Peru Looks to Capitalize on Growth

While many countries brace for the effects of the eurozone crisis, Peru stands to not only weather the fallout but to maintain one of Latin America’s highest GDP growth rates this year. Dubbed by international investors as one of the “new tigers” of emerging economies, Peru boasts a growing middle class, a booming mining sector, and several trade agreements in the pipeline. With a promising economic outlook, Peru’s leaders hope to harness the country’s growth to expand its presence in global markets.

Peru is showing stability amid global uncertainty, allowing the government to pursue its economic agenda. This month, Peru’s Finance Minister Luis Miguel Castilla announced that the country’s international reserves exceed 30 percent of GDP, acting as a buffer against external volatility. He pointed out that Peru’s Fiscal Stabilization Fund—also used to ward against international economic shocks—now accounts for 3.5 percent of GDP. "The focus today is back on Greece, on Europe, but we have an important space to mitigate adverse impacts from a major crisis," Castilla said. A new report by consultancy group Latin Focus predicts Peru will have the lowest inflation rate in Latin America over the next two years. With an estimated growth rate of 6 percent this year, Peruvian officials are confident in the continued growth of the middle class.

Peru’s trade and investment outlook are similarly promising. While Peru’s mining industry continues to boom with investments estimated at $53 billion, other industries are also growing. Coffee and cacao exports reached a record $1.55 billion last year, and agro-exports are expected to grow three times faster than Peruvian exports as a whole in 2012. Released last week, the World Economic Forum’s 2012 Global Enabling Trade report showed that Peru rose 10 spots this year, ranking above regional economic leaders Brazil and Mexico in development of policies and institutions to promote trade.

In order to harness the power of the growing economy, Peru’s Congress is considering tax reform to increase tax revenues to 18 percent of GDP by 2016. The new legislation seeks to close loopholes and cut tax evasion while facilitating the collection process and expanding tax audits. Rather than create new taxes, the reform would enlarge the tax base and target tax evaders; at present, half of the population fails to pay income tax. The legislation—which aims to bring in an additional $4.5 billion over the next four years—also moves toward a more progressive income tax regime. Last year, the country’s tax revenues stood at 15.5 percent of GDP, less than other large Latin American economies like Brazil and Chile.

Given continued growth, the government is intent on opening the Peruvian market to international trade, particularly to Asia and the United States. On May 24, the congressional Foreign Trade Commission voted to eliminate the single customs declaration tax on imported merchandise, which legislators hope will boost the country’s competitiveness. Humala administration officials are in Washington this week to discuss progress on the 2009 U.S.-Peru free trade agreement, since Peruvian exporters want to increase the country’s market share in the United States. Ysabel Segura, manufacturing director at the Association of Exporters, said that regional integration would be an effective approach, and that “the best thing would be to combine efforts with Colombia and other Latin American countries.”

As such, Peru is seeking new trade agreements, among them the Pacific Alliance and the Trans-Pacific Partnership (TPP). President Ollanta Humala will travel to Chile on June 6 for a meeting of the Pacific Alliance, an economic bloc consisting of Chile, Colombia, Mexico, and Peru. Leaders will evaluate ways to formalize integration of the four member economies in order to ease the flow of capital and goods. The Humala administration says the Pacific Alliance has “special priority” in order to foster growth and increase trade with the Asia-Pacific region. Meanwhile, the TPP would tie Peru directly to Asian markets, as it seeks to establish a free trade agreement between Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, the United States, and Vietnam. Peruvian officials participated in the latest round of negotiations which ended on May 16 in Texas, and a new round begins in July in California.

Learn More:

• Learn about the Pacific Alliance in an AS/COA Online explainer about regional organizations.
• Read an AS/COA Online explainer about the Trans-Pacific Partnership.
• Visit the Peruvian Ministry of Finance website.
• See an infographic of how Peru’s tax revenues stand compared to other Latin American countries.