BMI View: While we anticipate headline growth in Peru to slow in the coming years, as China ' s hard landing feeds through into a more moderate expansion of the mining sector, we continue to expect the country ' s economy to remain one of the most dynamic in Latin America. Moreover, we see a number of interesting investment opportunities at the sector level.
Although we are expecting a moderation in growth in Peru over the next five years, as the country's mining boom slows, we believe the economy will remain one of the most dynamic in Latin America, such that we forecast average real GDP growth of 5.5% between 2012 and 2017. This view is underpinned by a burgeoning consumer story and a strong investment outlook, with several opportunities at the sector level.
|Growth To Remain Dynamic|
|Peru - Real GDP Growth, pp contribution|
On the consumer side, we believe significant currency appreciation in recent years will continue to bolster consumers' purchasing power, boosting private consumption growth. In addition, we see significant potential for further banking sector expansion, as penetration remains quite low as compared to the country's regional peers ( see, 'More Moderate Banking Sector Growth Ahead', September 19). Moreover, with corporate and business loans comprising 66.2% of total loans in July, we believe there is greater potential for the expansion of consumer credit over the coming years as well. This will also benefit from the continued rise in GDP per capita, as we forecast it to nearly double from US$6,627.7 in 2012 to US$12,884.9 in 2022, driving demand for consumer goods and financial services.
|Room To Grow|
|Latin America - Assets-To-GDP, %|
Holding The Most Promise…
From a sectors perspective, our Food and Drink team anticipates dynamic growth over the coming years, forecasting per capita food consumption to rise by 50.0% between 2012 and 2017, second in the region only to growth in Colombia (57.0%). Moreover, investments from Chilean retailers Falabella and Cencosud are positive signs. That said, a lack of infrastructure and poor retail development could weigh on the sector's growth, potentially preventing the expansion into more rural areas.
Our Autos team also remains fairly constructive on Peru's growth potential, forecasting passenger car sales to grow by 40.0%, and the light commercial vehicle segment to expand by 20.0% this year. Furthermore, the team forecasts average growth of 12.4% between 2012 and 2017, underpinned by strong private consumption growth, rising GDP per capita and continued extension of credit. In addition, a relatively stable business environment and strong sales growth could incentivise firms to increase productive capacity in the country in the next five to 10 years.
On the telecommunications side, while our industry team sees Peru as one of the few markets with strong growth prospects, fewer wealthy consumers mean that firms' profit margins are relatively low and average revenue per user (ARPU) is weak. As such, our Telecommunications team believes that operators must target the lower-income end of the market, as well as rural areas in order to continue growing. Indeed, Vietnam's Viettel has acquired the market's fourth license, and we expect it to aggressively target the lower end of the market, though it will face stiff competition from market leaders, Claro and Movistar.
Some Growth Moderation, But Attractive Investment Story Remains Intact
Peru's investment story has long been underpinned by the mining sector, and while we expect this to remain an important driver of growth over the coming years, we believe it will be much more moderate. Indeed, our Mining team forecasts the sector to grow by an average of 5.0% between 2012 and 2017, a relatively healthy clip, but a sizeable slowdown from the 18.4% average growth recorded during the previous five years. This is underpinned by our view for a significant rebalancing of China's economy from an investment-driven growth model to one where consumption plays a larger role ( see, 'Emerging Markets: Beyond China's Hard Landing', September 27). As such, we anticipate slower headline growth, as well as weaker demand for base metals, which will drive prices lower as well. This means that firms are likely to increasingly re-evaluate their capital expenditure plans, translating into more moderate investment flows into major commodity producers such as Peru ( see, 'Capital Expenditure To Slow', October 29).
|Growth To Remain Off Its Recent Highs|
|Peru - Mining Sector Value US$bn, % chg y-o-y|
However, the story is not all bad, as the country's varied metals complex means that while it may suffer from cuts to capital expenditure plans or less exploration, our Mining team continues to see new production coming on line over the coming years. As such, while a moderation in mining sector growth may lead to some delays in infrastructure investment related to the sector, our Infrastructure team maintains a relatively positive outlook on the sector. Peru's investment agency, ProInversión, recently released an agenda which will look to develop US$10bn in projects by end-2013, ranging from transport infrastructure to power generation and sanitation. Although the country has previously delayed similar concessions, our Infrastructure team believes the upcoming projects will provide a good indication of investors' assessments of Peru's political and business environment risks.
Moreover, our Shipping & Freight Transport team has highlighted rising investor interest in using Peru as a gateway to Asia for Peruvian products, as well as those from western Brazil and landlocked Bolivia. Indeed, we are seeing investment from international operators such as APM Terminals and DP World in the Port of Callao. On the transport side, Peru still has a lot of work to do in terms of addressing bottlenecks in order to take advantage of its mineral resources.
|Peru - Net Petroleum Exports, boe/d|
In addition, Peru's energy sector outlook is looking increasingly optimistic. Due in part to new oil production and a recent natural gas discovery by Repsol and Petrobras, our Oil & Gas team forecasts the country to become a net petroleum exporter in 2014, with production growth really picking up from 2015 onwards. Moreover, our Oil & Gas team believes the country remains largely underexplored, meaning that an expected licensing round for blocks along its border could lead to more discoveries. That said, both political risk and security concerns are likely to continue weighing on the sector due to weak relations with indigenous communities near some blocks, as well as recent Sendero Luminoso (Shining Path) attacks on natural gas infrastructure ( see, 'Increasingly Bullish Energy Sector Outlook', September 28).
Political Risk To Remain Elevated
While Peru's economy offers a wealth of opportunities at the sector level, the operating environment is not without risks. In our view, political risk is likely to remain high over the coming years on the back of continued social unrest and tenuous security situation (see, 'Humala To Remain In The Hotseat', July 17). Indeed, mining sector protests have been widespread and often violent in recent quarters, stemming from issues related to wages and environmental degradation. Given that we believe income inequality is a root cause of many of these issues, we expect they will take years to resolve. In addition, the domestic security situation has come back into focus in recent months following an increase in activity by left-wing insurgent group Sendero Luminoso. While President Ollanta Humala is looking to crack down on insurgent activity, the group's location largely in the remote Apurímac, Ene and Mantaro River valleys (VRAEM), means we believe the government is likely to struggle to establish control over the area. This has important impacts on our investment outlooks for the energy and infrastructure sectors in particular, especially given the recent attacks against natural gas infrastructure ( see, 'Security Improvements Essential To Investment Outlook', October 26).