Private investment: the engine of GDP that does not come out of lethargy

Private investment covers 80% of the total investments that move in Peru. Academics and officials agree that it is the cornerstone of the economy, and for this year, its recovery will be vital considering that GDP is expected to rebound to 3% after a year of recession, where we fell to the worst level in 31 years (without count the pandemic).

According to the Central Reserve Bank of Peru (BCRP), private investment will close 2024 with a growth of 2.3% and would end the two consecutive years in negative: -0.4% in 2022 and -7.2% in 2023. There is even a slight improvement in the prospects for the current, since in the December Inflation Report the issuing entity estimated an increase of just 1.8%.

What is the correction due to? The BCRP alleges that an environment of social and political stability was reached, and the “strong supply shocks” were reversed—that is, social protests and climate anomalies, according to its argument—in addition to improving the financial conditions for encourage credit and, in turn, give rise to the recovery of business confidence.

We can do better

Although most of the BCRP business expectations indicators continue in the pessimistic range, in the long term, the feeling is more auspicious: in 12 months, the projections of the future of the economy, the sector, business and personnel hiring, are on optimistic ground.

Luis Miguel Castilla, former Minister of Economy and Finance, recognizes that the gradual recovery of confidence is encouraging but the growth in private investment estimated for this year is low and insufficient.

In his opinion, the Peruvian market is hit by the crisis of citizen insecurity and crime – from small to large businessmen – as well as violations of legal security, as has happened with the Metropolitan Municipality of Lima and the Constitutional Court in the case of tolls, since “it sets a bad precedent in the resolution of disputes and damages the awarding of concession projects.”

Also former Minister of Economy and Finance Carlos Oliva remembers that the ideal is for private investment to grow at a higher rate than GDP as was the case before the pandemic—although far from double-digit rates.

“In the end, more than by announcements, economic agents are moved by facts. I think we have to wait a few months to see the specific policies and on that basis, talk about a positive impact on private investment. It is not that it is going to move because they changed one or two people,” Oliva commented for La República, in reference to the arrival of Gustavo Adrianzén to the presidency of the Council of Ministers and those of José Arista and Rómulo Mucho, to the portfolios of the MEF and Minem, respectively.

What will move private investment?

Breaking down the BCRP projection, we see that residential investment will rise 1.1% – that is, that made in housing, be it a house or building – and non-residential investment, 2.8% – usually machinery and equipment for capital formation, as well as commercial constructions.

Within non-residential, the 7.8% increase expected for mining investment stands out after two consecutive years with falls of 8.2% and 13.3%. The beginning of construction of the Antamina, Zafranal and Corani Replenishment projects will explain the result. “With a more positive attitude from some mining companies, (the projection) could be somewhat higher.” Yes, it would be a difference compared to last year with respect to better prospects that they may have,” commented Julio Velarde, president of the BCRP.

Castilla maintains that although the unblocking of mining projects is being promoted, the hydrocarbons sector “remains paralyzed” and the Government of Dina Boluarte is not being consistent, although “it has done everything possible” after empowering the Special Team for Monitoring Private Investment , which achieved the expansion of the Environmental Impact Study of Inmaculada (Ayacucho) and the Expansion of Antamina (Áncash), mainly.

And, with respect to non-mining investment, the forecast rate of 2.0% is supported by the progress of works at the Jorge Chávez International Airport — which is at 80% and would open its doors at the end of this year — as well as the first phase of the construction of the Chancay Port Terminal —to be inaugurated next November— and the southern dock of Callao (Bicentenario Dock), among others (see graphics).

BBVA Research is more cautious, and forecasts a variation of 1.7% in total private investment. Key to the rebound in private investment will be greater interest in construction projects and progress in infrastructure works, and in mining, due to the progress of some medium and small projects, such as the expansion of Toromocho (of Chinalco, in the region). Junín) and San Gabriel (from Buenaventura, in Moquegua), among others.

Another tangible and beneficial effect for the economy, as the supply shocks already mentioned dissipate and socio-political and inflationary stability is recomposed – this year we would finally return to the pre-pandemic level (2.2%) and employment, consumption is expected to also decrease. dynamize Not only will private consumption grow at 2.7%, but also, the BCRP estimates that companies will begin to replenish inventories that were reduced during last year.

Nobody interviews the wineries

Approach. José Távara, professor and researcher at the PUCP

Although there is a recovery in expectations, the BCRP survey captures the opinion of companies of a certain size and the formal sector, it does not express the majority opinion of millions of informal, ordinary citizens. “Whose expectations?” we should ask ourselves when we talk.

I defend my skepticism about the projections. They should be taken with caution. I am not trivializing them but I am saying that they are subject to assumptions. I think the investment of small businesses that are extorted should also be taken into account. The impact of crime is high on families in popular neighborhoods that do not have protection. You never interview a winery that puts pomegranates on it and ask if it will continue to invest.

Another error is the tendency of technocrats and big businessmen to pretend that politics and economics go along separate lines, who believe that there may be a radical political crisis but the economy does not blink and the figures do not move. That is false. The weakening of institutions takes its toll on us and remaining silent in the face of the abuses that we see today from Congress—which are not responded to by the Executive Branch—also. Pretending that this does not affect the economy is a serious mistake.

Great damage is done to the economy and well-being. It is a mistake to discuss how much GDP will grow due to improved expectations and it is “less bad” than a year ago. Business and political elites should also raise their voices and not remain silent as if the status quo is reasonable.

Lima 2027 Pan American Games: a challenge for which we must be prepared

The Peruvian capital will host the 2027 Pan American Games—for the second time, after hosting it in 2019. The Minister of Economy and Finance, José Arista, already announced that for every dollar invested, up to US$4 will return to the country.

In order to get the best out of the sporting event, Luis Miguel Castilla alleges that it is an opportunity to accelerate projects and for public entities to keep pace, although the economic impact will be limited because Lima has not been decongested. He does not believe that Line 2 will be ready by 2027 and there is no real plan to attack citizen insecurity.

For his part, Carlos Oliva urges us to have a joint vision and not “each person with their own projects” or generating confrontations in order to “give Lima the boost it needs.”