Beware Brazilians bearing gifts Peruvians have Investing in mixed feelings about their neighbour’s influence Page 2 FINANCIAL TIMES SPECIAL REPORT | Wednesday September 21 2011

www.ft.com/peru­2011 | twitter.com/ftreports Mood of cautious optimism takes hold

Business slowly accepts president as early fears of an authoritarian approach seem to fade away, says John Paul Rathbone

llanta Humala admits he sometimes looks in the mir- ror and cannot believe he is president. Members of the Oexclusive Club Nacional, styled on the English gentleman’s model and situ- ated a few hundred metres from the presidential palace in central , feel the same way. It has been less than four months since Mr Humala, a former army officer with no government experi- ence, unexpectedly won the June 5 run-off. His narrow victory over cen- tre-right candidate Keiko Fujimori, the daughter of a former president, sparked a record sell-off on the Lima stock exchange. Since then, Mr Humala has dis- pelled many of the concerns held by investors – including the buttoned- down businessmen lunching in the Club Nacional’s chandeliered dining rooms. “There is a mood of cautious optimism,” admits one. Even by Latin American standards, Smart mover: President Humala has so far shown a moderate approach on policy, although sceptics are worried he may launch into greater state intervention if the economy falters Getty it has been a remarkably volatile year in Peru. It is the world’s second-big- also left doubts about where his Everyone is wondering if there are Humala has gone first to those he For now, high commodity prices what would happen if Mr Humala’s gest producer of copper, silver and true instincts lay and whether his any more shocks on the way, says knows best – and it may be that they give his new government the financial popularity sagged, or commodity zinc, and one of the globe’s fastest- political makeover masked a latent Hernando de Soto, the internationally will also prove good at their jobs.” elbow room to be all things to all prices collapsed. Then he could growing economies, having trebled in authoritarianism. acclaimed Peruvian economist. “Yet, It is all part of the ambiguity that people. Growth remains high – a 6-7 launch into greater state intervention size since 2000. Such concerns are particularly per- so far, the change in Mr Humala’s surrounds Peru’s new president. He per cent expansion is forecast for this and become the populist authoritarian Electoral tensions really began to tinent in a country that is still trau- approach shows he realises he has to wants to strengthen the role of the year and 5-6 per cent for 2012. many fear he is at heart. heat up in April, after centrist candi- matised by recent hyperinflation, be the president of all Peruvians. That state, but at the same time the state is A “strategic alliance” with Brazil “While commodity prices are high, dates split the electorate and Mr insurgency and authoritarianism. shows he is a smart politician.” renowned for its corruption and ineffi- will see the continent’s largest coun- he can be a Lula,” says Moisés Naím, Humala scooped up their votes in the After all, it was only in the mid-1990s Certainly, the president is going to ciency. Improving it is the work of try build roads linking its agricultural a senior associate in the Carnegie first round. Local debt markets subse- that former president Fujimori, now need all the good ideas he can assem- generations, not a single presidency. markets to the Pacific, benefiting Endowment think-tank’s economics quently clammed up. Some feared Mr serving a 25-year prison sentence for ble if he is to deliver on his central Indeed, as consecutive terms are not from Peru’s many free-trade agree- programme in Washington, DC. Humala’s rise in the polls might jeop- human rights abuses, suppressed the promise of social inclusion, while allowed under the constitution, many ments with the US and Asia. This “Should they fall, he could become a ardise the $42bn of investment that Shining Path guerrillas and brought keeping Peru’s commodity-heavy wonder if his wife might run in 2016, could even turn Peru into “one of the Chávez.” international mining companies – order to the macroeconomy. economy thrumming. allowing Mr Humala to return again most dynamic regions on earth”, says So far, Mr Humala has followed the such as BHP Billiton, Xstrata and Nobody disagrees with his govern- in 2021 – just as the Kirchner hus- Walter Molano, head of research at Brazilian script. He has been fiscally Freeport-McMoRan – were set to pour ment’s patently reasonable desire to band-and-wife team sought to do in BCP Securities, the emerging-markets prudent and politically pragmatic. into Peru’s $168bn economy. fight corruption, beat crime and Argentina. When asked, he replies focused investment bank. There is little evidence – yet – that he Since then, markets have Inside this issue reduce poverty by expanding social that it is too early to say. Nonetheless, sceptics worry about will not continue that way. rebounded, the country’s debt rating Taking the long view Hernando services to the poorest regions, espe- has been upgraded and pledges of de Soto talks property rights Page 2 cially the Andes and Amazon. There, even more foreign investment have more than 200 social conflicts have come in, after the little-known Mr Guest column Felipe Ortiz de flared up this year as indigenous Humala has proved not to be the Zevallos hopes the president’s groups have protested the impact of bogeyman many feared he was. moderate rhetoric will unite Peru’s new mining projects. The 49-year-old has assembled a political factions Page 2 It will still be a delicate balancing rainbow cabinet consisting of leftwing act, however, to keep public finances radicals and former military men, Food and drink trim, while meeting the high expecta- admixed with orthodox economists. Chef Gastón Acurio tions Mr Humala has nurtured among , the finance min- takes on New York his core constituency – the third of ister, served in the previous govern- Page 3 Peruvians who live on less than $4 a ment. Julio Velarde, the widely day. respected head of the central bank, Exchanges Cross­ So far, the ramp-up in social spend- has been reappointed. trading platform has ing he promised during his campaign “We are all very non-ideological,” rocky start Page 3 has been well calibrated and carefully says Salomón Lerner, a millionaire targeted. The government budget, Ethanol Sugar­based industry set businessman who is Mr Humala’s for rapid growth Page 3 which is running a surplus, can easily prime minister. “What’s important is meet the extra $370m cost. not the colour of the cat, but that it Retail Growth in domestic spending A tax on windfall mining profits has catches mice.” power is attracting interest Page 3 also proved digestible – and followed a If at times Peruvians’ worries have very un-Chávez-like consultation seemed hysterical, it is with good rea- Commodities between the government and mining son. In 2000, Mr Humala, then a colo- Mining remains the companies. Instead of seeking to raise nel, led a failed revolt against Alberto main source of $2bn-3bn as companies had feared, the Fujimori, the president at the time. wealth Page 4 extra tax bill is about $1.1bn. After he was pardoned, he ran in the As a political outsider, Mr Humala 2006 elections, espousing the kind of Juniors and has so far turned to a close circle for socialist rhetoric bellowed by Vene- small caps advice, in particular his wife, Nadine zuela’s radical president Hugo Chávez Good returns on Heredia, and the prime minister. The – and only narrowly lost. exploration Page 4 35-year-old Ms Heredia is telegenic, This year, advised by Brazilian grew up in the same area as Mr political image-makers, he adopted a Pensions Reform is crucial to Humala and accompanies her hus- more moderate approach. Following address social inequality Page 4 band to all high-profile state func- former Brazilian president Luiz Inácio tions. She has his ear. Lula da Silva’s lead, he dropped talk More on FT.com The president’s appointment of of nationalising companies and spoke Conflicts New law seeks to former military colleagues to key instead about economic centrism and defuse tensions between developers advisory positions has been more con- social-inclusion policies for the poor. and indigenous communities troversial. “This stirs understandable The rhetorical switch helped fears,” says one western diplomat. Mr Humala win the election. But it “But it’s also understandable that Mr

Well­balanced choice of advisers favours growth

terms of his statements on Mr Favre’s experience – Politics human rights and some of he worked closely with the the advisers he has on secu- campaign that carried President selects rity and democracy issues.” former Brazilian president cabinet from left The new president has Luiz Inácio Lula da Silva to promised “more action and victory – helped him turn a and right, reports fewer words” than Alan radical ally of Venezuela’s Prime Minister Lerner Naomi Mapstone García, his predecessor. President Hugo Chávez into Mr Humala’s first acts someone the business com- macro-economic policy. Mr included the brokering of a munity could warm to. Castilla, who served as dep- Markets have applauded $1.1bn windfall mining levy, For the role of prime min- uty finance minister in the ’s decision the creation of a new minis- ister, Mr Humala chose his previous administration, is to swap his signature red try of social inclusion and closest adviser, Salomón prioritising private invest- T-shirt and revolutionary the signing of a law grant- Lerner, a 65-year-old mil- ment in major infrastruc- rhetoric for a sombre suit ing communities the right lionaire businessman. Mr ture works. and pledges to protect the to be consulted over invest- Lerner has had a long his- “We need to sustain rights of investors. ments. tory on the fringes of Peru- growth of 6-7 per cent for However, the Peruvian His choice of cabinet and vian politics, and has poverty reduction along president’s abrupt shift in advisers casts more light on headed a state-owned fish- with our social pro- message has left observers, his thinking on policy, and meal company, a radio sta- grammes,” he says. “With- and some of his own sup- how he plans to balance the tion and a bank, in between out growth it’s very diffi- porters, waiting to see what radical leftist elements of running a helicopter busi- cult to reduce poverty. And he does next. his support base with the ness. He says the govern- that’s a fundamental objec- “Humala is a work in moderates who helped him ment regards the private tive of ours.” progress,” says Michael win the election. sector as an important As head of the new minis- Shifter, president of Inter- Luis Favre, an Argentine motor of development. try of development and American Dialogue, the communist-turned-socialist The appointment of social inclusion, Kurt Bur- Washington policy forum. adviser sent to Peru last Harvard- and Johns Hop- neo, a former director of the “The initial signs are year by Brazil’s Workers’ kins-educated Luis Miguel central bank, will be basically positive on eco- party, has been instrumen- Castilla as finance minister charged with fulfilling nomic and social policy. tal in Mr Humala’s political has been greeted as a The concerns are more in makeover. strong sign of continuity in Continued on Page 2 2 ★ FINANCIAL TIMES WEDNESDAY SEPTEMBER 21 2011 Investing in Peru Property rights are key to fair inclusion Choice of advisers new president, Ollanta Humala, “Both Keiko and Humala cam- Its provocative title shows his Moreover, because of tax trea- Taking the long view a former army officer. paigned on a reform platform, undiminished promotional flair. ties, this legal title carries mul- Yet Mr de Soto prefers to take and were a vote for change. But, contrary to popular myth tilateral weight. With that in favours Hernando de Soto, the long view on local politics Humala’s difference is that he and James Cameron’s block- hand, the investor can raise the economist, talks to and the closely fought second- believes the state has an eco- buster movie, Mr de Soto funds easily, anywhere. round vote against Keiko Fuji- nomic role to play. The question believes indigenous life and glo- “Contrast that with what John Paul Rathbone mori, daughter of the former is, how much will he tinker?” balisation are compatible. indigenous people have: prop- growth president. He advised Mr Fuji- Mr de Soto’s most heartfelt After months of fieldwork, Mr erty titles unrecognised outside mori until they fell out when the current subject, though, is the de Soto found that indigenous their communities. We know of Continued from Page 1 Two graceful alpacas are graz- leader made a grab for power. Peruvian Amazon. In a country people do feel their poverty and a case of a mahogany tree sold ing in front of Hernando de “A notable point about this that is the world’s second-larg- isolation, do want better educa- for 3kg of sugar, about $3. By Mr Humala’s key electoral Soto’s home, but there is no year’s election is that – however est producer of copper and sil- tion and health services, and do the time it reached California, pledges. Mr Burneo, who began sign of his pet dogs, Marx and controversial it was – the losers ver, the Amazon is the scene of want property and businesses. that same tree was worth as the 2011 campaign as the head Engels, so named because “they respected the result. That’s a When conflict arises, it is usu- much as $50,000.” of former president Alejandro are German, hairy and have no good sign,” Mr de Soto com- ally because of a feeling of pow- Critics might say shaky prop- De Soto: land title is everything Toledo’s economic team, will respect for property”. ments. “And if people do worry ‘A notable point about erlessness. erty rights have not stopped oversee implementation of a The Peruvian economist first about Mr Humala’s military this year’s election Mr de Soto’s solution is better China’s booming economy. Mr One of its first pieces of legisla- pension scheme targeting poor came to fame with his 1987 best- background, that’s also positive: property rights, a view that de Soto admits the Amazon tion was a consultation law, over-65s, and the broadening of seller The Other Path. Now, he being sensitised is a way of pro- is that the losers draws on his original insight in presents special problems. Many which gives local communities Juntos, the conditional cash- is everywhere. So far, some 30 tecting themselves.” respected the result. The Other Path. Most poor peo- indigenous titling systems do the right to be consulted about transfer scheme. governments – from Afghani- Another of Mr Humala’s more ple, given the chance to partici- not provide precise locations, proposed investments. In the key portfolio of mining stan to Mexico and Russia – unusual features is his uncon- That’s a good sign’ pate fairly in a capitalist sys- contain naming errors and are “That’s all every well, but and energy, Mr Humala chose have sought his advice on how ventional family. The presi- tem, would do so rather than inaccessible. Communal-owner- who do you consult with?” asks Carlos Herrera Descalzi, an to harness his brand of popular dent’s father believes in Que- stay outside. Yet any sense of ship rules often differ, even Mr de Soto. engineer who briefly held the capitalism. chuan racial superiority, and some 200, often bloody, social inclusion also requires a legal between neighbouring groups, The implication is that this post in 2000 after the collapse of When the FT met Mr de Soto one brother is serving a prison conflicts. system that people feel is on which in themselves are diffuse. can never be clear while prop- the Fujimori government. Mr on a typically grey Lima after- sentence, having led a 2005 Some of these are crude bat- their side. One way of ensuring Nonetheless, Mr de Soto says erty rights remain insecure. It is Herrera has moved swiftly to noon, he was suffering from jet coup. Mr Humala himself led a tles for local power, fomented by this is to give full legal protec- that attempts to confer legiti- only with secure title that indig- broker the new mining levy and lag. Yet despite his globe-trot- revolt in 2000. smugglers. But most relate to tion to poor peoples’, usually de mate title must be made if there enous groups can choose demand that Camisea, the coun- ting, the wellspring of much of “Jimmy Carter and Bill Clin- protests by local indigenous facto, property rights. is to be a real attempt to avoid between turning their backs on try’s flagship natural gas his thinking remains Peru. ton had brothers, Margaret groups against foreign invest- A common example is untitled the kinds of protests that left the world economy, or engaging project, operated by a consor- The lights are low in the Thatcher a son,” observes Mr de ment in mining and hydrocar- slum dwellers. For the Amazon, more than 30 people dead in the with it. tium led by Pluspetrol of Argen- study. History books and eco- Soto drily. As for Mr Humala’s bons. How to anticipate and pre- Mr de Soto gives this example: Amazonian town of Bagua two “Once title has been estab- tina, must prioritise domestic nomics tracts are piled high on economic policies, early signs vent them is the theme of Mr de “A foreign investor comes to years ago. lished, at least you have a markets. He will also review a glass table and on the shelves. are positive, although it is too Soto’s next book, The Amazon is Peru. He secures title to a Mr Humala’s government is choice,” he says. “Without it Peru’s multibillion-dollar agree- The subject of the day is the early to tell for sure. not Avatar. project under Peruvian law. equally sensitive to the subject. you have nothing.” ment with Brazil to build up to six hydroelectric dams in the Amazon. “We respect commit- ments, but the previous govern- ment approached this in a very bad way. I want to see how far it has advanced,” he said in an interview. To alleviate lingering con- Brazilian cerns that he was about to make a radical turn in economic pol- icy, Mr Humala also persuaded well-respected banker Julio Velarde to remain as central bank governor. inf luence Humberto Speziani, president of Confiep, Peru’s employers’ association, says Mr Humala managed to “dispel the doubts” with his cabinet picks. “We’re very satisfied. The grows ever president has been pragmatic, acting in the interests of the country. He’s shown that Peru will have continuity in eco- nomic policy,” he says. Business approval came at the stronger expense of discord among the more radical elements of Mr Humala’s base, who mutter that The initiative dates back to 2005 the president is allowing “the Foreign relations under former Peruvian president Ale- enemy to steer the ship”. jandro Toledo, when Luiz Inácio Lula Aída García Naranjo, a promi- ‘Strategic alliance’ helps da Silva was his Brazilian counterpart. nent feminist activist and edu- provide route to booming It continued under Peru’s next presi- cator, and the new minister for dent, Alan García. But it is under their women, is flying the flag for the Pacific markets, writes successors – Ollanta Humala in Peru left in the cabinet, backed up by John Paul Rathbone and Dilma Rousseff in Brazil – that the vice-ministers such as the trade alliance is likely to take off. unionist Pablo Checa in the “Over the past 10 years, there have labour ministry. rom a distance, the huge statue been more presidential meetings , a renowned of Jesus that gazes out at the between Peru and Brazil than over the singer and the first female Afro- Pacific on Lima’s seafront previous 180,” says Mr Veja approv- Peruvian minister, was a popular appears identical to the more ingly. choice for the culture ministry. Ffamous Christ the Redeemer in Rio de Three vast infrastructure projects, Mr Humala’s selections for the Janeiro that overlooks the Atlantic. It largely financed with subsidised fund- ministries of the interior and is almost the same size, and Christ’s ing from BNDES, Brazil’s state-owned defence have been more contro- arms are outstretched in almost the development bank, are planned that versial, prompting criticism that same way. will link – by canal, road and train – he fudged electoral promises to The resemblance is no accident. The Brazilian markets to Peru’s Pacific Seeing double: the gift of a Pacific almost­twin to Christ the Redeemer has raised questions about Brazil’s role in Peru Reuters appoint civilians. 36m-high Cristo del Pacífico statue was ports and thence Asia. The southern- The president tapped two sculpted in Brazil, and its $1m cost was most one, the Interoceanic highway, Nonetheless, Brazil’s growing pres- exploring the possibility of building Whatever the concerns, it appears retired military officers, Daniel almost entirely met by Odebrecht, the built by Odebrecht, is almost complete. ence worries many Peruvians. Brazil hydroelectric plants along the border. that the links are only going to get Mora and Oscar Valdez Dan- Brazilian construction company. Meanwhile, Brazil’s Votorantim may enjoy a cuddly image in Lima, Understandably, local inhabitants won- stronger, especially if Brazil’s early cuart, to head defence and the More importantly, the statue, which Metais, the mining company, has pur- thanks to its football and carnival, and der why their communities should be courtship of Mr Humala is anything to interior respectively. Home was inaugurated on June 29 this year, chased zinc mines as well as Cajamar- its social-democratic economic model, flooded to send electricity elsewhere. go by. affairs is particularly sensitive is a symbol of Brazil’s growing pres- quilla, Peru’s biggest refinery. Vale, now apparently being copied by Mr “Brazil is very important to Peru,” Political image-makers from Brazil’s in Peru, given the recent dra- ence in South America’s fastest grow- another mining company, operates a Humala, is seductive in a country says , Peru’s new Partido dos Trabalhadores (Workers’ matic rise in coca production in ing big economy. It is also a reminder phosphates concession in northern where more than a third of the popula- foreign minister, who describes his party) advised Mr Humala on remote zones controlled by rem- of why Brazil’s presence in Peru is Peru. Petrobras, the state-controlled oil tion lives in poverty. approach as “absolutely pragmatic” campaigning strategy and tactics. After nants of the Shining Path insur- increasing so quickly: China. company, has investment plans. And Yet many Peruvians are asking and as focused on “strengthening he won the election, the first visit Mr gency of the 1980s and 1990s. “In the 20th century, the world econ- Gerdau bought Peru’s biggest steel whether they really want their country regional ties”. Humala made as president was to Mr Humala also raised eye- omy was all about the Atlantic,” says plant in 2006 and says it plans to invest to be “Brazilianised” – and not without He adds: “Nonetheless, while there Brasília. brows with the appointment of Miguel Veja Alvear, head of the Brazil- $120m over the next three years. reason: in the past 10 years, Peru’s eco- are many opportunities, there are also What is most extraordinary is that Adrian Villafuerte, once a close Peru chamber of commerce in Lima. The idea behind the alliance is sim- nomic growth has been higher and pov- problems and threats. One problem is perhaps no country other than Brazil associate of Vladimiro Montes- “In the 21st century, it’s all about the ple: Brazil provides technology and erty has fallen faster than in Brazil. the need to remove commercial barri- would have been able to get away with inos, the disgraced former spy- Pacific: more than half of all global investment. Some $15bn of Brazilian As one letter-writer to Peru’s La ers and tariffs. One threat is drugs: we the same strategy. It would have been master, as a military adviser. trade is there.” investment is pouring in, compared República newspaper has pointed don’t want to have the same supply unthinkable for Venezuela or the US, More than a little shy, Mr The statue is one of a number of with the $10bn that China is due to out, when it comes to the World Bank’s relationship with Brazil as Mexico does for example, to have played a similar Humala favours scripted public projects under way as part of Brazil’s invest, although that is still less than annual Doing Business report, Peru with the US.” role in Peru without a huge outcry. appearances and the occasional “strategic alliance” with Peru. This is total US or Spanish investment. ranked second among Latin American Peru is currently the world’s largest It speaks to the might of Brazilian tweet over interviews. When designed to bring their economies close In return, Peru can offer labour and countries, in the number 36 spot producer of cocaine and Brazil – a ris- “soft power” – and the country’s huge pressed, he tends fall back on a together and provide a commercial market access. The early results have globally, while Brazil was 127th out of ing consumer in its own right – is gravitational pull on a continent where watch-this-space-style message. bridge for Brazil into the Pacific on the been startling: bilateral trade has 183. increasingly an important onward ship- it accounts for half the landmass and “More than words, judge me for back of Peru’s free-trade agreements increased sevenfold in just six years to Another problem is the environment. ment point to Europe’s fast-growing its neighbours cannot help but spin what I do,” he said this month. with China, South Korea and the US. $3.4bn. Brazilian utility companies have been market for illegal drugs. into its orbit. The world is watching.

Contributors John Paul Rathbone Latin America Editor New president moderates his inner warrior Naomi Mapstone Andean Correspondent

Their misgivings are of the Communist Party in the sector while raising more than are perhaps the teething party, the APRA, now only Jack Farchy Commodities Correspondent Guest Column understandable. Mr Humala led 1950s and he instilled a sense $1bn to be spent on social problems of any new accounts for four seats of the FELIPE ORTIZ DE ZEVALLOS an army revolt in 2000. He was of political destiny in his sons. inclusion projects in some of government. There have been 130 in Congress. Martin Brice a radical pro-Hugo Chávez Indeed, Ollanta means “far- the poorest regions. no major mistakes, as yet. Three months after the Commissioning Editor Who is Ollanta Humala? A presidential candidate in the seeing warrior” in Quechua To reassure financial Mr Humala has a varied election, Mr Humala’s good question – and one to 2006 election, which he and is a name of which Mr markets, Mr Humala also asked political base – much of it presidency presents more Philip Parrish which Standard & Poor’s seems narrowly lost. He then entered Humala feels proud. Julio Velarde, the orthodox comprises centre-left moderates, questions than answers. Liz Durno to have an answer. the 2011 presidential campaign He is happily married to Central Bank governor, to stay although leftwing radicals form Can a former military officer, Jearelle Wolhuter Peru’s controversial new in much the same form. Nadine Heredia, a distant for another term. And he an important but smaller imbued with a messianic Sub­Editors president had only been in However, after his rather relative who, some believe, has appointed Luis Miguel Castilla proportion. The latter are likely calling but with limited Steven Bird office for a few weeks when radical platform only looked set presidential ambitions. as finance minister. Mr Castilla to want to see big changes to administrative experience, walk Designer the credit rating agency to win him 15 per cent of the What does Mr Humala think? is respected, having worked Peru’s economic model; the Peru’s political tightrope? upgraded his country’s debt. vote, Mr Humala gradually That is unclear. At first, he former may be content with What will his instincts be Andy Mears But then the upgrade came changed his political message called for a new constitution Felipe Ortiz de minor adjustments. when he confronts his first Picture Editor after Mr Humala had made a from à la Chávez to à la Lula – that would increase the state’s Zevallos says The model has been crisis? Hold to the centre – or moderate inauguration speech, coached by Brazilian advisers. role in the economy, compared that, so far, successful, by and large. Over hew to his original and more For advertising details, contact: after he had appointed a Mr Lerner, then acting as with the current 1993 version. Humala has the past decade, the economy radical constituency? John Moncure on: “rainbow cabinet” and after his Mr Humala’s campaign Although Mr Humala swore been a unifying, has grown at 6 per cent a year More importantly, will he Phone +1 212 641 6362 prime minister, Salomón manager, played a crucial role himself in as president on “the rather than a and some 3.4m Peruvians have learn from what he has been Fax +1 212 641 6544 Lerner, gave a well-received in persuading him to drop his democratic spirit of the 1979 divisive, force been lifted out of poverty. Still, achieving by continuing to Email: [email protected] presentation of the new original radical “plan” and constitution”, he has since the state remains remarkably broaden his political vision? or your usual representative government’s programme adopt a more moderate “road dropped plans to change the previously at the Andean inefficient. Partly as a This is the main unknown: to Congress. map”. All this helped Mr 1993 constitution. This, Development Corporation, a consequence, this has whether Ollanta Humala will All FT Reports are available on S&P’s vote of approval was Humala to eventual victory. however, may be simple multilateral lender, and as generated a widespread sense rise to the Quechua meaning FT.com. reflected in other ways too: Mr After he won, Mr Humala was pragmatism, given that he vice-minister of finance in the that corruption has flourished. of his name. Go to: www.ft.com/reports Humala currently enjoys a 55 also wise enough to insist on lacks sufficient votes in previous administration. Social inequality remains high. For the moment, after a Follow us on twitter at per cent approval rating – high Mr Lerner accepting the Congress to do so. True, some other For many analysts, Peru is a volatile first half of the year, www.twitter.com/ft.reports by Peruvian standards, even if premiership. Elsewhere, he has shown a appointments – in the military country with great potential. Peru is enjoying a mood of All editorial content in this that approval is not across the Where is Mr Humala from? similarly pragmatic streak. A and the foreign service – have One reason is its extraordinary cautious optimism. supplement is produced by the board. While Mr Humala scores His family is from Ayacucho, windfall tax on mining profits been controversial. There have diversity. Such diversity, FT. Our advertisers have no a rating in the mid-60s from a proud but poor Andean followed negotiations with the also been some hiccups and however, also makes it difficult Felipe Ortiz de Zevallos is influence over, or prior sight of, the country’s poor, wealthier region, where the Shining Path industry. The result only reversals in government policy to govern. Political chairman of the Apoyo the articles or online material. classes are less convinced and guerrilla movement had its partially lowered the towards coca growers and representation is scarce. consultancy and Peru’s give him just 40 per cent or so. roots. His father was a member competitiveness of the mining fighting drug traffic. But these Indeed, Peru’s main political former ambassador to the US. FINANCIAL TIMES WEDNESDAY SEPTEMBER 21 2011 ★ 3 Investing in Peru

Retail Chileans cash in on consumer boom Chilean retailers used to say department stores, its Tottus Manhattan tastes the best of Lima Peru reminded them of Chile in supermarkets and Sodimac the 1990s. Lately, Peru and its home improvement centres. population of 29m has been Ripley is pouring $56m into Profile looking more like Chile in the eight new department stores in subsequent decade. the next two years. Food and drink Surging domestic demand, the Chile’s SMU Group joined the rapid expansion of regional rush in January, snapping up Gastón Acurio faces his markets and new social policies supermarket operator Alvia, toughest test, writes to alleviate poverty are expected which has 11 stores in Peru. to propel Peru’s retail sales to Both retailers and mall Naomi Mapstone $48.8bn by 2014, up 22.1 per operators, including Parque cent from this year, according to Arauco and Mall Plaza, are Business Monitor International. looking beyond Lima to booming hen Gastón Acurio “Private consumption will be regional centres such as Ica, opened the doors the main driver of Peruvian Piura, Arequipa and Trujillo. of La Mar, his growth in 2011 and 2012, Forum, a Chilean car loan Madison Square supported by increased access company, has sized up the WPark restaurant, in New York to consumer credit and a rise in buying power of Peru’s growing this week, the Peruvian chef social security payments,” BMI middle class and announced a moved a step closer to says in an August report. $48m investment in the market. achieving a global goal. Chilean department stores, New­car sales tripled between Mr Acurio now has 33 supermarket chains and mall 2006 and 2010, and Peru’s restaurants spread across operators already have footholds automotive association is Latin America, Europe and the in Lima, where a third of Peru’s forecasting 170,000 sales this US, making him a veritable population lives. year after the signing of free­ mini “multilatina”. Ripley and Saga Falabella trade agreements with Japan, While the cordon bleu-trained dominate the department store China and the US significantly chef’s interests represent a sphere, which includes a thriving lowered the tax on imports. fraction of Latin American credit card financing market. The growing number of multinationals such as Alicorp Chef Gastón Acurio wants to bring Peruvian gastronomy to the world Reuters They face increased competition Peruvians with the means to of Peru, América Móvil of from fellow Chilean group travel has also cemented the Mexico and Embraer of Brazil, Mr Acurio has used his home and has created a thriving place? There were a hundred Astrid y Gastón, which has Cencosud, which announced last commitment of LAN, the Chilean his expansion has been no city of Lima as a testing industry of cooking schools. people interested, why did been known to serve confit of month it would invest $70m in flagship carrier, to its Latin less aggressive. ground for new concepts, Manhattan’s La Mar has they choose you?’ I said, ‘The guinea pig. 10 department stores by 2014. American hub. Over the next “Our mission is to bring launching everything from some big shoes to fill, moving world is changing – the Mr Acurio’s right-hand man, The company already operates five years, LAN will invest fine Peruvian cuisine to the Peruvian fast-food outlets into the space formerly landlords were looking for Victoriano Lopez, is the Wong, the upmarket Peruvian $700m in Peru, including the world, and New York is our serving yellow potato chips to occupied by Danny Meyer’s something new’.” executive chef, and will focus supermarket chain, after a construction of a corporate biggest battle,” Mr Acurio Chinese-Peruvian fusion. Tabla. Peruvians will recognise on trademark ceviches (seafood 2007 takeover. headquarters. says. “There’s a valuable The food revolution he has “He has the best location in Manhattan’s upscale cevicheria dishes) and reinterpretations Meanwhile, Saga Falabella is market for Japanese cuisine, sparked at home has turned New York,” says Mr Acurio. as a blend of Mr Acurio’s of classic Limeño dishes, such investing $100m in its Naomi Mapstone French, Chinese – we want Lima into Latin America’s “All of our colleagues there popular Lima eatery of the as sliced potatoes with yellow that for Peru.” leading gastronomic destination said, ‘How did you get this same name and his five-star chilli sauce.

Cross­border stocks start trading slowly

Mexico, especially given Profile the latter’s participation in Exchanges the proposed “Arc of the Pacific” economic bloc Mila launches amid with Colombia, Chile and Peru. turmoil, writes All four have trade deals Naomi Mapstone signed or in train with the US and Canada, and all are looking to Asia for growth. It has been a slow start for Of the four, only Colombia the Mercado Integrado is yet to join the Asia- Latino Americano (Mila), Pacific Economic the cross-trading platform Co-operation forum. that links the exchanges of Mr Stenning says Mila Peru, Chile and Colombia. will also build products The tie-up created Latin around Standard & Poor’s America’s second biggest new Mila 40 index of the market after Brazil, with a biggest, most liquid stocks market capitalisation of on the three exchanges. $614bn and forecast daily Several mining and trading volumes of $300m. energy initial public But Mila has racked up offerings are in the works, only $2m in cross-border aside from the government’s trades since its May touted offering of shares in launch. Francis Stenning, state-owned oil company director general of Lima’s Petroperu, he adds. exchange, says launching “We’ve had an IPO every amid global market turmoil other year or so in the and one of Peru’s most past decade,” he says. “A divisive presidential very long election process elections did not help. caused delays, so we “Mila is the beginning of expect to see some come to a very interesting process market in the next couple of integrating the region,” of months.” Mr Stenning says. Daniel Gamba, the “We are still in the first Peruvian-born head of stages, perfecting tune-ups Latin America and Iberia [of regulation and tax]. We for BlackRock, the asset will look at going into manager, says a reluctance other markets, such as to go public is common fixed income or derivatives. among the region’s We will [also] be looking at oligopolistic markets, but adding new members.” he finds it “hard to see The most likely new Peru in a bear market partners are Brazil and for too long.”

Ethanol Production takes off Peru’s fledgling sugar­based have given sugar growers ethanol industry is set to a boost, creating domestic take off this year, with the and export markets for entry of new players Maple ethanol producers. Energy and Gloria, writes “When Brazil goes to the Naomi Mapstone. US, there’s a substantial “Peru is arguably the best import tariff; when we go place in the world to into the US, there will be no produce sugar cane in import duties. The same is terms of yields. The yields true of Europe – we can go are phenomenal,” says Rex into Rotterdam duty­free,” Canon, chief executive of says Mr Canon. Aim­ and Lima­listed Maple Given that Peru’s entire Energy. domestic market will Constant sun and ultimately require about negligible rainfall give cane 25m gallons a year and growers on the north coast Maple’s plant will have a a year­round season, capacity of 35m gallons leading to yields of about a year, the company 150 tonnes of cane per is principally focused hectare, compared with on exports, starting about 80 tonnes in Brazil. with Europe. Until the 1960s, when a Maple’s $254m project leftist military regime near the deepwater Pacific nationalised the sector, port of Paita is on track to Peru’s arid northern coast go into production in the was home to one of the fourth quarter. The world’s most efficient company is planting sugar industries. 7,800ha in its first phase, Now a new law and aims to increase mandating a 7.8 per cent production to 10,000ha. blend of ethanol in gasoline “Our goal is to be the and the signing of a lowest­cost producer of number of free­ ethanol,” says trade deals Mr Canon. The ethanol facility has $148.5m in project­ finance debt from lenders such as the Andean Development Corporation, the Inter­ American Development Bank, Interbank of Peru and FMO, the Dutch development bank.

Sugar cane grows very well in Peru’s climate 4 ★ FINANCIAL TIMES WEDNESDAY SEPTEMBER 21 2011 Investing in Peru Exploration Miners exploit catches eye rich seams in of investors Juniors and small caps Searches are being spite of tax and funded increasingly from Lima, with earnings so far looking healthy, local protests writes Jack Farchy

cost of $5.7bn, giving the company the When Alex Black was trying to raise Commodities largest growth pipeline in this metal money to develop a goldmine in cen- in the industry. tral Peru, no investor in the tradi- Lobbying efforts set to put In the fortnight after Mr Humala tional markets of Toronto or London sector’s expansion back on became president, Xstrata saw its was interested. share price fall 8 per cent. The shares It was 2009 and most were still chas- track, writes Jack Farchy of companies with higher Peruvian tened by the experience of the finan- exposure fell even further and the cial crisis, so Mr Black did something Lima stock exchange was forced to that, at the time, was rather unusual osé Marún’s workplace is close after some local miners fell 15 for a non-Peruvian: he raised all the remote by almost any stand- per cent in a day. capital for his exploration company, ards. The manager of Xstrata’s But the country is of broader signif- Rio Alto, in Lima. South American copper opera- icance to the global economy than “The reason we’re listed here in Jtions spends his time shuttling merely as a destination for foreign Lima is because nobody in Canada between an office in Lima and the investment: with its large, untapped believed our story,” he says. high Andes mountains, where, reserves, Peru could determine the For juniors (miners focused on spurred on by record prices, the Lon- balance of the market for metals such exploration) and small-cap mining don-listed company is rushing to build as copper, which are crucial to the companies in Peru, that is an increas- new mines. growth of emerging economies. ingly common story. Two of those mines, Tintaya and According to Macquarie, the Austral- Companies such as Minera IRL (also Antapaccay, are reached by a bumpy ian bank, Peru will be the source of a listed on London’s Alternative Invest- plane ride to the ramshackle town of third of the planned new copper sup- ment Market), Alturas, Rio Cristal, Yauri. Other than mining, the area’s ply over the next five years. Candente Copper and Panoro are main industry is cheesemaking. Since the election, however, the listed in Lima, and in many cases, A third Xstrata project, Las Bam- miners’ lobbying efforts appear to Peruvian shareholders represent a bas, “is the most remote ore body in have paid off. At the end of August, growing proportion of their investor the country”, says Mr Marún. “When Salomón Lerner, the prime minister, base. we came [here], there was no electric- announced that a decision had been Exploration is booming. The coun- ity. Until 2005 there was no telephone reached on a new tax structure that try’s rich geology has been exploited communication.” Workers commute would raise an additional 3bn soles for centuries, but, because of the vola- by helicopter. ($1.1bn) from the mining sector each tile political situation of recent dec- In recent months, Mr Marún and year. Miners expressed relief that the ades, it has not been thoroughly sur- other mining executives have had plan, whose details were still being veyed until now. According to Metals another frontier to navigate: the corri- finalised as it passed through Con- Economics Group, a consultancy, dors of power at the presidential pal- gress, would calculate a royalty based Peru was the third-largest destination ace in Lima. on their profits rather than revenues, for exploration investment in 2009. Since the election in June of Ollanta and so shield them in periods of low The growth in investment has gone Humala, who had campaigned on a profitability. hand-in-hand with a rise in the promise of a 40 per cent windfall tax The uncertainty over taxes has Despite the often remote locations of mines, Peru is one of the world’s largest producers of metals Bloomberg number of companies raising money on the mining sector, the most impor- nonetheless delayed much-needed in the domestic market. Alberto tant project for the industry has been projects in the country’s mining sec- But tax is not the only challenge for The company is building new homes Arispe, chief executive of Kallpa Secu- damage limitation. The possibility of tor. By July, Southern Copper had the industry in Peru. Protests from for 370 families whose church, school Money in metals rities, a Lima-based brokerage, esti- sharply higher taxes in Peru threat- invested just $160m of the $800m capi- communities, whose villages often and community hall will be disman- Peru rides the boom mates there are some 90 Canadian ened to derail $42bn of planned min- tal expenditure it had planned for the need to be relocated due to mining tled to make way for the mine. juniors with Peruvian assets, of which ing investments in the country, which year in Peru, according to Oscar sites, have grown more vocal. In Tintaya’s previous owner, BHP Bil- 15 are listed in Lima. Indeed, some is among the world’s largest suppliers Gonzalez Rocha, the chief executive. April, the outgoing government of liton, sold it to Xstrata in 2006 after it ●Copper The red metal, used in argue there are more funds available of metals (see box). Peru’s copper production was 3.1 per Alan García cancelled Southern Cop- was invaded by an armed mob. Now the wiring of almost every building or to mining companies in Lima than in Peru is central to the growth plans cent lower in the first half of 2011 per’s Tia Maria project and in June it Luis Rivera, general manager of the household appliance, is Peru’s most more traditional hubs. of companies such as Xstrata. than a year earlier. revoked the licence of Bear Creek’s two mines, says he spends 70 per cent important commodity. The country is Mark Cruise, chief executive of Together, Antapaccay and Las Bam- Mr Marún of Xstrata says: “The Santa Ana project. of his time dealing with the communi- the world’s second­largest producer, Trevali, a Canadian miner that has bas will add approximately 500,000 moment you have uncertainties, you At the site of Xstrata’s Antapaccay ties, rather than day-to-day mining although it looks set to lose that title just raised $10m from South American tonnes to its annual copper produc- start to have rocks on the road and mine, trucks and cranes move among operations. to China, as output was down 3.1 per investors, says it is “absolutely” eas- tion by the end of 2014, at a projected projects get delayed.” homes dotted along the valley floor. “I have had to learn how many cent in the first half. Investors and ier to raise money in Peru than in mining executives are bullish about litres of milk it takes to produce a Europe or North America – most of the longer­term prospects for copper. kilo of cheese, and how long it takes the world’s mining markets are in the Booming demand led by emerging to mature a gourmet cheese,” he economies helped push the metal to throes of a punishing bear market. chuckles. a record above $10,000 a tonne It is not only junior companies that Others are less cheerful about their earlier this year. are seeing the benefits. Larger Lima- engagement with communities. Mr listed companies such as Buenaven- Gonzalez Rocha of Southern Copper ●Gold and silver Peru is the tura, Volcan and Milpo enjoy forward says the company is exploring in world’s sixth­largest gold producer price/earnings multiples of 9-12 times Argentina, Ecuador and Chile: “We and second­largest silver producer. – well above the 6-8 times of the large are trying to do more diversification Both metals have been on a tear in London-listed diversified groups. with other countries, in order not to the past year as investors have lost That is largely thanks to the boom- have everything in one country that faith in paper currencies. Gold hit a ing economy that has created much has problems like Peru.” record above $1,900 a troy ounce in wealth. Citizens in formal work must Most, however, are cautiously opti- September. Analysts believe gold and invest in pension funds, whose assets mistic on the prospects for the mining silver prices will stay high as long as have been growing at an annual rate industry under Mr Humala – investors the eurozone sovereign­debt issues of 19 per cent, according to Standard included. Since the election, the min- remain and monetary policy in the Chartered, the investment bank. The ing-heavy Lima general index has ral- US remains loose. funds must invest half their assets in lied 7 per cent, bucking a crash in the domestic market, so valuations ●Zinc Peru produces 12 per cent of mining shares in almost every other have been lifted. the world’s zinc, behind only China. world market. There are few large zinc projects “The market here is small,” says Mr In the same week as Mr Lerner planned in the coming years, leading Arispe of Kallpa. “Demand is much announced the new mining tax, the some to believe the metal could be higher than supply; there are not so government passed a long-awaited poised to rally sharply. many companies to invest in.” law on community engagement. Cru- Pension funds cannot invest in jun- cially for the miners, however, it did ●Lead Peru is the world’s fourth­ ior companies, but Kallpa is consider- not give communities a veto over new largest lead producer, with 6 per ing launching a fund to allow them an projects. cent of the market. Lead prices are indirect investment into the sector. Voicing a sentiment common in below their 2008 record, currently The capital available has caught mining circles all over Peru, Eduardo trading at around $2,400 a tonne. the interest of foreign miners. “If Hochschild, executive chairman of the The outlook for the metal is clouded one wanted to go to the effort, it London-listed precious metals miner by an environmental clampdown on would be very easy to go and raise that shares his name, says: “We’re not lead­acid battery makers in China, $100m,” says an executive at an inter- cheering that it has passed – but it’s which accounts for 45 per cent of national mining company with assets not nearly as bad as it could have lead demand. in Peru. “It’s a market that throws been.” money at you.”

Pensions Hope for reforms without politics

Beatriz Merino likes a system. Instead, he is rolling Merino, who has been on finance minister (and Mr challenge. Having completed out a scheme that targets fact­finding missions to Chile Castilla’s former boss) five turbulent years as the poor Peruvians over 65. and Colombia. pushed legislation through nation’s human rights But reform of the pension Despite failing to attract to increase the limit on the defender, the new head of system remains a key test more than 30 per cent of funds’ overseas investments the private­pension fund of the president’smission to formal workers, the funds’ from 30 per cent to 50 managers’ association, bring social inclusion to one financial success and per cent. who was also the country’s of the world’s fastest­ voracious appetite for high­ Ms Merino says the first female prime minister, growing economies. “One quality investments has central bank will approve the is turning her sights to of the main objectives of exposed the lack of percentage of funds to flow pension reform. whatever reform we put domestic investment abroad, but in the “It is unacceptable that together is to deepen opportunities. meantime, “we need the seven out of 10 Peruvians coverage,” says Luis Miguel Together the funds government to provide a have no kind of pension,” Castilla, the finance minister. manage $30bn in assets – greater offer of investments she says. “Now is the time “We’ve had the system for 23 per cent of gross and the necessary for reform. I ask two things: close to two decades, and domestic product. This is guarantees to invest”. that the debate be technical, some overhauling is needed.” expected to increase to Mr Castilla and the not political, and that they Ms Merino would like to $50bn in five years, putting president have already name a commission of see Peru follow the announced they will seek independent experts who “magnificent” example of Beatriz significant private investment can propose a reform to Chile, which revamped its Merino: seven in big­ticket infrastructure the state.” pensions system in 2008. out of 10 investments in roads, The country has Latin Chile encouraged gradual Peruvians airports, water and energy. America’s highest rate of entry to its private system, have no kind Jose Antonio Blanco, informal employment and restructured fees and of pension country officer of Citibank 35 per cent of the incentivised women to join for Peru, welcomes the new population live below the up by paying them a $600­ pressure on the government administration’s emphasis on poverty line, so keeping a­child bonus. to play its part in expanding public­private partnerships in politics out of the equation Peru’s funds – AFP the country’s investment the infrastructure sector. is likely to be a challenge. Horizonte, AFP Integra, AFP opportunities. “For the past 30 years, Peru Peru’s four private pension Profuturo and Prima AFP – The funds already account has been financing its short­ funds (AFPs) have already have been criticised for for almost a third of shares term needs by postponing mobilised once this year to levying high fees, creating traded on Lima’s mining­ investments in infrastructure. fend off a radical proposal another barrier to entry heavy stock exchange. The country is ready to by Ollanta Humala, when he for the country’s growing “We still have very shallow invest,” he says. was still a presidential middle class. capital markets and there’s Ms Merino says she is candidate. Even before his “You have to be careful a long way to go to deepen confident Mr Humala will not election on June 5, he that this reform will not markets and competition. be tempted to go back on retreated from the plan, foster tax evasion; that in There’s also a lack of his word and nationalise the which would have created a order not to pay the pension instruments,” Mr Castilla says. private­pension sector, as mandatory national public fund, you might end up In the dying days of the Argentina did in 2008. pension scheme and making informal who is previous administration, decimated the private formal today,” says Ms , former Naomi Mapstone