents higher firm investment in R&D activities.

3.6 3.6 3.5 3.2 3.2 3.1 3.1

2.8 2.7 2.5 2.5

0

0.5

1

1.5

2

2.5

3

3.5

4

Bra

zil

Ecu

ado

r

Bo

livia

Me

xico

Ch

ile

Co

lom

bia

Uru

guay

Arg

enti

na

Par

agu

ay

Ve

ne

zue

la

Pe

ru

R&

D e

xpe

nd

itu

re in

dex

15

Modest productive diversification

Source: Stein (2014).

Composition and complexity of exports 1984-2010

Peru South Korea

16

17

Summing up, outstanding macroeconomic performance…

Sources: CEDLAS, ECLAC, IMF, Moody’s.

Poverty reduction

(2004-2011)

Foreign reserves/

GDP (2013)

Average inflation

(2004-2013)

Public debt/GDP

(2013)

GDP growth average

(2004-2013)

18

…but lagging in other equally (or more) important ones

Sources: ECLAC, IADB, Molinas et al. (2010) , World Bank, World Economic Forum.

3. Short-term economic deceleration and government responses

19

Economy has decelerated

Real GDP growth*

Source: BCRP. *Forecasted values for 2014Q3 and 2014Q4.

6.0% 5.7%

6.8%

5.4%

4.3%

6.2%

5.2%

7.2%

5.1%

1.7%

3.4%

5.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%2

01

2Q

1

20

12

Q2

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

Qu

arte

rly

GD

P g

row

th r

ate

The recent economic deceleration is tightly related to supply shocks

• Primary activity deceleration:

– Fishing

– Metallic mining

• Deterioration of terms of trade

• Less dynamism in public investment

• Fall in business confidence

The country´s growth is highly sensitive to commodity prices

22 Source: IMF. *A stable commodity prices scenario is assumed for the 2014-2019 period.

Difference between average GDP growth rates in the 2003-2011 period and the 2014-2019 period*

2.0%

1.6% 1.5%

1.1% 1.1% 1.0% 0.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%P

eru

Uru

guay

Ecu

ado

r

Bra

zil

Bo

livia

Co

lom

bia

Ch

ile

Pe

rce

nta

ge p

oin

ts

23

The context is beginning to change i) More favorable international context:

• Consolidation of the recovery of the US economy.

• Greater dynamism of the Chinese economy because of expansionary fiscal and monetary policy initiated in May 2014.

• Stabilization of the terms of trade.

23

24

The context is beginning to change ii) Beginning of production at Toromocho project:

• Its production levels will be around 100 thousand metric tonnes per year.

• This project will increase the metallic mining growth rate in 3.5 percentage points and the GDP growth rate in approximately 0.3 percentage points.

24

25

The context is beginning to change (II)

25

Dependent employment in Metropolitan Lima*

(Index, January 2012=100)

Sources: EPE-INEI, ASOCEM, SUNAT, MEF. *Moving average of the last 3 months.

Private investment indicators*

(Index, January 2012=100)

90

95

100

105

110

115

98

99

100

101

102

103

104

105

106

Ene-13 Abr-13 Jul-13 Oct-13 Ene-14 Abr-14

Despachos de CementoVolumen de importación de bienes de capital (eje der.)

Jun-14

99

100

101

102

103

104

105

106

Ene-12 May-12 Set-12 Ene-13 May-13 Set-13 Ene-14 Jun-14

Cement sales Capital goods imports

Strategy for short-term economic reactivation

• Fiscal stimulus of 1% of GDP • Simplification of procedures related to investment

projects • Measures for regulatory improvements and

administrative simplification – Shortening of the approval time for environmental impact studies – Faster information provisions from government institutions for

investment projects – Establishment of special mechanisms for public contracts – Reduced response time for permits and licenses for infrastructure

projects – Occupational safety and health law modifications to take into account

the risk of the activities involved.

26

4. Development strategy and the National Plan for Productive

Diversification

27

The Trap to avoid

Source: World Bank.

Middle income trap 1965-2013

28

-

5,000

10,000

15,000

20,000

25,0001

96

5

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

GD

P p

er

cap

ita

(20

05

co

nst

ant

do

llars

)

Brazil Chile South Korea Jordan Mexico Peru South Africa

Peruvian Development Strategy

Sources of development

Education

Health

Infrastructure Crime

reduction

Government modernization

Productive diversification

29

Development Strategy: Recent progress

30

Electrification coefficient 2010-2013

Household with access to improved water and drainage

2005 – 2013

Sources: INEI and Ministry of Energy and Mines.

40%

45%

50%

55%

60%

65%

70%

75%

80%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Pe

rce

nta

ge o

f h

ou

seh

old

s

Improved water access Sewer access

82% 85% 87% 89%

55% 59%

63%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013

Pe

rce

nta

ge o

f h

ou

seh

old

s

National Rural

Development Strategy: Recent progress (II)

31

Percentage of households with at least one cellphone owner

2005-2013

Source: INEI.

School attendance by age 2005-2013

60%

65%

70%

75%

80%

85%

90%

95%

100%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Pe

rce

nta

ge o

f p

op

ula

tio

n

3-5 years 6-11 years 12-16 years

21%

30%

45%

60%

67% 73% 75%

80% 82%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Pe

rce

nta

ge o

f h

ou

seh

od

ls

Development Strategy: Recent progress (III)

32

Population with health insurance 2004-2013

Source: INEI.

Chronic desnutrition on children under 5 years of age

2007-2013 28.5%

23.8% 23.2%

19.5% 18.1% 17.5%

0%

5%

10%

15%

20%

25%

30%

20

07

20

09

20

10

20

11

20

12

20

13

Pe

rce

nta

ge o

f ch

ildre

n u

nd

er

5 y

ear

s

20%

30%

40%

50%

60%

70%

80%

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Pe

rce

nta

ge o

f p

op

ula

tio

n

Total Urban Rural

National Plan for Productive Diversification

Goals:

In close coordination with the private sector, we look for:

• Increasing GDP per capita from US$ 10,900 (PPP) to US$ 17,000 by 2021 and US$ 30,000 by 2030.

• Increasing non-traditional exports (as direct contribution form the plan) by US$ 5 billions in 2021 and US$ 18 billions in 2030.

• Reducing regional and sectorial gaps.

• Reducing informality in 10pp by 2021 and an additional 20pp by 2030.

33

The Three Pillars of the Plan

Pillar 2

Adequation of regulations and administrative simplification

Pillar 3

Expansion of productivity

Pillar 1

Promotion of productive

diversification

Increasing the export bundle

through market failure correction

in sectors with high development

potential.

Improving investment climate through better regulation and procedures.

Increasing productivity and reducing productive heterogeneity among firms

34

Main actions of the Plan

Pillar 1:

Promotion of the

productive diversification

• Integration to global value chains

• Identifying new growth engines for the economy

• Foreign direct investment attraction

• Implementing actions to attract knowledge intensive FDI

• Implementation of the National Policy for Innovation

• Working along the private sector in order to obtain 16 sectoral innovation agendas by 2016

• Incorporating innovative processes into business strategy

• Implementation of the National Policy for Quality

• Quality as support for diversification

• Creating the National Quality Institute in 2015

Main actions of the Plan

Pillar 2:

Adequation of regulations and administrative simplification

• Removal of investment barriers and facilitation of

productive activities – Identification of opportunities for regulation

improvement.

• Adequation of rules to promote competitive and profitable businesses with the ability to generate formal employment

• Administrative simplification – Intoducing new electronic government measures – Introducing new tax schemes for MSMEs – Facilitation of information on government goods

and services demand

Main actions of the Plan

Pillar 3:

Expansion of productivity

• Technological extension programme for MSMEs

– Reinforcing 20 Technology Innovation Centers by 2016 .

– Technological diffusion for the agricultural sector

• MSME cost-reduction and financing reform

– Creation of a fund for financing MSMEs

– Factoring and mutual guarantee funds

• Cluster support programme

• Regional diagnostic studies

– Implement work agendas to improve regional productivity

5. Conclusions

38

Conclusions

• Significant improvement of macroeconomic conditions over recent years.

• Pending agenda on human and social development indicators.

• Good growth perspectives for the following years.

• Government has an economic development strategy to avoid middle income trap.

39