Economic Analysis - Investment Growth To Return To Peru - DEC 2017


BMI View: Economic activity in Peru will benefit from a turnaround in investment growth , driven by the mining sector and public stimulus and reconstruction efforts. An ambitious infrastructure agenda may also bolster investment, but we note significant hurdles and political risks remain.

  • Fixed investment growth is set to pick up over the coming quarters, driven by mining sector activity and government stimulus efforts. We forecast real GDP growth to reach 2.8% in 2017, accelerating to 4.3% in 2018.

  • Forward-looking indicators, including imports of capital goods, point to an acceleration of investment growth over the coming quarters.

  • Construction is set to pick up, driven by mining and public sector-funded reconstruction and infrastructure development. However, we note considerable hurdles and political risks cloud President Pedro Pablo Kuczynski's infrastructure agenda.

Fixed investment in Peru will turn from a persistent headwind to growth into a tailwind over the coming quarters. Following thirteen consecutive quarters of declines, preliminary estimates from the Finance Ministry have private investment rising more than 4.0% y-o-y in Q3. Investment in the mining sector was likely a major driver of this turnaround, as a recovery in copper prices has prompted mining firms to expand operations.

Our Mining team expects copper production in Peru will ramp up over the coming years, supported by a strong project pipeline ( see 'Copper: Steady Growth Ahead ' , September 26). Major international firms, including Southern Copper, Freeport McMoRan and MMG, are all seeking to boost output through expanding existing operations and investing in new projects. Southern Copper alone has allocated USD375mn for the Tia Maria project and, as of Q217, has invested USD650mn of a total of USD1.2bn for an expansion of its Toquepala site. Additionally, Milpo has also announced a USD4.8bn investment in its Michiqulillay project and Teck Resources acquired AQM Copper to develop the USD1.6bn Zafranal project.

GFCF To Pick Up With Mining Investment & Stimulus
Peru - Gross Fixed Capital Formation
Source: BCRP, BMI

An increase in the value of inputs and capital goods imports in recent months also bodes well for increased investment in the coming quarters. Raw material imports have spiked, with agricultural and industrial raw material YTD growth reaching 22.0% and 9.8% y-o-y in August, respectively. While, industrial capital goods imports jumped into positive territory in July and August, with 18.2% and 14.6% y-o-y growth. These increases are reflective of the implementation of mining firms' investment plans as well as investment into other sectors.

Rising Imports of Inputs Bodes Well For Investment
Peru - Import Growth, % y-o-y 6mma
Source: BCRP, BMI

Construction Industry To Reverse Course

A large portion of fixed capital formation growth will come from the construction sector, driven by mining investment and government-funded infrastructure and reconstruction efforts in response to devastating flooding in Q117. Corruption allegations have disrupted major projects and will see Peru's construction industry contract by 1.2% in real terms in 2017. However, we expect a recovery in the sector over the coming quarters as both public and private investment picks up due to stimulus efforts and increased mining capital expenditure. High frequency data suggests the recovery has already begun, as Peru's construction activity index turned positive in June and July, reaching 3.5% and 3.8% growth y-o-y, respectively.

Construction Industry Showing Early Signs Of Recovery
Peru - Economic Activity Index, Construction, % y-o-y
Source: BCRP, BMI

Political Risks Remain At The Fore

Corruption and political infighting will pose a major risk to infrastructure development and and investment growth over the coming year. The ouster of Finance Minister Alfredo Thorne in June over the Chinchero airport project marked the fourth cabinet-level departure precipitated by Peru's opposition-controlled legislature, with rapid turnover at key posts undermining the prospects of the Peruvian government's ambitious infrastructure programme. Immediate risks following the ouster of Kuczynski's entire cabinet in September have abated following the appointment of a new cabinet and subsequent vote of confidence by the Fuerza Popular (FP)-controlled legislature. However, we note that continued political infighting and opposition by FP legislators could derail progress on infrastructure projects. Re-tendering major works, including the USD7.0bn Southern Peruvian Gas Pipeline, will be difficult tasks without the complications of further turnovers within contracting agencies. Should further disruptions occur, our Infrastructure team would likely be forced to revise down our construction forecasts for 2018.