Solution Manual for Principles of Corporate Finance 14th Edition by Richard B...
Emerging markets - Peru
1.
2. 2
Executive Summary
• Peru’s population growth in relation to its GDP reflects a rapid increase in the GDP per capita; and its
consumption still presents large space for growth
• Since the 1980s, Peru has demonstrated some political stability, with a growing democracy and
openness towards the world, but 2011 elections presents risks
• Economically, Peru has been presenting a strong stability, with GDP growth above and consumer price
increases below those of some of its closer peers
• FDI in Peru has augmenting substantially over the past years, mainly due to improvements in regulations
for investments
• Politically and economically, Peru presents high potential for investments, but the country still presents
social risks that should be considered prior to investing
Rodrigo R. Coutinho
4. 4
• Peru is the 3rd largest country in South America, after Brazil and Argentina;
major cities are Lima (capital) – which accounts for ~48% of the country’s
GDP -, Arequipa, Chiclayo and Cuzco
• High population growth between 2000 and 2008 (~20%), but recent stable
and lower rates – ~1.1% per year, what might lead to a decrease in the
population
• Ethnic groups: Indigenous (45%), mixed background – mestizos (37%),
European (15%) and others (3%)
1. Demographic characteristics
Peru’s population growth in relation to its GDP reflects a rapid increase in the
GDP per capita; and its consumption still presents large space for growth
Source: Pyramid research; Merril Lynch; US Department of State.
56.8 61.4
69.7
79.5
93.0
109.0
162.3
26.7 27.1 27.5 27.9 28.4 28.8 31.5
2002 2003 2004 2005 2006 2007 2013
GDP Population
60
57
36
13
61
65
42
17
71
58
43
19
Mob. Phone Land Line Cable TV Internet
2006 2007 2008
• Household final consumption expenditure has increased on avg. 4.4% in
the 1998-2008 period; 8.4% in 2007, and 8.7% in 2008
• The country is subdivided into Litoral (Western arid coastal plains),
Altiplano (central rugged Andean mountains) and Floresta (eastern
lowlands with tropical forests – Amazon basin)
Population (MM) and GDP (%) – 2002-2013 Selected goods penetration in Peru
CAGR GDP: 10.1%
CAGR population: 1.51%
Rodrigo R. Coutinho
5. 5
• Alejandro Toledo
was elected in 2001
and became in power
until 2006
• He consolidated
democracy, signed a
Trade Promotion
Agreement with the
US, and led an
impressive economic
boom which
decreased poverty by
5.6%
2. Political conditions
Since the 1980s, Peru has demonstrated some political stability, with a growing
democracy and openness towards the world, but 2011 elections presents risks
Political movements in Peru since 1985
Source: Economist Intelligence Unit; US Department of State.
1985
1990
1995
2001
2006
• Amid inflation,
economic hardship
and terrorism, in
1985, Alan Garcia
Perez became the
first democratically
elected President of
Peru in 40 years
• In 1990, after 2 years of hyperinflation
(1988-1990), and increasing terrorist threat
by Sendero Luminoso, Alberto Fujimori, a
relatively unknown mathematician was
elected
• He implemented drastic economic reforms
to tackle inflation, privatized state-owned
companies, removed investment barriers,
improved public finances and combat
terrorism
• However, his 2 terms (1990-2000) were
marked by his “auto-coup” in 1992 and
corruption; on the beginning of his 3rd term
in 1990, he resigned and exiled in Japan
2011
• In 2006, Alan Garcia
was re-elected
President, defeating
Ollanta Humala, left-
wing candidate, with
close relations to
Chavez from
Venezuela and
Morales from Bolivia
• During his term, he
signed trade
agreements with the
US, Canada,
Singapore and
China, and begun
negotiations with
Korea, Japan, the
EU, and others
• For 2011, the two
candidates leading
the poll are from the
center-right or right
wing – Ms. Keiko
Fujimori with 22%
and Luis Castaneda
with 21%
• It tends to be no
major changes in
politics for the
upcoming years
• However, Ollanta
Humala, defeated
by a narrow margin
in 2006 may run,
which increases
uncertainty over
political stability in
Peru
Rodrigo R. Coutinho
6. 6
• Exports 2008: USD 31.2 billion: USA (18.6%), China (12%),
Switzerland (10.9%)
• Imports 2008: USD 27.7 billion: USA (18.9%), China (13.4%), Brazil
(8.2%)
• Unemployment rate fell from 9.4% in 2003 to 7..5% in 2007
• Total debt to GDP has decreased from 147.3% in 1988 to 53.7% in
1998, 26.9% in 2007 and to 22.1% in 2008
3. Economic performance
Economically, Peru has been presenting a strong stability, with GDP growth
above and consumer price increases below those of some of its closer peers
GDP growth in % [2007-2010]
Source: The World Bank Group (Doing Business); LAVCA (Latin American Venture Capital Association).
5.7
4.2
-2.7
3
4.7
3.2
-1.7
4
7.5
2.5 -0.3
2.5
8.9 9.8
1.5
5.8
2007 2008 2009 2010
Peru
Colombia
Chile
Brazil
• GDP 2008: US$ 127.8 billion (up 9.8% from 2007)
• GDP: manufacturing (15.5%), agriculture (7.6%), services (55.1%),
mining (5.7%), construction (5.9%), and others
• Natural resources: copper, gold, silver, zinc, lead, iron ore, fish,
petroleum, natural gas and forestry
• Agriculture: coffee, cotton, asparagus, paprika, artichokes,
sugarcane, potatoes, rice, banana, maize, poultry, milk, etc.
Consumer price increases in % [2007-2010]
3.6
5.7
4.8
4.14.4
8.7
2 2.3
5.5
7
4.6
3.7
1.8
5.8
3.2
2
2007 2008 2009 2010
Colombia
Chile
Brazil
Peru
Rodrigo R. Coutinho
7. 7
• According to World Investment Group, Peru appears as the 5th
destination for Brazilian FDI outflows – following Argentina, Mexico,
Angola and Chile
• Peru (with 9 payments) is below average Latin America & Caribbean
(33.2) and OECD (12.8) with regard to taxes
• Regarding trading across borders, Peruvian cost to export is cheaper (US
$ 875 per container) than Latin America & Caribbean (US$ 1,244) and
OECD (US$ 1,090); and its cost to import (US$ 895) is also cheaper than
the other two (US$ 1,481 and US$ 1,146, respectively)
4. Investment environment
FDI in Peru has augmenting substantially over the past years, mainly due to
improvements in regulations for investments
Source: United Nations Conference on Trade and Development; World Investment Group; LAVCA.
1,943
3,467
5,491
6,924
4,760
36 0 66
736
396
1995-2005 2006 2007 2008 2009
FDI Inflows FDI Outflows 33
46
46
49
50
53
54
57
58
63
75
76
Dominican Republic
El Salvador
Argentina
Panama
Peru
Costa Rica
Uruguay
Colombia
Mexico
Trinidad & Tobago
Brazil
Chile
FDI in Peru in USD MM [1995-2009]
Annual Scorecard on PE & VC Environment in
Latin America and Caribbean - 2009
• Peru in 2009 is one position better than in 2008; mainly due to specific
regulations and programs approved in 2008 to foster the development of
domestic private capital funds industries
• Peru presents a high-quality accounting standards and moderately
high openness to inward portfolio investment and corporate
governance
• Peru is ranked 56 in the “Doing Business 2010 Rank” from the World
Bank; up 9 positions from its 65th place in 2009; and is ranked
Rodrigo R. Coutinho
8. 8
• Peru offers a fast-growth economic situation based on trade and
investments, and a recent stable political environment
• Peru has several trade agreements signed - with the US,
European Union, Asia Pacific Economic Cooperation (APEC)
and MERCOSUR -; and is studying agreements with Chile,
Mexico, Thailand and Singapore;
• Peru has agreements for the promotion and protection of
investments (BIT) with 29 countries of Europe, Asia and LatAm
• Peru presents high potential for investments in:
• Tourism – Cuzco, Machu Pichu, lake Titicaca, Amazon forest,
etc.
• Metal mining: copper, gold, molybdenum, silver, zinc, etc.; big
mining companies have been granted concessions for
exploration of mining projects – Rio Tinto, Xstrata and Vale.
• Manufacturing: natural resources whether mineral or agro
farming (e.g. long fiber cotton and the alpaca fine fiber)
• Forestry, fishing, hydrocarbons and chemicals, textiles and
clothing, jewelry, metallurgy, services, etc.
5. Conclusion
Politically and economically, Peru presents high potential for investments, but
the country still presents social risks that should be considered prior to investing
Forecasted economic growth - conclusions
Source: ProInversion – Private Investment Promotion Agency - Peru
• Peruvian economy is not yet very diversified; thus, it is very
dependant on commodity international prices
• Peru presents considerable differences (political, economical
and social) between Lima (capital) and other provinces of the
country
• Social movement activity is an inherent risk in Peru –
movements have increased in recent years around opposition to
extractive industries (mining and hydrocarbons sectors), and
there have been several violent confrontations over 2009
• Permanent conflicts between government, who stimulates
the production of rice in the jungle, and farmers, who prefer
to plant coke, with higher returns
• Terrorist group Sendero Luminoso,, who manifests against
government, still present risk to the country:
• It is recently after support from rural population (farmers)
Opportunities Risks
Rodrigo R. Coutinho
9. 9
Rodrigo R. Coutinho
Mobile: +1 (917) 344-0512
E-mail: rodrigo@rodrigocoutinho.com
New York | NY
Rio de Janeiro | RJ