Australia and Peru recently finalised a comprehensive trade agreement that PM Malcolm Turnbull says will generate exports, income and jobs.
But before exporters rush into this emerging South American market you should be aware of the challenges and potential risks.
EMIS, the global online market intelligence service launched recently in Australia, has released a detailed report highlighting the major issues now facing exporters and importers looking to trade in Peru.
In the report, respected market analysts Dun& Bradstreet has downgraded Peru's political rating outlook from “stable” to “deteriorating.”
This is due largely to President Pedro Pablo Kuczynski's highly controversial decision to pardon the former president, Alberto Fujimori, who was serving a 25-year sentence for corruption and human rights abuses. The decision has plunged the country into its worst political crisis in recent years.
Short-term economic outlook
Heightened political and policy uncertainty is likely to have a seriously detrimental impact on economic sentiment, significantly threatening economic prospects in the short term, notes Dun & Bradstreet.
“The political crisis that shook Peru in recent weeks has already weighed on public investment and caused business confidence to fall to its lowest level in nine months in December,” the report finds.
“This does not bode well for future private investment.”
In response, the central bank cut its benchmark interest rate from 3.25% to 3% in January. Reserve requirements on foreign currency deposits have also been trimmed to help strengthen lending.
The central bank is ready to loosen monetary conditions further should the economy continue to expand below its potential.
“While the implementation of a more expansionary monetary policy, together with improving terms of trade, will help rev up the domestic economy, this may not be sufficient to fully counteract the impact of political turmoil on growth,” Dun & Bradstreet predicts.
Also, the upward trend in Peruvian per capita income is likely to continue over the next decade.
Peru has made notable progress in trade liberalisation recently, progressively reducing tariff barriers and other trade-distorting measures.
Poor education quality, infrastructure constraints, weak institutions and capacity issues are the main challenges facing Peru.
And pollution from extractive industries, unsustainable practices and intensive agriculture threaten fresh-water resources.
Strong GDP growth
Dun & Bradstreet notes Peru has abundant mineral resources – a vital factor in recent strong GDP growth.
However, poverty levels are high and income distribution is uneven.
Consequently, the poor majority have become increasingly resentful of international investors (many of whom took advantage of economic liberalisation in the 1990s by moving in to develop the country’s natural resources), with resource nationalism having significant potential for socio- political instability.
Turbulent political history
Peru’s modern political history has been turbulent. The widespread violent insurgency of the late 1980s was quelled in the 1990s, but tough government measures resulted in human rights abuses.
Key political figures continue to become embroiled in human rights abuse investigations.
For Australia, the comprehensive trade agreement signed in Canberra last week supports its goal of increasing its gains from the Trans-Pacific Partnership (TPP). It also provides a gateway to Latin America.
Specific benefits include the elimination of tariffs on beef within five years, and immediate duty-free access for Australian wine, sheep meat, most horticulture products (including almonds), kangaroo meat and wheat; and for pharmaceuticals, medical devices, paper and paperboard.
According to Australia’s Department of Foreign Affairs and Trade, PAFTA will allow more sugar market access for Australian sugar farmers and will create new opportunities for Australian mining service providers.
For Peru, the benefits of PAFTA will be seen in the long term if Peruvian businesses and industries fully use this opportunity.
Overall country risk rating
Dun & Bradstreet assesses Peru as an emerging country with a “moderate” risk, but with a deteriorating rating outlook.
This is due to significant uncertainty over expected returns. Risk-averse customers are advised to protect against potential losses.
However, systemic risk within Peru’s financial sector is relatively low, given robust capital adequacy ratios, low levels of leverage and sufficient provisions for non-performing loans.
Local banks’ exposure to a tightening of external financing is limited and direct exposure to the commodity sector is also rather low.
Established in 1995, EMIS has grown to be the foremost source of company, industry and country information accessed by businesses looking to expand their presence and success in key emerging markets.
EMIS provides relevant news, research, analytical data and peer comparisons for more than 125 countries.