Peru’s economic and trade outlook is looking rosy – based on a diet of free trade, commodity resources and a booming GDP, writes Luis Waldmann.

Peru is the talk of town at the moment. Exports that include copper and zinc are expected to more than triple in 2008 to US$36bn from 2003 levels; the economy is expanding almost four times faster than in the US; and a handful of free trade agreements will lead to fresh investments.

Likewise, private sector appetite for infrastructure in Peru is at an all-time high, says Luiz Jordo, director of structured finance at Brazilian construction firm Andrade Gutierrez. The Brazilian company is building Peru’s Interoceanica Highway, for which US$321mn bonds due 2025 and US$241mn debt maturing in 2018 were issued last year internationally with BNP Paribas as sole arranger and bookrunner.

Moreover, the cost of political risk insurance for Peru is at a 14-year low, says Scott Swensen, who manages the Latin Power funds at Conduit Capital Partners, in New York. Conduit usually buys insurance from Opic and Miga to cover investments in Latin America.

In fact, the next rating upgrade by both Fitch and Standard & Poor’s will propel Peru into investment grade. The country’s US$100bn GDP is forecast to rise 6.9% in 2008, after growing an expected 8% in 2007, according to the Economist Intelligence Unit (EIU).

Andrade Gutierrez is eyeing projects in irrigation and water treatment that can be as hefty as US$1bn each, Jordo says. And the equivalent of US$200mn can be raised inside Peru for a long-term project through bank loans and bond issuances, says Daniel Melo, structured finance manager at Andrade Gutierrez.

Pipeline competition

As for Conduit Capital, it is competing to do a pipeline that will stretch from the gas-rich Camisea field to Ilo in southern Peru. The total cost is around US$1bn and Conduit could shell out US$300mn with co-investors, Swensen comments.

In 2007, Conduit sold US$355mn-worth of power plants across Latin America and the Caribbean, a record for the firm, amid soaring prices of local assets, especially those energy-linked, Swensen says. The New York-based firm is steering clear of Venezuela and Bolivia.

Looking ahead, almost 50% of Peru’s exports will be warranted by free trade agreements by November 2008, expects Fritz Du Bois, a director at the Lima-based Instituto Peruano de Economía. Peru will have free trade with China, Chile, Canada and the four-nation Efta bloc in Europe, he anticipates. Peru and the US signed a free trade accord in December 2007.

However, challenges persist. A steep fall in the price of commodities, which account for two thirds of exports, would hit Peru hard. Also, there is risk of social unrest if the GDP rises less than 6% annually, says Du Bois.

Commodity leaders

BNP Paribas’s trade finance portfolio in Peru is likely to increase 20% in 2008 as pricey commodities will boost demand for Peruvian exports, says Francis Bayly, relationship manager in Lima for the Paris-based bank.

Recent deals closed by BNPP include a five-year loan for Pesquera Diamante, which was led by Citibank, as well as a credit totalling US$75mn in the metals sector backed by inventory and export receivables, and other structured transactions in the mining and metals, oil and gas and fishmeal sectors, he says.

Mining is BNPP’s main goal in the Andean country, and targeted metals are copper, gold, silver, zinc and lead.

Fish farming is a new focus of BNPP, which is being driven by swelling Chinese purchases of protein-rich fishmeal. Peru produces about 50% of the world’s fishmeal.

Similarly, Scotiabank Pers trade finance portfolio will grow approximately a fifth in 2008, says Eduardo Patsías, manager of global transaction banking at Scotiabank Per. Scotiabank presently has a 16% share of the Peruvian foreign trade market.

In 2007, Scotiabank deals included a credit of roughly US$50mn to three Peruvian mining companies and another US$50mn financing for two fish farming companies. Additionally, “thanks to the free trade agreement Peru signed with the US last December, Peru-bound investment will intensify, especially in agribusiness”, fish farming and textiles, Patsías says.

Result of imports

“A growing economy like Peru’s will fuel imports, resulting in more insurance opportunities with exporters to Peru and banks financing those exports,” says Lin Franklin, president of US credit insurer FCIA. Additionally, the government decreased duties to an average of 2% at the end of 2007 from 8%, clearing the way for imports, says Du Bois.

Imports will climb to US$30bn in 2008 from US$11bn in 2003, while the trade surplus will narrow to US$5.5bn this year from US$8bn in 2007, according to EIU projections.

The largest exposure sectors in Peru for the New York-based insurer are banks, processors of agricultural products, plastics manufacturing and telecommunications. Bank financing is usually on 180 days while exporter financing is on 30 to 90 days, says Franklin. The company sells credit insurance to exporters extending credit terms to Peruvian importers and coverage against non-payment to banks providing import and export trade financing.

The main risks for FCIA in taking on Peru corporate and bank repayment obligations are the ability and willingness of the obligor to pay its commitments in a prompt manner, he says.

Franklin adds that obtaining reliable credit and financial information about Peru obligors sometimes complicates his firm’s ability to assess this risk. He also has doubts on how well the legal system will work should an obligation be enforced.

Besides, Peru continues to struggle with a high poverty rate, inadequate investment in infrastructure and an inefficient bureaucracy, Franklin remarks.

Infrastructure demands

Peru’s ports, roads, pipelines and other infrastructure will keep demanding mounting investments in order not to hinder future economic growth. Peruvian infrastructure is rated 104 in a ranking of 161 countries by the Geneva-based World Economic Forum, behind neighbours Ecuador, Colombia, Brazil and Chile.

In a bid to address this, last December the Inter-American Development Bank (IADB) approved a US$400mn loan for a US$3.9bn liquefied natural gas project in Peru, the largest private investment there ever, according to the US institution. The project consortium is headed by US-based Hunt Oil and includes Spain’s Repsol YPF, Korean company SK Energy and Marubeni Corporation of Japan.

This IADB-supported investment is expected to raise Peru’s GDP by 0.5% per year, generating about US$230mn royalties yearly and US$90mn in income tax revenue for the government, the lender says. The project comprises the construction and operation of a natural gas liquefaction plant, a marine terminal and a 408km pipeline extending to the existing Transportadora de Gas del Per pipeline.

Earlier in 2007, the IADB approved a loan totaling US$100mn for sanitation sector reform, a US$50mn credit to support Sedapal, the Lima water and sewer utility company, and a US$200mn financing due in 20 years for a water resources reform programme.

Above all, infrastructure in Peru points to the mining sector. And to Dan Riordan, executive vice-president and managing director of US-based insurer Zurich, the mining sector has been very successful in attracting new investment and loans, as commodity prices have been high and other markets such as Bolivia have not been viewed favourably by foreign investors.

The long-term and sizable nature of foreign investments and loans to mining in Peru drives the demand for Zurich insurance, Riordan says. Zurich policies can be US$125mn per risk and 15 years long.

Despite the good momentum, risks to invest in Peru do exist. And the 2011 general elections can bear evidence of that. The leftist movement led by Venezuela’s President Hugo Chavez wields considerable influence in Latin America. As recently as 2006 the Venezuelan-backed candidate obtained 45% of the vote in Peru.