Peru: Hands across the Amazon

Manifest Destiny was a term coined at the start of the 19th century to justify the U.S.’s policies of conquest, annexation and western immigration. It allowed the country to transform itself from a set of hard-scrabble states, hugging the eastern seaboard, into a continental giant that bridged the Atlantic and the Pacific. Manifest Destiny was probably the single most defining factor that allowed the U.S. to differentiate itself from its Latin American brethren, by allowing it to mobilize the massive resources lodged deep in its hinterland and move them east and west. Many of the Latin American countries were unable do the same. Mexico’s shallow ports limited its maritime capabilities. Argentina and Brazil’s ports were on the Atlantic, and less accessible to oriental consumers. However, Brazil is taking steps to achieve its own manifest destiny, and in the process it is converting Peru into the new California.

A series of major infrastructure programs in roads, energy, ports, railroads and airports are triggering a productivity revolution that will sharply accelerate Peru’s economic development. The interesting thing is that much of the capital is being provided by Brazilian firms, as they seek to exploit Peru’s access to the Pacific Basin. Launched in 2000, as the Initiative for Infrastructure Integration of South America (IIRSA), the project’s main achievement was the construction of three highways and waterways that linked Peru to Brazil, thus allowing the two countries to perforate their formerly impenetrable mountains and jungles. Two of the three highways were completed last year, and the third one is more than 60% done. Sensing the opportunities at hand, Brazilian firms are hurling themselves into Peru, pouring billions of dollars to construct new ports and railroads that will bring their products to the oriental market. From CVRD to Petrobras to Odebrecht and Braskem, the titans of the Brazilian corporate world are converting Peru from a backwater of poverty into one of the more developed countries of the region. Meanwhile, other Latin American countries are taking on debt to attend to political issues; Peru is capturing international funds to improve its own productive capacity. The Olmos irrigation project, for example, will greatly enhance the country’s agricultural exports. A new gas field discovered by Petrobras near Camisea is boosting Peru’s LNG exports. Four billion dollars of new hydroelectric plants at Inambari will allow Peru to interconnect its electricity grid with Brazil, providing its energy system with greater resilience and stability. These are the reasons why Peru was able to coast through the international credit crunch, and why it will probably be the fastest growing country in the region during 2010.

We expect the Peruvian economy to grow more than 5.7% y/y in 2010, with an inflation rate of slightly more than 2%. The country’s fiscal deficit will improve to 1.8% of GDP, down from 2% in 2009. Likewise, the current account will post a small shortfall of 1.2% of GDP. Booming exports will help offset the massive inflow of capital goods needed to modernize the country’s infrastructure. Peru’s burgeoning economic activity is reflected in the streets of Lima, where thousands of new cars choke the narrow roadways. The growing middle class is flocking to the sea of retailers and shopping centers that are sprouting across the landscape. Fortunately, Peru’s growing prosperity is eliminating the prospects for anti-systemic political candidates, such as Ollanta Humala, taking center stage. With the electoral calendar full for the next 18 months, with a series of regional and presidential elections, some people are worried that Peru will follow in the Bolivarian footsteps of Venezuela, Bolivia and Ecuador. However, the chances of such a scenario are nil.  Lima Mayor Luis Castaneda is leading in the polls, with 26% of the vote. The rest of the field consists of former President Fujimori’s daughter, Keiko, with 19%, and Humala with 15%. Former President Toledo is making a big comeback, and many Peruvians think that he could be the surprise winner in May 2011. Peru’s transformation is allowing it to return to the glory days it enjoyed prior to its reluctant independence from Spain. A slow drive through the center of Lima reveals the cathedrals and palaces that once adorned the bastion of Spanish control. This helps explain why it took the pincer maneuver by San Martin from the south and Bolivar from the north to finally defeat the last redoubt of royalist loyals. Today, Peru is poised to become a new California by becoming an outlet for Brazil to move its enormous treasure trove of natural resources to the immense markets that lie on the other side of the Pacific.

One Response to "Peru: Hands across the Amazon"

  1. Gregorio Arevalo   January 15, 2010 at 4:59 am

    A new California it may well end up becoming, but Peru’s increasing prosperity has had so far very little to do with Brazilian investment, which pales in comparison to investment from Peruvians themselves and from countries and regions other than Brazil, including Spain, Asia and other Latin American countries. This is not to say that Peru won’t benefit from increasing interest by Brazilian companies, but to make the argument that Peru has been growing because of Brazilian investment is a totally inaccurate exaggeration.