Investment attraction and innovation policy, combine to create a favorable business climate: some thoughts about Peru

Mercedes AraozJune 19th, 2012

http://www.iadb.org

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The World Economy…

In 2010 the world economy expanded by 5% after falling 0.5% in 2009 (the most since World War II). The 2010 growth was explained by the expansion of emerging and developing economies (7.1%) and to a lesser extent by the recovery of advanced economies (3%).

World trade grew 15.4% after it experienced a decline of 10.9% in 2009

World Trade Volume

WorldAdvanced EconomiesEmerging Economies

WorldAdvanced EconomiesEmerging Economies

World GDP Growth(Annual % change)

Source: IMF

Recent data show a slowdown in economic activity ... mainly in the developed economies

Source: IMF

Developed Countries: Jan 2007 – Aug 2011Service Index

Developed Countries: Jan 2007 – Aug 2011Manufacture Index

Manufacture and Service Global Index: Jan 2007 – Aug 2011

Service

Manufacture

Developed economies have not yet recovered the levels of GDP per capita before the crisis

Real per capita GDPVar % Quarter II 2011 / Quarter IV 2007

Source: ECLAC

In emerging economies has been removing monetary stimulus due to inflationary pressures and the risk of bubbles in asset markets

(*) Includes Brazil, Colombia, Chile, Mexico and Peru .(**) includes China, India, Indonesia, Philippines, Malaysia and Thailand.

Change in official interest rate from December 2010

Official Interest Rate (Monetary Policy)(%)

Inflation(% Var. 12 Months)

Source: CEPAL, IMF

By the end of 2011, UNCTAD global forecasts are located between 1.3 and 1.5 billion dollars, these are still far from the 1.77 trillion reached in 2008.

It predicts that the increase in business confidence push to higher levels of investment, but the degree of recovery will depend on achieving a sustained economic growth and the behavior of FDI in developing economies.

2009 2010 2011* 2012*World Economy 0,6 5,0 4,4 4,5Latin America and the Caribbean 1,8 6,9 4,3 4,1

United States 2,6 2,8 3,0 2,7Canada 2,5 2,9 2,3 2,7European Union 4,1 1,8 1,7 2,6Japan 6,3 4,3 1,6 1,8

Economic Growth

Economic Growth Forcasts

Source: IMF, UNCTAD* Forecast

LATIN AMERICA …

The impact of the crisis in Latin America was significant ...

GDP Growth in the previous three years

GDP Growth in 2009

An

nu

al G

row

th %

Source: ECLAC

… But transitoryV

ar %

. R

eal

GD

P

Growth Forecast

Source: ECLAC

… Poverty in Latin America

… The resistance was shown in the Social Field

Trade Channel determined the crash ...

... But the crisis spread through the Financial Channel

Net purchases by foreign investors and growth "unexplained" GDP

GD

P g

row

th in

200

9 “

un

exp

lain

ed"

by

ex

po

rts

Domestic bond purchases by foreigners

Collapse in exports and slowdown of GDP in 2009

Per

cen

tag

e o

f G

DP

gro

wth

in

200

9

Impact of exports on GDP growth in 2009

In 2010 Latin America had a strong rebound with growth of 6.1%.Peru, Brazil, Chile and Colombia recorded an increase in its level of economic activity of 8.8%, 7.5%, 5.3% and 4.3% respectively.However, in Mexico, the 2010 growth was not large enough to regain pre-crisis levels and reverse the decline in employment. Thus, Mexico's growth of 5.5% in 2010 could not offset the contraction of 6.1% recorded the previous year.

Rebound and Stabilization in the Region

GDP and Domestic Demand 2010 (% anual Var. )

GDP Domestic Demand

Source: ECLAC, BCRP

Gro

wth

of

rea

l d

om

est

ic d

ema

nd

Real GDP Growth

The real GDP growth has moderated, but domestic demand continues to expand vigorously

Latin America: Growth in domestic demand and real GDP, 2010

Source: ECLAC

The expansion will be less unequal, with output gaps closed or closed in much of the region.Real GDP Growth, 2009-11

(Simple average, annual percentage change)

Latin America and the Caribbean: Product Gaps(Percentage of potential GDP, simple average by

region)

South America

Mexico and Central America

Caribe

South America

Mexico and Central AmericaCaribe

Source: ECLAC

Capital flows to the region have recovered rapidly after the crisis

Latin America: Net inflow of capital, 1980-2010(Percent of GDP)

Emerging Economies: Periods of strong net capital inflows

(Percent of GDP)

Continuous poverty and inequality reduction

____________________Source: CEPAL

Total poverty in Latin America (Var % , 2005 -

2009)

Extreme poverty in Latin America (Var % , 2005 -

2009)

0,40

0,45

0,50

0,55

0,60

0,65

Uru

guay

Perú

El S

alv

ador

Ecuador

Costa

Ric

a

Arg

entina

Para

guay

Méxic

o

Panam

a

Chile

Nic

ara

gua

Bolivia

Rep.D

om

inic

ana

Bra

sil

Colo

mbia

Hondura

s

Guate

mala

Año más reciente 2002

Gini coefficient of income distribution from 2002 to 2009

20022009

Expected growth of the middle classes in Latin America over the next 10 years

(Var. %)

2005 -2010 2010 -2020

Source: UNCTAD

Global flows of FDI stagnated in 2010, growing by 1%, following a strong rally in Asia and Latin America and the contraction experienced by the developed economies, with the exception of the United States

2009 2010 Variation World Economy 1 114,1 1 122,0 0,7 %Developed Economies 565,9 526,6 6,9 %Developing Economies 478,3 524,8 9,7 %Eastern Europe and CIS 69,9 70,5 0,8 %

Latin America and the Caribbean 116,1 141,4 21,4 %United States 129,9 186,1 43,35 %European Union 361,9 289,8 19,9 %

Current view of Foreign Direct Investment (FDI)

Source: UNCTAD

Foreign Direct Investment (FDI)(Billions USD)

South America Mexico, Central America and the Caribbean Total

Income from Foreign Direct Investment in Latin America

(Billions USD)

FDI recovery

• The recovery of developed economies.

• The dynamism of certain emerging economies driving growth in some sectors by increases in demand.

• The growth of domestic demand in some countries.

• Increased outsourcing by foreign firms in response to the crisis.

Source: ECLAC

Destination of FDI in Latin America and the Caribbean(2000 – 2010 )

South America

2005 - 2009 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3830

29

27

33

43

Series1 Series2 Series3Natural Resources

ManufactureServices2005 - 2009 2010*

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

56

41

35

54

95

Series1 Series2 Series3Natural Resources ManufactureServices

Mexico, Central America and the Caribbean

Source: ECLAC

Latin America: Origin of FDI(2006 – 2010)

Latin AmericaUnited StatesSpain

NetherlandsUK

OthersCanada

JapanChina

Caribbean Financial Centers

Source: ECLAC

DOING BUSINESS IN LA

Venezuela

Bolivia

Honduras

Ecuador

Brazil

Costa Rica

Uruguay

Nicaragua

Argentina

Paraguay

Guatemala

El Salvador

Panama

Chile

Colombia

Peru

Mexico

172

149

131

130

127

125

124

117

115

106

101

86

72

43

39

36

35

Latin America - Aggregate rankings

Source: Doing Business Report, 2011

Starting a Business across Regions

Venezuela

Brazil

Uruguay

Costa Rica

Ecuador

Bolivia

Nicaragua

Guatemala

Paraguay

Peru

Argentina

Chile

El Salvador

Honduras

Colombia

Panama

Mexico

141

120

65

60

56

50

39

37

35

27

26

22

17

14

14

9

9

Time to Start a business (days)

Region Procedures (number)

Time (days)

Cost (% of

income per capita)

Paid in Minimun Capital

(% of Income)

Latin America 10.5 43.6 35.9 3.8

Caribbean States 7.9 71.6 36.5 5.6East Asia & Pacific (EAP) 7.8 39 27.1 50.6

European Union (EU) 5.9 14.6 5.7 18.4

Organization for Economic Co - Operation and Development (OECD)

5.6 13.8 5.3 15.3

South Asia 7.1 24.6 24.5 24.1

Source: Doing Business Report, 2011

Registering Property Acoss Regions

Region Procedures (number) Time (days) Cost (% of income per capita)

Latin America 6.9 43.9 3.7

Caribbean States 6.7 96.5 8.4

East Asia & Pacific (EAP) 4.7 82.6 3.9

European Union (EU) 5 35.2 4.8

Organization for Economic Co - Operation and Development (OECD) 4.8 32.7 4.4

South Asia 6.3 99.8 6.9

Source: Doing Business Report, 2011

Credit Information

EconomyDepth of credit

information index (0-6)

Public registry coverage

(% of adults)

Private bureau coverage

(% of adults

United Kingdom 6 0 100Portugal 5 67.1 16.3

New Zeland 5 0 100Argentina 6 30.8 100

Peru 6 25.5 33.3Honduras 6 22.7 100

El Salvador 6 21.8 95Uruguay 6 19.4 100

Guatemala 6 16.4 8.8Paraguay 6 13.9 0

Bolivia 6 11.3 31.4Mexico 6 0 71.6Panama 6 0 31.9Ecuador 5 36.5 45

Chile 5 30.9 22.9Brazil 5 26.9 53.5

Costa Rica 5 23.3 64.8Nicaragua 5 14 21.4Colombia 5 0 63.1Venezuela 0 0 0

Source: Doing Business Report, 2011

Changes to business regulation 2009/2010 in Latin America

Source: Doing Business Report, 2011

Venezuela

Bolivia

Argentina

Ecuador

Nicaragua

Honduras

Paraguay

Guatemala

Guyana

Panama

Peru

Suriname

Brazil

Colombia

Costa Rica

El Salvador

Mexico

Uruguay

Chile

0

10

20

20

25

30

30

35

35

40

40

40

50

50

50

50

50

75

85

LATIN AMERICA: Property Rights Index

Source: Global Property Guide

LATIN AMERICA: INVESTMENT POSSIBILITIES

The infrastructure Quality Gap Index* (IQGI)

Source: World Economic Forum.

Latin American has prove to have a very propitious environment for private investment in infrastructure, their challenge is execution and innovation to deal with the specific complexities that each country faces.

LA Investment needs in infrastructure

The infrastructure private investment attractiveness index (IPIAI) **

The region will need in the short term financing, principally for the execution of projects based on natural resources

Foreign Direct Investment in Natural Resources

Foreign Direct Investment US$ bn(accumulated stock since 2005).

Financing need of Top ten investment projects

Source: World Economic Forum.

But Latin America is not one entity: there is diversity in the region

• The “two giants” (BRA, MEX)

• Medium Size Emerging South America: medium size countries combine good performance both in inflation and growth (CHL, COL, PER)

• The “heterodox” countries: most countries have achieved low inflation, but it remains a problem in ARG and VEN

Diversity in the region (GDP and CPI forecast)

Source: World Economic Forum.

1

2

3

4

The region made substantial economic and institutional reforms, but also enjoyed a benign favorable environment in the second half of the 00s But the region also confronted – and passed -severe tests, including the global financial crisis of 08

The region has passed a demanding sequence of tests since the 90s

A bright future, if the right road is taken

Latin America Forecast

Source: BBVA Research, 2010

… a positive international image of Peru...

Peru gets the investment grade

The Economist: Peru with the best climate for Microfinance in the world

Peru is up 5 positions in the competitiviness index

Peru the best place to invest in South America

Peru Solid economic fundamentals

good economic indicators, an incentive for private and public investment…

Private and Public Investment(% GDP)

Prom 2003-07

2008 2009 2010 2011 2012 2013

16.021.5

17.7 18.7 19.4 20.6 22.2

2.9

4.25.3

6.5 6.5 6.46.3

Inversión Privada Inversión PúblicaPublic Investment

Investment project announcements with High Probability

(US$ Million )

Jun.09 Sept.09 Dic.09 Mar.10 Jun.10 Sept.10 Dic.10 Mar.11

10.2 9.7 10.312.1 12.1 12.6

13.714.7

Evolution of the investment project announcements: 2011

(US$ Billion )

  2011 2012 2011-2012Mining 5834 8128 13962Oil 2406 2468 4874Electricity 1797 2306 4103Industrial 1559 1358 2917Infrastructure 1296 846 2142Other sectors 1816 898 2715Total 14708 16004 30712

Private Investment

Investment grade ratingLatin American Comparison

Fuente: Standard & Poor`s, Fitch Ratings y Moody´s

País S&P Fitch Moody´s

Chile A+ A A1

México BBB BBB Baa1

Perú BBB- BBB- Baa3

Brasil BBB- BBB- Baa3

Colombia BB+ BB+ Ba1

Venezuela BB- BB+ B2

Argentina B- RD B3

Bolivia B- B B2

Ecuador CCC+ CCC Caa3

2007 2008 2009 2010 2011

6558

62

46

36

Source : Doing Business 2011 - IFC

Continual improvement of business climate

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00% 54.80%54.30%52.30%

48.60% 48.70%

44.50%

39.30%

36.20%34.80%

31.30%24.40%23.90%21.20%

17.10% 17.40%16.10%

13.70%12.60%

11.50%9.80%

% Pobreza Total % Pobreza Extrema

Source: INEI

-15 -10 -5 0

Perú

Brasil

Ecuador

Chile

América Latina

Rep. Dominicana

Honduras

Guatemala

Panama

Paraguay

Colombia

Costa Rica

Mexico

Continuous poverty reduction...

Poverty Reduction in Latin America (2005 – 2009)

% Total poverty

% Extreme poverty

Modern legal and stable framework

Legal Stability Agreements

Guarantees recognized by the State:

INVESTORS Stability of the right to non discrimination. Stability of the Income Tax System, applicable to investors,

in force when the agreement is concluded. Stability of the system of free availability of foreign

currency and remittance of profits, dividends and royalties.

RECEIVING COMPANY Stability of the systems of labor engagement in force when

the agreement is concluded. Stability of the system of export promotion applicable when

the agreement is concluded. Stability of the Income Tax System

Requirement: Minimum investment of US$ 5 MM in any economic sectors.

US$ 10 MM for hydrocarbon and mining sectors.

Validity: 10 years. Concessions: Term according to the contract’s life (Max. 60 years).

Source: Proinversión

Peruvian Trade Policy

“Turn Peru into an exporter of

goods and services with higher added

value”

Integration strategy, two instruments

• Improving conditions of market access, forming expanded markets. (increase of exports)

• Provide clear and predictable rules for trade.• Achieving certainty and an attractive regulatory framework to

private investment. (Increased investment)• 3 negotiating fronts: multilateral, regional, bilateral

National Export Strategic Plan (PENX)

• Export supply: Identification of export supply and its development (improvement programs for quality and competitiveness agenda);

• Markets: trade promotion, market research;• Trade facilitation: infrastructure, finance, customs;• Export culture: training in export and development of human

capital.

Trade Development

International Trade

Negotiations

53

India

Japón

MERCOSURACE 58

CANSingapur

América Central

Nueva Zelanda

Marruecos

Unión Europea

Chile

BruneiTailandia

Australia

Acuerdos en vigenciaAcuerdos que entrarán en vigenciaAcuerdos en negociaciónNegociaciones futuras

ChinaCorea

Canadá

EE.UU.

OMC

APEC

ALADI

Malasia

VenezuelaExtensión de Preferencias

Vietnam México: ACE 8

Costa Ricay Panamá

Suiza y Liechtenstein

Sudáfrica

EFTA (Noruegae Islandia)

Preferential access to the most important markets

Institutional Framework

Policy Continuity, along different governments Focus on three pillars: economic growth, social inclusion and

democratic institution National Competitiveness plan or agenda into place, shared by

all shareholders (private and public sector), with political will to implement it.

Focus on entrepreneurial promotion and competition, regulation of non tradable good and services where there is some monopolistic market structure.

Some external locks, vg. FTAs, opening markets Financial provision (having the best environment for

microfinance; good regulation ) Infrastructure, private public partnership

Institutional framework

Contestable funding of science, technology and innovation projects (FYNCIT)

Contestable funding fo technology transfer and development for small and medium size business

OECD and UNCTAD evaluation and base line on Science and Technology policy

Changes in the National Investment System in order to include the spillover effects of Investment in technology and innovation.

Educational reform, evaluating students and teachers New SME promotion legislation Working in the factors for improve our position in the doing

business index and in the competitiviness index, changing laws and facilitanting trade and investment.