Republic of Peru Business Guide

Introduction

Peru (Spanish: Perú, Quechua: Piruw, Aymara: Piruw), officially the Republic of Peru (Spanish: República del Perú), is a country in western South America.  It is bordered on the north by Ecuador and Colombia, on the east by Brazil, on the southeast by Bolivia, on the south by Chile, and on the west by the Pacific Ocean.

Peruvian territory was home to the Norte Chico civilization, one of the oldest in the world, and to the Inca Empire, the largest state in Pre-Columbian America.  It was conquered by the Spanish Empire in the 16th-century, which established a Viceroyalty with jurisdiction over most of its South American domains.  Independence was declared on 1821 but consolidated only after the Battle of Ayacucho, three years later.

Peru is a presidential representative democratic republic divided into 25 regions.  Its geography varies from the arid plains of the coast of the Pacific Ocean to the high mountain peaks of the Andes mountain range and the tropical forests of the Amazon Basin.  It is a developing country with a moderate Human Development Index score and a level of poverty of around 50%.  Main economic activities include agriculture, fishing, mining and manufacturing of products such as textiles.

The combination in Peruvian territory of different ethnic groups over five centuries has formed a multiethnic society.  This mixture has resulted in a wide diversity of cultural expressions in fields such as art, cuisine, literature and music. The country has also a rich cultural heritage, which includes the UNESCO World Heritage Site of Machu Picchu.

Economy

Peru's economy reflects its varied geography - an arid coastal region, the Andes further inland, and tropical lands bordering Colombia and Brazil. Abundant mineral resources are found in the mountainous areas, and Peru's coastal waters provide excellent fishing grounds. However, overdependence on minerals and metals subjects the economy to fluctuations in world prices, and a lack of infrastructure deters trade and investment. After several years of inconsistent economic performance, the Peruvian economy grew by more than 4% per year during the period 2002-06, with a stable exchange rate and low inflation. Risk premiums on Peruvian bonds on secondary markets reached historically low levels in late 2004, reflecting investor optimism regarding the government's prudent fiscal policies and openness to trade and investment. Despite the strong macroeconomic performance, underemployment and poverty have stayed persistently high. Economic growth continues to be driven by exports of minerals, textiles, and agricultural products, and by expectations for the Camisea natural gas megaproject and for other promising energy projects. Upon taking office, President GARCIA announced Sierra Exportadora, a program aimed at promoting economic growth in Peru's southern and central highlands.

Investment Outlook

The business outlook for Peru for 2007 is very positive thanks to its strong economic performance coupled with relatively smooth Presidential and regional elections in 2006. The strong demand for and high prices of minerals enabled Peru to achieve a ranking as the number one emerging market in the world. The U.S. Government recognized Peru's progress in economic policy and other issues by selecting Peru for the Millennium Challenge Account's Threshold Program for fiscal year 2007.

The United States is Peru's most important commercial and agricultural partner and the two nations enjoy an excellent overall relationship. Peru is three times the size of California and home to over 27 million people. Peruvians welcome U.S. technology, products and services and are frequent travelers to the U.S. Despite the close geographical proximity of other major trading partners such as Brazil, Argentina, Chile and its Andean neighbors, the high quality and wide selection of competitively priced products provide U.S. exporters with a distinctive edge. For 2006 (Jan.-Oct.), Peru ranked 43rd as a market for U.S. exports.

The 2006 Global Enterprise Monitor study rated Peru as “the most entrepreneurial country in the world with 40.2 percent, the highest percentage of adults engaged in early-stage entrepreneurial activity….based on opportunity, not necessity.” Some government policies and their implementation still hinder the growth and development of business activity in Peru, especially for micro and small businesses. Nevertheless, in 2007, the economy is expected to repeat its strong performance led by continued export growth, strong fiscal management, continued exploration and commercialization of mining, oil and gas projects. Two new factors have emerged as drivers of Peruvian economic growth: the rise of stronger regional governments and national government policies and programs that attempt to improve the distribution of the benefits of economic growth especially among the poorer and more isolated parts of the country. From 2001 until present, Peru experienced strong, export led GDP growth. High mineral prices, fiscal austerity and agricultural exports that benefited from the Andean Trade Promotion and Drug Eradication Act (ATPDEA) contributed to Peru’s excellent economic performance. On December 7, 2005, the United States and Peru concluded negotiations on a bilateral free trade agreement. On April 12, 2006 the United States and Peru signed the U.S.-Peru Trade Promotion Agreement (US-PTPA). The Peruvian Congress ratified the Agreement by an overwhelming majority in June 2006. The U.S. Congress is expected to consider the agreement in 2007. To bridge the interim gap, the U.S. Congress voted to extend ATPDEA benefits for Peru and other beneficiaries until June 2007. Peru wishes to implement the agreement as soon as possible.

Peru does not have a bilateral investment tax treaty (BIT) with the United States. These provisions are included in the US-PTPA which, when implemented, should improve Peru’s business climate by increasing foreign and local investment in domestic industries, improving customs operations, enhancing protection of Intellectual Property Rights, respect for arbitration and other procedures that affect business operations. Upon entry into force, the US-PTPA will level the playing field for U.S. companies by providing equal access to the Peruvian market, expanding market access for U.S. products such as remanufactured goods and improving the overall commercial and investment climate. Under the ATPDEA, Peru exports thousands of goods to the United States duty free. Loss or temporary suspension of these tariff benefits would be detrimental to Peru’s economic growth. Besides enabling Peru to address the impact of globalization, the US-PTPA also enables Peru to better address its domestic challenges while expanding commercial opportunities, especially for micro and small businesses.

Market Overview

Peru’s economy has shown strong growth over the past five years, helped by marketoriented economic reforms and privatizations in the 1990s, and measures taken since 2001 to promote trade and attract investment. In 2006, Peru’s GDP was estimated to be $84.3 billion. GDP grew 7.5 % in 2006, 6.4% in 2005, and 5.2% in 2004. President Alan Garcia and his economic team have continued these policies. GDP is projected to grow by more than 7% in 2007. Recent economic expansion has been driven by construction, mining, export growth, investment, and domestic demand. Inflation is projected to remain under 2% in 2007. In 2006, the current account surplus rose to 2% of GDP and the combined public sector balance achieved an estimated surplus of 1.5% of GDP. In 2006 external debt decreased to 31.5% of GDP, while foreign reserves were a record $17.3 billion at the end of 2006.

Peru is projected to register a trade surplus of over $6 billion in 2006. Exports reached $23.4 billion, partially as a result of high mineral prices. Peru’s major trading partners are the U.S., China, EU, Chile, and Japan. Exports include gold, copper, fishmeal, molybdenum, petroleum, zinc, textiles, apparel, asparagus, and coffee. Imports include capital goods (machinery, vehicles), processed food, petroleum and steel.

Peru has a positive trade balance with the U.S. of about $3 billion. Through November 2006, US imports from Peru totaled $5.6 billion (CIF, USITC) and total U.S. exports to Peru were $2.65 billion (FOB, USITC). Peru’s main imports are machinery (capital goods), vehicles, processed food, petroleum, steel and cotton. The multi-billion dollar Camisea natural gas project, which came online in August 2004, continues to have a major positive impact on Peru’s economic growth. Peru belongs to the Andean Community, the Asia-Pacific Economic Cooperation (APEC) forum, and the World Trade Organization (WTO).

Peru’s economy is well managed, and better tax collection and growth are increasing revenues, with expenditures keeping pace. Private investment is rising and becoming more broad-based. The government has had success with recent international bond issuances, resulting in ratings upgrades. The Garcia administration is studying decentralization initiatives, and is focused on bringing more small businesses into the formal economy.

The stock of registered foreign direct investment in Peru was $14.3 billion at the end of November 2006, according to ProInversion, versus $13.9 billion at the end of 2005. The U.S. and Spain are the largest source of foreign direct investment in Peru. U.S. registered investment in Peru through December 2006 totaled $3.9 billion on a replacement cost basis.

Market Challenges

On June 4, 2006, APRA candidate Alan García Pérez was elected to the presidency by 52.5% of the voters. In Garcia’s first presidential term from 1985 to 1990, Peru suffered hyperinflation and a poor investment climate. García returns to the presidency with promises to improve Peru’s social conditions, while monitoring budget discipline, macroeconomic stability, and respect for contracts. His immediate goal is to decrease poverty, especially in Peru’s southern highlands where poverty is most acute. With 36 seats, APRA has the second-largest bloc--next to the Union for Peru/Peruvian Nationalist Party coalition’s 45 seats--in the 120-seat unicameral Congress which was sworn in July 2006, a couple of days before the new President.

The Garcia Administration will face strong social pressure to reduce high poverty and unemployment rates, both of which exceed 50%. There are signs that the benefits of consistent economic growth are beginning to trickle down to the poorer classes in the form of broader job creation and greater funding for education. There has been progress in strengthening democratic institutions and a 40% increase in per capita GDP from $2000 in the year 2000 to approximately $3000 in 2006. Two institutions, the judiciary and the customs/tax authority (SUNAT by its Spanish acronym) continue to be notable impediments to business operations in Peru. The strengthening of the Nuevo Sol versus the U.S. dollar has increased the attractiveness of U.S. product imports. The government has no specific standards required for imports. Some industry standards are being developed in the private electronics and construction industries. Peru’s consumer watchdog agency, INDECOPI, has a small standards office to develop and enforce Peruvian product standards. Peru’s IPR enforcement problems keep it on the Special 301 Watch List.

Market Opportunities

Due to the strong growth of the Peruvian economy, six new** Best Prospects for U.S. exports of non-agricultural products have been added to this year’s list:

• Mining Industry Equipment - Construction Equipment**
• Oil and Gas Field Machinery - Pumps, Valves, Compressors**
• Industrial Chemicals ** - Building Products**
• Food Processing and Packaging Equipment - Pollution Control Equipment**
• Security and Safety Equipment - Drugs and Pharmaceuticals
• Air Conditioning and Refrigeration Equipment**

One new ** Best prospect for U.S. agricultural products has been added to this year's list:

• hard red wheat - soybean meal
• cotton - dairy products (whey and cheese)
• yellow corn - beef and offals**
• pet food