I nvestment attraction and innovation policy, combine to create a favorable business climate: some thoughts about Peru

1. Investment attraction and innovation policy, combine to create a favorable business climate: some thoughts about PeruMercedes AraozJune 19th, 2012

2. http://www.iadb.org The Inter-American Development Bank Discussion Papers and Presentations are documents prepared by both Bank and non-Bank personnel as supporting materials for events and are often produced on an expedited publication schedule without formal editing or review. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This presentation may be freely reproduced.

3. The World Economy…

4. World GDP Growth(Annual % change) In 2010 the world economy expanded by 5% after falling 0.5% in 2009 (the most since World War II). The 2010 growth was explained by the expansion of emerging and developing economies (7.1%) and to a lesser extent by the recovery of advanced economies (3%). World Trade Volume WorldAdvanced EconomiesEmerging Economies WorldAdvanced EconomiesEmerging Economies World trade grew 15.4% after it experienced a decline of 10.9% in 2009 Source: IMF

5. Recent data show a slowdown in economic activity ... mainly in the developed economies Developed Countries: Jan 2007 – Aug 2011 Manufacture Index Developed Countries: Jan 2007 – Aug 2011 Service Index Manufacture and Service Global Index: Jan 2007 – Aug 2011 Service Manufacture Source: IMF

6. Developed economies have not yet recovered the levels of GDP per capita before the crisis Real per capita GDP Var % Quarter II 2011 / Quarter IV 2007 Source: ECLAC

7. In emerging economies has been removing monetary stimulus due to inflationary pressures and the risk of bubbles in asset markets Official Interest Rate (Monetary Policy) (%) Inflation (% Var. 12 Months) (*) Includes Brazil, Colombia, Chile, Mexico and Peru .(**) includes China, India, Indonesia, Philippines, Malaysia and Thailand. Change in official interest rate from December 2010 Source: CEPAL, IMF

8. Economic Growth Forcasts By the end of 2011, UNCTAD global forecasts are located between 1.3 and 1.5 billion dollars, these are still far from the 1.77 trillion reached in 2008.It predicts that the increase in business confidence push to higher levels of investment, but the degree of recovery will depend on achieving a sustained economic growth and the behavior of FDI in developing economies. Economic Growth Source: IMF, UNCTAD * Forecast

9. LATIN AMERICA …

10. The impact of the crisis in Latin America was significant ... GDP Growth in the previous three years GDP Growth in 2009 Annual Growth % Source: ECLAC

11. … But transitory Growth Forecast Var %. Real GDP Source: ECLAC

12. … The resistance was shown in the Social Field … Poverty in Latin America

13. Collapse in exports and slowdown of GDP in 2009 Trade Channel determined the crash ... Percentage of GDP growth in 2009 Impact of exports on GDP growth in 2009 Net purchases by foreign investors and growth "unexplained" GDP ... But the crisis spread through the Financial Channel GDP growth in 2009 “ unexplained" by exports Domestic bond purchases by foreigners

14. Rebound and Stabilization in the Region In 2010 Latin America had a strong rebound with growth of 6.1%.Peru, Brazil, Chile and Colombia recorded an increase in its level of economic activity of 8.8%, 7.5%, 5.3% and 4.3% respectively. However, in Mexico, the 2010 growth was not large enough to regain pre-crisis levels and reverse the decline in employment. Thus, Mexico's growth of 5.5% in 2010 could not offset the contraction of 6.1% recorded the previous year. GDP and Domestic Demand 2010 (% anual Var. ) GDP Domestic Demand Source: ECLAC, BCRP

15. The real GDP growth has moderated, but domestic demand continues to expand vigorously Latin America: Growth in domestic demand and real GDP, 2010 Growth of real domestic demand Real GDP Growth Source: ECLAC

16. The expansion will be less unequal, with output gaps closed or closed in much of the region. Real GDP Growth, 2009-11(Simple average, annual percentage change) South America Mexico and Central America Caribe Latin America and the Caribbean: Product Gaps(Percentage of potential GDP, simple average by region) South America Mexico and Central America Caribe Source: ECLAC

17. Latin America: Net inflow of capital, 1980-2010(Percent of GDP) Capital flows to the region have recovered rapidly after the crisis Emerging Economies: Periods of strong net capital inflows(Percent of GDP)

18. Continuous poverty and inequalityreduction Extreme poverty in Latin America (Var % , 2005 -2009) Total poverty in Latin America (Var % , 2005 -2009) Gini coefficient of income distribution from 2002 to 2009 2009 2002 ____________________ • Source: CEPAL

19. Expected growth of the middle classes in Latin America over the next 10 years(Var. %) 2010 -2020 2005 -2010 Source: UNCTAD

20. Current view of Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) (BillionsUSD) Global flows of FDI stagnated in 2010, growing by 1%, following a strong rally in Asia and Latin America and the contraction experienced by the developed economies, with the exception of the United States Source: UNCTAD

21. FDI recovery Income from Foreign Direct Investment in Latin America (BillionsUSD) • The recovery of developed economies. • The dynamism of certain emerging economies driving growth in some sectors by increases in demand. • The growth of domestic demand in some countries. • Increased outsourcing by foreign firms in response to the crisis. South America Mexico, Central America and the Caribbean Total Source: ECLAC

22. Destination of FDI in Latin America and the Caribbean (2000 – 2010 ) Mexico, Central America and the Caribbean South America Manufacture Natural Resources Services Source: ECLAC

23. Latin America: Origin of FDI (2006 – 2010) Others Canada Caribbean Financial Centers Japan China Netherlands UK United States Spain Latin America Source: ECLAC

24. DOING BUSINESS IN LA

25. Source: Doing Business Report, 2011

26. Starting a Business acrossRegions Source: Doing Business Report, 2011

27. RegisteringPropertyAcossRegions Source: Doing Business Report, 2011

28. CreditInformation Source: Doing Business Report, 2011

29. Changes to business regulation 2009/2010 in Latin America Source: Doing Business Report, 2011

30. Source: Global Property Guide

31. LATIN AMERICA: INVESTMENT POSSIBILITIES

32. LA Investment needs in infrastructure Latin American has prove to have a very propitious environment for private investment in infrastructure, their challenge is execution and innovation to deal with the specific complexities that each country faces. The infrastructure private investment attractiveness index (IPIAI) ** The infrastructure Quality Gap Index* (IQGI) Source: WorldEconomicForum.

33. Foreign Direct Investment in Natural Resources The region will need in the short term financing, principally for the execution of projects based on natural resources Foreign Direct Investment US$ bn (accumulated stock since 2005). Financing need of Top ten investment projects Source: WorldEconomicForum.

34. But Latin America is not one entity: there is diversity in the region Diversity in the region (GDP and CPI forecast) • The “two giants” (BRA, MEX) • Medium Size Emerging South America: medium size countries combine good performance both in inflation and growth (CHL, COL, PER) • The “heterodox” countries: most countries have achieved low inflation, but it remains a problem in ARG and VEN Source: WorldEconomicForum.

35. The region has passed a demanding sequence of tests since the 90s The region made substantial economic and institutional reforms, but also enjoyed a benign favorable environment in the second half of the 00s But the region also confronted – and passed -severe tests, including the global financial crisis of 08 4 3 2 1

36. A bright future, if the right road is taken Latin America Forecast Source: BBVA Research, 2010

37. … a positive international image of Peru...

38. Perugets the investment grade

42. The Economist: Peruwith the bestclimateforMicrofinance in the world

43. Peruis up 5 positions in the competitivinessindex

44. Peru the best place toinvest in South America

46. Peru Solid economic fundamentals

47. Investment grade ratingLatin American Comparison • Continual improvement of business climate good economic indicators, an incentive for private and public investment… Source : Doing Business 2011 - IFC Evolution of the investment project announcements: 2011(US$ Billion ) Fuente: Standard & Poor`s, Fitch Ratings y Moody´s Private and PublicInvestment (% GDP) Investment project announcements with High Probability(US$ Million ) PrivateInvestment

48. Continuous poverty reduction... PovertyReduction in LatinAmerica (2005 – 2009) % Extreme poverty % Total poverty Source: INEI

49. Modern legal and stable framework Guarantees recognized by the State: INVESTORS • Stability of the right to non discrimination. • Stability of the Income Tax System, applicable to investors, in force when the agreement is concluded. • Stability of the system of free availability of foreign currency and remittance of profits, dividends and royalties. • RECEIVING COMPANY • Stability of the systems of labor engagement in force when the agreement is concluded. • Stability of the system of export promotion applicable when the agreement is concluded. • Stability of the Income Tax System Legal Stability Agreements Requirement: Minimum investment of US$ 5 MM in any economic sectors. US$ 10 MM for hydrocarbon and mining sectors. Validity:10 years. Concessions: Term according to the contract’s life (Max. 60 years). Source: Proinversión