Peruvian Moment: Investment alternatives in times of uncertainty

The recent opening of the Frontal Trust office in Peru, right in the middle of the particular political, economic, and social moment in the neighboring country, was the perfect excuse to organize a digital meeting to analyze what is happening and put on the table the opportunities Peru offers in times of crisis. 

On Friday, November 12, Frontal Trust and Diario Financiero, held the digital meeting Peruvian Moment: Investment alternatives in times of uncertainty, a conversation in which participated Diego Macera, manager of Instituto Peruano de Economía and member of the Commission for Sustainable Mining Development of the Presidency of the Council of Ministers, and Raul Benavides, partner, and portfolio manager of Frontal Trust Peru.

Before addressing the “Peruvian moment,” Raul Benavides took the opportunity to comment on the reasons that motivated the opening of the office in Peru, ensuring that Peru has the macroeconomic fundamentals necessary to establish an office in that country and that the political-economic situation accelerated the process, becoming a place where attractive opportunities can be found to offer to local and foreign investors. “With more than 30 million inhabitants and a financial industry that still has plenty of room to grow and develop, Peru is an interesting place for a company specializing in alternative assets like us. That is why we decided to establish our company in Lima and replicate here the same business model we have in Chile.” He also noted that in the first stage they will focus on the area of private equity, an industry that is very underdeveloped in Peru and presents great growth opportunities.

Then, the economist of Universidad del Pacífico and a master’s degree from the University of Chicago, Diego Macera, referred to the economic situation of Peru, emphasizing that beyond the political crisis that the country is experiencing, with a president who has faced ongoing difficulties and who in less than three months has replaced more than half of the ministers with whom he began his government, the economy is being recovered, which has demonstrated the strength of its macroeconomic fundamentals. “Despite having shown one of the most severe falls in the world, Peru’s GDP in August 2021 was nearly 2% above pre-pandemic levels,” Macera said.

The external sector has also brought favorable winds for recovery. According to Macera, there is a significant improvement in terms of trade exchange, which has led the trade balance to its record highs. The labor market, on the other hand, shows differentiated dynamics. In the third quarter of 2021, average wages were 8.6% lower than in 2019, while formal sector wages exceeded their pre-pandemic records by 4.6%. “This result reflects a slow reversal of the loss of quality jobs that affected most workers.”

Inflationary pressures have also characterized Peru’s post-pandemic economic environment. Inflation reached 5.8% in October, falling below the rates shown by Brazil, Mexico, and Chile. To address this context, like the rest of the countries in the region, the Central Bank of Peru has raised its reference rate to 1.5%.

The macroeconomic credibility of the Executive has also deteriorated, reflected, for example, in the devaluation of the currency, which has shown greater volatility and has even climbed to historic highs in response to the climate of uncertainty autogenerated by the new administration’s contradictions.

By 2021, the economy is expected to grow 11.7%, with upside skewed risks. For 2022, however, the prospect of low growth of around 1.5% remains as a result of a 16.2% drop in private sector investment. “This would respond to the strong deterioration in business confidence that exists in the face of the political and economic uncertainty experienced by the country.”

After his economic analysis, Macera referred to the political moment, ensuring that President Castillo faces constant problems within his administration. “Bad appointments add instability in the face of a Congress in which he has no majority. With only three months in office, the President’s approval is already lower than his disapproval.”

He also said that “without congressional control, the potential for harm from the government is still important, but not entirely.” He warned that although vacancy looks today seem improbable, nothing can be ruled out. The main risk is the Constitutional Assembly, although it seems increasingly unlikely. “Populist outfits can be expected in the coming months, but constrained by political control and the incompetence of the Excecutive.”

Following the presentation, the moderator of the meeting, Marily Lüders, director of the Diario Financiero, held a friendly and relaxed conversation with Diego Macera and Raul Benavides, while answering interesting questions from the audience.

In conclusion, Raul Benavides pointed out that “Peru is not finished because Castillo was elected as President. Quite the contrary. Economic expectations are good, and the country has plenty of room to move forward. And this crisis, although very complex, opens up opportunities that, well-structured and with adequate collateral, can be very well positioned in the risk-return curve.”

Diego Macera, in addition to supporting Benavides’ remarks, said that “the economic fundamentals of Peru are very sound, and all indicators reflect that the main concern is how the political environment will behave. The red line many investors are seeing is how the Constitutional Assembly discussion progresses. But my vision is that it is not in the priorities of the Executive.”

Diego Macera Link