InsightsThe Extinct Peruvian Miracle

The Extinct Peruvian Miracle

Peru's economic crossroads.

The once-prosperous period of the “Peruvian miracle” has ceased, presenting substantial hurdles in sustaining average regional growth rates. Projections for 2023 indicate an impending recession, marking the most strenuous period in over two decades. This economic downturn results from a lack of sustained investment, which hinges on confidence. Recent years witnessed waning trust in the country’s socio-economic model, impacting both local and foreign investment. Fears intensified post-ex-President Pedro Castillo’s tenure, leading to substantial capital flight, exacerbating instability. Additionally, flawed regulatory oversight and market control consolidation within conglomerates hinder growth and productivity, accentuating the plight. The departure of business elites and an exodus of young talent further compound the issue, reflecting a diminishing commitment to Peru’s future. 

Government policies and economic impact 

Simultaneously, lax governmental policies enabling capital outflow exacerbate the situation. Tax loopholes incentivising Peruvians to invest abroad hinder reinvestment within the country. Despite robust macroeconomic strengths, including low inflation and manageable debt-to-GDP ratio, internal factors pivotal for sustained growth have waned. Urgent governmental action to restore investor confidence, establish a robust capital market system and encourage local investment is imperative to rekindle Peru’s potential for high growth. 

For GDP growth, investment—both local and foreign—is crucial, encompassing mega projects and smaller-scale ventures alike. Long-term, sustainable investment depends on confidence. However, since 2017, Peru has encountered challenges in both areas. Presently, private investment has dipped into negative figures(i) and since leftist ex-president Pedro Castillo’s victory in 2021 (now incarcerated), substantial amounts of money have been leaving the country(ii), sparking widespread fear. Approximately 8% of GDP (around USD 17 billion) exited the country in that year. Further contributing to the instability, nearly 40% of assets from individual mandatory pension funds have been permitted for withdrawal (congress think(iii) short term votes), and mutual funds have seen a significant 40%(v) decline in their assets.  

Reviving the “Peruvian miracle” seems daunting without substantial investment and political stability. Sustaining an annual growth rate of over 4% is vital for alleviating underemployment and unemployment. 

As per the 2023(vi) Organisation for Economic Co-operation and Development (“OECD”) Report on Peru, the country exhibits the lowest-quality transport infrastructure, one of the weakest rule-of-law measures, over 80% informality among workers, notably low levels of reading comprehension (according to PISA assessments). However, it boasts the region’s lowest inflation over the past 30 years, the lowest debt-to-GDP ratio in Latin America and an extensive array of investment projects, primarily in the mining sector. Complicating matters are widespread corruption issues (with six elected presidents either incarcerated or under trial) and a prevailing perception that the government has neglected fundamental duties related to security, education and healthcare. 

Structural concerns and need for reforms 

The economic front has witnessed a concerning trend—a pro-business rather than a pro-market agenda—over the last two decades, a factor rarely discussed. This period has seen a notable consolidation of market control within a handful of conglomerates across various major industries. Additionally, according to a recent OECD study, Peru has the second lowest perception regarding the “extent of market dominance.” This scenario adversely impacts growth and productivity levels. 

Surprisingly, it was only as recent as June 2021 when the street called “antimonopoly law”(vii) was passed by Congress and enacted—a development that allowed significant market consolidations across numerous major industries with minimal backing for enhanced competition. For instance, a single financial group commands 37% of the banking system(viii) (and 87% of all electronic transactions(ix)) while the top 4 groups collectively control 87% of the banking system. Furthermore, a leading pharmacy chain manages roughly 75% of all ”modern” stores nationwide, while a single company holds control over nearly 98% of the beer production within the country. 

Such large-scale control often yields extraordinary margins. Regulatory oversight has been notably deficient. Presently, the Chinese government, as the ultimate beneficiary, has control over the largest energy distributor in Peru’s capital, having acquired it in 2020. They have extended an offer to acquire the second-largest distributor, potentially securing 100% control over Lima’s distribution. Yes, 100%!  

But there’s also a more subjective concern that is troubling and that is the sense of abandonment or, more aptly put, the “detachment” exhibited by the business elites toward the future of the country. This increasing “detachment” from their own country, where they amassed their fortunes, has become noticeable in recent years. Many of them no longer reside in Peru, having established themselves in developed cities and countries. Gradually, they’ve been departing, largely due to the fear sparked by the brief tenure of the radical left in power (lasting less than 18 months). In response, they relocated abroad and transferred their liquid assets offshore. 

I was in Chile some time ago, and despite the intense period they underwent in 2019 (with multiple incidents of vandalism such as burnt metro lines, buildings, churches and standalone stores, along with the election of a radical left candidate and a referendum to change the constitution), the leaders of major groups remained deeply rooted in the country, actively advocating for it, even on social media. The concept that if you want democracy and progress you must fight for it was, and still is, very present. Most of their children study locally, later seeking postgraduate studies abroad. However, in Peru, recent trends show a different inclination, urging young people to leave right after completing their schooling. This trend is widespread across the entire population. In 2022, 401,740 Peruvians departed and never returned. By June 2023, nearly 415,000 Peruvians had followed suit, a significant rise from the 110,185 who left in 2021.  

The government bears significant responsibility for this situation. Corruption, crime, a lack of trust in the legal system, stringent labour laws, high informality and more continue to proliferate. Moreover, the country has leaned towards a pro-business stance for the past two decades instead of fostering a pro-market environment. Regulatory frameworks have enabled extensive industry concentration, stifling competition. Additionally, financing options for projects have been strained for the last 25 years.  

The capital markets have been designed in some way that it can’t thrive. To illustrate, in the early 1990s, after significant reforms, Peru’s GDP stood at USD 50 billion, and the Lima Stock Exchange experienced an average of 1,800 trades daily. Fast forward to 2023, 30 years later, where the GDP has soared to USD 250 billion (fivefold), yet we’re seeing only around 425 trades daily; a mere fraction of the 9,000 trades per day that the trend suggests. Almost all the financing has flowed through the banking system.  As a proxy, the profits of the largest bank has grown 43 times in that same period of time(x). It seems the system has been engineered to render the capital markets as mere marketing tools, channeling everything through banks. No real competition will translate into lower and better interest rates for companies and better returns and products for investors.   

Another striking aspect is the active encouragement of capital outflow from the country. Typically, governments focus on attracting more investments to boost GDP, generate jobs, increase consumption, improve services and raise taxes, utilising the tax system as a pivotal tool. As a standard rule for Peruvian investors, foreign earnings incur a 30% tax rate on dividends, income, or profits, unless specific treaties apply. However, governmental actions have introduced loopholes effectively allowing locals to move their funds out of Peru and invest abroad, facing as little as 5% taxation on dividends, capital gains, or debt. In some cases, investing in foreign stocks incurs a 0% tax rate. Consequently, why would locals choose to invest in local stocks that are less liquid and subject to equal or higher taxes? These tax loopholes are encouraging Peruvians to redirect their investments away from Peru, hindering reinvestment within their own country. 

Rebuilding Peru’s economic foundations 

Peru continues to possess robust macroeconomic strengths, surpassing those of any other country in the region, enabling it to potentially regain its status as a high-growth nation. However, the internal factors that previously drove investments are no longer prevalent. It is difficult to build a country when locals are leaving, especially those who have spearheaded investments, undertaken risks and reaped significant profits and are hesitant to continue investing. They now fear reinvesting their profits and prefer to diversify. Without a shift in government strategy towards fostering confidence and instilling trust in the future, achieving this will be challenging. There is a need to establish a genuinely functional capital market system (beyond a mere marketing tool for the OECD) and cease incentivising investments outside of Peru in favour of encouraging investments within the country. Revitalising Peru’s growth hinges on overcoming these obstacles and reinstating faith in the nation’s economic prospects.

________________________________________________________________________

i Central Bank September Report , CAPIA

ii https://gestion.pe/economia/repunta-salida-de-capitales-del-peru-por-incertidumbre-y-falta-de-inversiones-salida-de-capitales-del-peru-bcr-fuga-de-capitales-del-peru-al-exterior-noticia/

iii Asociación de AFP´s, https://gestion.pe/tu-dinero/bcrp-un-setimo-retiro-de-afp-implicaria-la-salida-del-25-de-los-actuales-fondos-julio-velarde-noticia/, CAPIA

v Reporte Asociación de Fondos Mutuos del Perú Octubre 2023, CAPIA. http:// fondosmutuos.pe

vi Estudios Economicos de la OECD : Peru 2023

vii Ley 31112 “Ley que establece el control previo de operaciones de concentración empresarial”

viii Superintendencia de Banca y Seguros , Reporte Octubre 2023. https://www.sbs.gob.pe/app/stats_net/stats/EstadisticaBoletinEstadistico.aspx?p=1#

ix BCRP. https://www.bcrp.gob.pe/docs/Publicaciones/Reporte-Estabilidad-Financiera/2023/noviembre/ref-noviembre-2023.pdf

x Bloomberg Credicorp (BAP. N) net profits 1993 vs 2022.

About the Author

Carlos Rojas
Carlos Rojas
Carlos Rojas is a Founding Partner of CAPIA, whose leadership and contributions in the finance industry have made him a sought-after columnist, speaker and mentor in Peru's financial landscape.
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