Low business confidence delays investment progress

The Central Reserve Bank of Peru (BCRP) adjusted downward the projection of private investment growth for this year. The drop went from an initial estimate of 0.5% in March to 2.5% in June. The forecast for 2024 remains at 1.8%.

The reduction is the result of a slow recovery of the business trust and a lower level of execution of the mining investment so far this year, indicates the monetary authority in its latest Inflation Report.

In fact, the president of the BCRP, Julio Velarde, affirmed that mining investment is expected to fall 18.9% and non-mining investment by 0.5% in 2023.

However, he stressed that there will be a slight recovery in mining placements due to some projects that have already been announced.

However, he stressed that these are not yet of the magnitude of the disbursements registered in the third quarter of last year. “The mining investment this year we expect [que sea] nearly US$4.7 billion, but to a large extent they are investments in already existing mines to maintain production”, pointed out.

The BCRP forecasts They are in line with the data from the Ministry of Energy and Mines (Minem), which reported that mining investment accumulated US$1,170 million in the first four months of the year, which meant a 19.2% reduction compared to the same period in 2022 (US $1,448 million).

Among the holders with the highest disbursements, the Antamina Mining Company SA (US$147 million), Anglo American Quellaveco SA (US$126 million), Southern Peru Copper Corporation (US$116 million) and Minera Yanacocha SR L (US$77 million). These companies, together, represent 39.8% of the mining investment executed at the national level until April.

The largest disbursements were made to infrastructure items (US$298 million), with a fall of 12.7%; and plants (US$285 million), which accumulated a decline of 24.6%. The subsectors with positive figures were equipment (+34.1%) and exploration (6.8%).

In 2022, mining investment reached US$5,364 million.

Factors after the fall

Former Minister of Economy and Finance Kurt Burneo emphasizes that low business expectations are the main element driving the negative performance of the private investment in the country.

“Those expectations necessarily have to do with what investors observe in terms of government policy,” he says.

Well, this —he warns— will determine to what extent a businessman is willing to apply more resources to expand his production capacity.

For his part, Luis Miguel Castilla, also a former head of the MEF, emphasizes that, in addition to the slow recovery of business confidence and the drop in mining investment, another factor that has an impact on the negative figures for private sector investment is the difficulty to advance in the unlocking of infrastructure projects.

This occurs despite the regulations that have been approved and the support provided by the MEF. “A large part of the works are still paralyzed and there is no relevant progress in the National Infrastructure Plan,” he says.

In addition, he attributes the decline in investment in mining to the difficulties that mining companies face in obtaining permits for new operations.

Impact of El Niño Global and social conflicts

Peru faces the imminent arrival of the Global El Niño phenomenon in the coming months. This climatic event will exacerbate the crisis in private investment, says Castilla Rubio.

“One of the sectors that will be affected the most is construction,” he mentions. This will be so because floods and torrential rains in the north and the coast will make it difficult to deploy infrastructure projects, he explains.

Meanwhile, Burneo indicates that if regional and local governments promote investment for prevention works before the arrival of El Niño, this would serve to “align positively” the expectations of private agents, since it would generate a perception of productivity.

However, it regrets that currently subnational governments are not “advancing in the execution of their budget.”

On the other hand, the outbreak of a new social conflict is another factor that would play against private investment, says former minister Castilla, since it would affect key sectors such as trade, tourism and mining.

“The social and political upheaval meant that the country basically did not grow in the first four months of the year,” he remarks.

Greater flexibility

Private investment in the country fell 12% during the first quarter of 2023, according to the National Institute of Statistics and Informatics (INEI).

In this regard, the Knowledge Manager of the Development Bank of Latin America (CAF), Verónica Frisancho, points out that from her institution it is expected “that this has been the floor” and that in the coming months this indicator will not continue to decline. But the result will depend on the political situation in the country.

For his part, Castilla mentions that the dynamism of sectoral placements will also depend on the relaxation of the regulatory framework in areas such as mining. For example, greater efficiency when granting socio-environmental permits.

For this, both the Legislative and the Executive must work hand in hand, he mentions. It also highlights thatThe promotion of investments under the modality of work for taxes (OxI) and public-private associations (PPP) is crucial.

“In APP so far there is no relevant project, despite the announcements of awarding more than US$3,000 million this year,” he warns.

Underemployment and poverty

The reduction in the advance of private investment explains more than half of the drop in the projection of GDP for 2023, which now stands at 2.2%, says Diego Macera, director of the Peruvian Institute of Economy (IPE).

For his part, Castilla emphasizes that the negative result would also cause an increase in the level of poverty because it stops the creation of formal jobs and, instead, the numbers of underemployment and precarious employment are increasing, “which puts the well-being of millions of Peruvians at stake.”

One-year business expectations are more optimistic

Business expectations in May presented a more optimistic outlook for 12 months, according to the Survey of Macroeconomic Expectations of the Central Reserve Bank of Peru.

Regarding the economy in general, it went from 53 to 56 points, compared to April. By productive sector, from 54 to 58, since it had been stagnant since March. On the situation of the company, from 58 to 61; while product demand (59 to 62) and staff recruitment (53 to 54) also scored better.

Only long-term investment by companies fell one point compared to the short term, which was in green, although still in the pessimistic range.

At 12 months, he went from 55 to 54; and 3 months, from 45 to 47, which reflected that it was expected to overcome El Niño Costero, although not the political crisis, which continues to generate instability.

figures

• US$4,700 is the estimated investment for this year in the mining sector.
• Mining placements are expected to be 18.9% less than last year.
• Investments in mining fell 19.2% until April.

reactions

Kurt Burneo, former Minister of Economy

“To the extent that there is more realism in terms of macro policy, investor expectations will be more realistic. The growth rate is small and that is in line with the decisions of private investors”.

Luis Miguel Castilla, former Minister of Economy

“Peru could easily be having private investment growth rates of between 5% and 10% given a framework of stability. If the risks of The boy and the social upheaval, there would be more investment”.

Verónica Frisancho, manager of the CAF

“I don’t think (private investment) will continue to decline, we don’t have a projection of how much it can reach, but it depends a lot on the political stability in the country, Which is always going to have an impact.”