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It’s fair to say that over the last decade, Brazil has been the primary focus of anyone commenting on the investment prospects of Latin America. However, while Brazil has been expanding on the back of a consumption-fuelled spending spree, another major Latin American economy, Peru, has been building a sound and dynamic economy through prudent fiscal management, a pro-investment environment and putting macroeconomic stability at the heart of all major policy decisions. As the seventh biggest economy in Latin America in 2013 in real US$ terms, Peru has almost consistently posted above regional average growth since 2007, and is set to continue to do so over the medium term. During the global financial crisis of 2008-2009, real output growth in Peru dropped to just 0.9% but crucially, the Peruvian economy did not fall into recession. However, at less than 10.0% of the size of Brazil in real terms in 2013, it would be easy for prospective investors to overlook Peru in favour of its larger neighbour, an oversight they may later come to regret.
Real GDP Growth in Peru vs. Brazil: 2008-2013
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)
Note: Data for 2013 are forecast
Positive Outlook for Peru
Ranked the third best for ease of doing business in Latin America by the World Bank in 2013, Peru’s economic growth is primarily driven by investment which makes it an anomaly in the region. The country treats foreign investors as they do domestic, private investors which resulted in Foreign Direct Investment (FDI) worth 6.1% of total GDP in 2012, as opposed to 2.9% of total GDP in Brazil. This led to credit ratings agency Fitch reaffirming its confidence in the Peruvian economy in October 2013 by upgrading its foreign debt to BBB+, while Standard & Poor’s (S&P) also upgraded the country in August 2013, mainly down to plans for substantial investment in the mining sector which will see copper production double by 2016. Brazil, on the other hand, was downgraded from a positive outlook to stable by Moody’s in October 2013 while S&P put the Brazilian outlook as negative in June 2013.
Openness to Trade is a Key Asset
In terms of trade, Peru is also much more open to working with other economies than Brazil. Peru is part of several major free trade agreements (FTA) including the Asia Pacific Economic Co-operation (APEC) and the Trans-Pacific Partnership (TPP) which also includes the USA, Canada and Mexico as well as key Asian markets such as Vietnam, Singapore and Malaysia. Over the last decade, Peru has intensified its trade policies and in 2011, China became Peru’s biggest export market, overtaking the USA. Both countries are members of the World Trade Organization (WTO) and part of the G-20, but with exports worth an estimated 20.1% of total GDP in 2013 Peru, it is considerably more open than Brazil, where the corresponding figure is expected to be just 10.7%.
Consumers are Spending but not to Excess
Peru’s consumers are less well off than their Brazilian cohorts, with per capita disposable income expected to be just 57.5% of the same figure in Brazil. However, private final consumption expenditure (PFCE) as a percentage of total GDP in the two countries is very similar, indicating that consumers in Peru are becoming more important to the Peruvian economy. In Brazil, between 2008 and 2013 the economy grew in real terms by 14.2% while PFCE grew by 29.4% which is a sign of overzealous credit growth which has fuelled speculation about a potential credit bubble in the country. However, PFCE in Peru grew by 28.5% in real terms over the same time period while real GDP growth was 31.7% suggesting healthy, balanced growth of consumer expenditure.
Diverging Prospects in Peru and Brazil
Real GDP growth in Peru cooled in 2013 to 5.7% from 6.3% in 2012, but it still far outstrips Brazil which saw just 0.9% real growth in 2012 and is forecast to see real output increase by 2.7% in 2013. The 2013 growth figures for both economies are far more indicative of their diverging prospects over the medium- to long-term, with Peru set to enjoy a sustained period of economic prosperity and assured returns on investments.