Peru Country Brief - January 2009
Introduction
Australia and Peru have a friendly relationship, underpinned by cooperation in a number of regional and multilateral forums. As members of the Asia-Pacific Economic Cooperation forum (APEC), Peru and Australia work together to promote greater trade and investment liberalisation and enhanced regional integration. Peru hosted APEC in 2008, following Australia's year as host in 2007. Australia and Peru are members of the Forum for East Asia Latin America Cooperation (FEALAC), and Peru officially became a member of the Cairns Group in April 2007. Its membership of the Group reflects Australia and Peru’s shared interests on trade policy issues, particularly to achieve greater liberalisation of agricultural trade.
Political Overview
Background
Peru is a republic with a directly elected President, who serves a five-year term. Under a constitutional amendment approved in 2003, the President may be re-elected for a second but non-consecutive term. The President appoints a Council of Ministers, led by a Prime Minister, which is the principal executive body. The legislature consists of a single chamber of 120 members and can be dissolved once during a presidential term. The judiciary consists of several courts, one for each provincial capital, headed by the Supreme Court in Lima.
Politically, Peru is divided into 24 departments and the constitutional province of Callao. Departments are divided into provinces, which are in turn made up of districts. Provincial and district-level officials are popularly elected.
Political Outlook
Following indecisive results in the first round of Peru’s presidential elections in April 2006, a second round of voting took place on 4 June 2006. Dr Alán Garcia was elected with approximately 54 per cent of the vote, defeating the major opposition candidate, left wing populist Ollanta Humula. Dr Garcia was inaugurated on 28 July 2006. Dr Garcia took over from Alejandro Toledo, founder of the Perú Posible (“Peru Possible”) party, who was narrowly elected president in July 2001 after former President Alberto Fujimori fled to Japan. Mr Fujimori was subsequently extradited to Peru (from Chile) in 2007 to face human rights and corruption charges.
Dr Garcia’s APRA party governs without a Congressional majority (APRA holds 36 out of 120 seats in congress), and requires the votes of other parties to pass its legislation. The Alliance for the Future Party, led by former President Fujimori’s daughter Keiko Fujimori, has supported the Government in an informal alliance, although this alliance may prove fragile, given that ex-President Fujimori could, if found guilty of human rights and corruption charges, face a lengthy jail sentence. The opposition Union for Peru Party (UPP) holds 45 seats (the remaining 39 seats are divided amongst four other parties).
In October 2008 President Garcia accepted the resignations of six Cabinet ministers and the Prime Minister, following a scandal relating to the alleged payment of bribes by foreign companies in return for oil and gas concessions. On 14 October President Garcia announced the new Cabinet, headed by Prime Minister Yehude Simon. Trade Minister Araoz and Foreign Minister Garcia Belaunde were re-appointed to their positions.
Garcia was previously President of Peru from 1985-1990 in what is generally regarded as a difficult period, marred by economic instability, including hyper-inflation, and a rise in domestic terrorism. In his second term in office, President Garcia has built on the economic reforms implemented by his predecessor, President Toledo, working to enhance Peru’s economic prosperity through the liberalisation of markets, sound macroeconomic management and policies designed to attract foreign investment.
However, Peru faces the challenges of a fractured political scene and sharp social divisions. World Bank data for 2007 show that 53 per cent of the population lives below the national poverty line. Reducing income inequality and addressing Peru’s chronic poverty remain key challenges for the Garcia government. The Shining Path guerrilla movement, which was responsible for a violent insurgency throughout Peru that reached its peak in the late 1980s and early 1990s, still exists in small numbers in remote areas. On 9 October 2008, in the first major attack in many years, 19 people were killed when guerrillas fired on a military convoy.
Economic Overview
Peru Country Fact Sheet (pdf)
Economic and Trade Policy Directions
Since the 1990s, successive governments have sought to restructure Peru's economy, dramatically improving the Government's fiscal position. Peru is enjoying its longest expansion on record, with low inflation, a solid external position and declining indebtedness ratios. Public expenditure has been reduced through the abolition of subsidies and the privatisation of state owned companies. Trade barriers have been cut, direct subsidies to exporters and domestic producers have been eliminated, and equal treatment has been granted to foreign and domestic investors. The tariff system on imports comprises three rates: zero per cent, 9 per cent and 16 per cent, with a weighted average tariff of around 3.2 per cent.
Peru has facilitated its integration into the global economy through an active approach to regional integration and a commitment to pursuing bilateral free trade agreements (FTAs). Peru has concluded negotiations on FTAs with Chile, United States, Singapore and Canada. It also has a protocol on acceleration of the liberalisation of trade in goods and trade facilitation with Thailand. The FTA with the US is expected to enter into force on 1 January 2009 and will replace, as far as Peru-United States trade relations are concerned, an existing trade promotion agreement, the Andean Trade Preference and Drug Eradication Act (ATPDEA). The ATPDEA currently gives Peru tariff privileges on some 6,000 products. FTAs with Singapore and Canada were signed in May 2008.
Peru is also a member of the Andean Community Customs Union and has signed partial preferential trade agreements with Cuba, Argentina and Brazil. Peru is negotiating FTAs with China, and the EU. Peru (along with Australia, Vietnam and the United States) has shown interest in seeking to join an expanded Trans Pacific Strategic Economic Partnership Agreement (between New Zealand, Brunei, Chile and Singapore). The Agreement is seen as a potential pathway to advancing broader Asia-Pacific regional economic integration.
Economic Outlook
Peru has experienced recent impressive economic growth with real GDP growth at an estimated 9 per cent in 2008. The expected weakening of external demand in 2009 may slow growth to a still robust figure of between 6 and 7 per cent of GDP in 2009. Higher economic growth has been largely supported by mining and construction activity. Diversification into non-traditional exports, investment growth and strong consumer confidence and rising employment rates has also supported this recent trend. President Garcia’s economic policies have been characterised by fiscal discipline, inflation targeting, a managed float of the currency and investment in infrastructure and social programs.
In April 2008, Fitch Ratings upgraded Peru’s long-term foreign currency issuer rating to investment grade (BBB-), reflecting improving fiscal and external solvency ratios. A number of Government and major mining and energy projects, particularly relating to the Camisea natural gas field, combined with growing exports of minerals, textiles and agricultural produce, should help sustain investment levels.
Vigilant monetary policy is also expected to keep inflation under control. Peru’s economy does remain closely affected by trends in the US, its largest export market. In addition, minerals exports account for 60 per cent of total merchandise exports, exposing the economy to fluctuations in global commodity prices. Whilst a slowdown in the US economy may constrain export dynamism, this may be offset by continued strong demand from Asia, which is now the destination for around 30 per cent of Peru’s exports.
Bilateral relationship
Australia and Peru share significant interests and cooperate internationally in areas such as the environment, fisheries management and international law enforcement. The Australian Bureau of Meteorology has signed a Memorandum of Understanding with its Peruvian counterpart, the National Meteorology Service of Peru, to facilitate cooperation, including research into the El Niño phenomenon. In May 2006, Australia and Peru signed a Memorandum of Understanding on Cooperation in Education and educational ties are growing.
The Prime Minister, the Hon Kevin Rudd MP, attended the APEC Leaders’ Summit in Peru on 22-23 November 2008. The Minister for Trade, the Hon Simon Crean MP, and the Minister for Foreign Affairs, the Hon Stephen Smith MP, participated in the APEC Ministerial Meeting in Peru on 19-20 November.
In a sign of the increasing goodwill between Australia and Peru, the Peruvian Congress reactivated its Peru Australia Parliamentary Friendship League in 2004. Minister for Trade, the Hon Simon Crean MP, visited Peru between 30 May and 1 June 2008 to attend the APEC Trade Ministers’ Meeting in Arequipa. Parliamentary Secretary for Early Childhood Education and Childcare, the Hon Maxine McKew MP, attended the APEC Education Ministers’ Meeting on 11-12 June 2008.
Ms Patricia Teullet, president of COMEXPERU (Peru’s foreign trade association) and Peru’s alternate APEC Business Advisory Council (ABAC) member, visited Australia in September 2008 under Australia’s Special Visits Program. In September 2007, at the APEC meeting in Sydney, Peru and Australia signed a bilateral cooperation in Mining and Energy.
Australia’s Peruvian community consists of around 6,300 Peru-born persons (2006 Census). In 2006, around 25,000 Australians travelled to Peru for short stays of less than twelve months, mainly for tourism.
Bilateral economic and trade relationship
Australia's commercial ties with Peru continue to grow steadily. The increasing importance of Peru as a trading partner was demonstrated by the Australian Government's decision to open a Consulate-General (managed by Austrade) in Lima in 1999. The relationship is enhanced by Peru's attractiveness as a destination for mining investment and exports of mining services and equipment.
In 2007-08 merchandise trade between Australia and Peru totalled approximately $152 million. Major Australian merchandise exports ($84 million in 2007-08) to Peru included milk and cream, measuring instruments, mining equipment, toys, games and sporting equipment and heating and cooling equipment. Major merchandise imports ($68 million in 2007-08) from Peru included animal feed, animal oils and fats, coffee, textiles and preserved fruit.
Peru’s open investment regime and abundance of natural resources make it an attractive investment destination, particularly in the mining sector. A bilateral Investment Promotion and Protection Agreement was concluded in 1995 and entered into force in 1997. The majority of the Australian companies with offices in Peru are involved in the mining sector. The list of Australian companies in Peru includes ALS Chemex, Pasminco Explorations, Rio Tinto, BHP Billiton, Burns Philp, Amcor Packaging, Orica and Downing Teal as well as a number of other companies involved in mining services. Australia's commercial presence in Peru has more than tripled since 2004, with around 48 companies either selling goods and services or investing in Peru (up from 13 in 2004).
Peru is developing as a significant destination for Australian investment, particularly in mining. For example, the Antamina copper/zinc mine is two thirds owned by BHP Billiton and Xstrata and represents an investment in excess of $US2 billion. There are numerous new projects already approved with Australian companies highly competitive as engineering consultants and/or suppliers of future goods and services.
The services sector has shown an important increase with trade in services totalling $62 million in 2007. Recent visits by education institutions have highlighted the opportunity for Australian education services, both for studies in Australia and courses delivered in Peru.
APEC & Trade
Australia and Peru share a common commitment to the APEC vision of greater regional integration and global trade reform. Peru’s President Garcia, accompanied by Foreign Minister Belaunde and Trade Minister Araoz visited Sydney in 2007 for the APEC Summit and Ministerial meeting. A number of Australian Ministers and Senior Officials visited Peru for APEC meetings in 2008.
Export Opportunities
Australia’s Trade Commissioner in Lima is responsible for Austrade’s activities in Peru, Colombia, Ecuador and Venezuela. Export opportunities exist in mining, infrastructure (energy, airports and traffic systems), agribusiness (including agricultural equipment, technology and genetics), environmental management, food and beverage, medicaments, education, tourism, fashion, sporting and surfing goods, gaming equipment and other services.
Peru ranks among the world's top seven mining countries with large reserves of copper, silver and zinc. Opportunities exist for exports of mining services, equipment and technology in both underground applications and open cut mining. Australian designed mining locomotives, slurry pumps and mineral processing control systems have occupied a share of the local market for a number of years. There is also significant potential in agribusiness (particularly sugar) and the food sector, including dairy, gourmet foods, as well as for exports of medical and veterinary products. Australia has recently had considerable success in introducing wines and gourmet foods through the major retail chains, who are also considering importing a variety of canned and processed foods from Australia.
Recent visits by education institutions have highlighted the opportunity for Australian education services, both for studies in Australia and courses delivered in Peru.
Mining
Mining continues to be an essential component of Peru's foreign revenue earnings and Australia has a key role to play as a provider of mining goods and services and as an investor. Peru is Latin America's leading producer of lead, silver, zinc, tin and gold and number two in copper. There are numerous new projects already approved with Australian companies highly competitive as engineering consultants and/or suppliers of future goods and services.
Education
Enrolments of Peruvian students in Australian institutions continue to grow strongly. Total enrolments for 2007 increased by 91 per cent over the previous period. As at the end of August 2008, there have been 1,369 student enrolments in Australia (an increase on 870 enrolments at the end of August 2007). This will have an impact on Australia's future business ties with Peru as these students graduate and go into business and government. New visa regulations introduced on 1 April 2005 have made it much more straightforward and convenient for Peruvian students to obtain visas to study in Australia.
Australia and Peru signed a Memorandum of Understanding on Co-operation in Education in 2006.
Beef
Australian companies can now export both refrigerated and frozen beef to Peru. This follows the decision by the Peruvian quarantine agency, SENASA, in mid-2004, to approve the import of Australian bovine meat to Peru.
Trade Successes
Surf fashion
Billabong exported over A$5 million worth of surf fashion to Peru alone in 2006. This is impressive given the cheap cost of textiles and the large amount of pirated and copied brands sold in Peru. It sponsors riders in international surfing championships and is identifiably Australian. Austrade Lima will leverage off its positive image to introduce other Australian surf brands to the market.
Alpaca fleece
While only exported in very small quantities Australia's top quality alpaca fleece is being sold to Peru where it is transformed into garments and sold to Asia.
Australian dairy exports allowed into Peru
Following a visit to Australia by Peruvian quarantine officials in February 2000, Peru agreed to allow the export of Australian dairy products to Peru. Since that time, the level of Australian dairy exports to Peru has increased significantly. In 2007, Australia exported around $6.3 million of dairy products to Peru.
Australian wines take-off in Peru
As Peru's median income increases, so does demand for Australian gourmet food and beverages. There are now over 35 Australian wine brands available in Peru as well as port and sparkling shiraz.
Australian mining software dominates Peruvian market
With the rapid expansion of the mining industry in Peru, exports of Australian mining software have flourished. It is now estimated that two thirds of the mines in Peru run Australian specialist mining software and this is set to increase as more Australian companies become active in the sector.
Major Events
Australia Business Week
In late January each year the Australian Consulate-General in Lima holds its Australia Business Week event which highlights Australian goods and services. The event culminates with the Australia Day reception and attracts sponsorship from local and Australian businesses and significant local media.
Expo Australia
Australian Consulate-General in Lima hosted Expo Australia in September 2008 – a multi-sector exhibition featuring over thirty education institutions, wine companies, tour operators and exporters of surf fashion and consumer goods.
Extemin
Extemin a mining exhibition held biennially in the Peruvian provincial city of Arequipa. In 2007, 35 Australian companies exhibited their mining equipment, software and services on the Austrade Pavilion.