Thoughts on Perú

Sorry for my non-activity on the blog for such a long time. Work has been grueling.... Anyways, recently I have been talking to a friend on Facebook, who is a financial trader. He has been reading up on Kiva, and looks at it with his "financial" glasses on. Here is what he commented on regarding my earlier posts on Perú:

I perused your blog and have to say that you definitely have some good ideas from what I've read.

Regarding your thought on foreign investment or financials involved in the micro loan sector. To be honest I don't know of any in existence. But I do have to say this and it's the no brainer, investorship is drawn to growth. You look at a country like Peru and it's P/E ratio. 10.1 sounds good right? When you look at the global markets today U.S., Asia, and Uk are up there around 50 to 1. What that tells me is that there isn't too much volatility/growth capability here as compared to a country like Peru. But if you also look at the GDP of Peru, I may be mistaken it should be around 8 percent for 2007 not bad. All in all it tells me that fundamentally (briefly) that the country is not that bad price wise...actually down right cheap. The banking system is professional and inflation is down.

They currently are trying to increase free trade agreements with the U.S. as well as the UK and still is in the positive area as far as exports are concerned, but still are in rely heavily on agriculture and other natural resources. To me though I don't see any boom as far as capital-intensive manufacturing and knowledge based services yet. So until those signals are on the horizon I don't see much foreign investing happening on a wide scale, especially since it's market is still fairly small. That would also bring financials investing in the country if and when that happens.

One thing that worries me is the volatility in the government. Look what the market sentiment's reaction in the American exchanges after the Pakistan tragedy. Seriously you can't separate the two especially in "brick countries". You have to keep the scruples of a country’s economic and governmental relation in check. I know that area right now has been gray for some time now, but there has been some great changes with the new democratic president. I believe he's well suited for economic endeavors. Infrastructure wise Peru has a ways to get to the capital based and knowledge based economy that we all want.

And I think that has to start within itself for the long-term internally; thus making it more eligible for foreign investments. And that goes for financials and lending institutions domestically. Once these factors are addressed and executed upon I think we can see some foreign investing as well as loans and grants of that nature happening even from foreign product manufacturers, that tends to happen. Ultimately, I don't see an immediate change in the matters as far as companies other than the likes of Kiva expanding it's help to local Peruvian entrepreneurship; at least on the scale that we wish and through the markets. For a bit we'll have to rely on philanthropy and even loans from other governments and their private people like us. But hope is there and money is always to be made in a burgeoning economy.

Peru is still ahead of the economic curve as far as Latin categories are concerned.

My answer to him was:

thanks for your long analysis on the fundamentals of Peru. I agree with you on most points.

One thing to note is that the fundamentals may appear a bit skewed because much of the GDP growth is because of the mining industry. Especially copper and gold are quite big. This industry is mainly owned by large, foreign conglomerates like Newmont, Southern Copper, and Shougang Corp (iron ore). Much of the export money made in this industry goes towards the foreign shareholders of these companies, and has very little direct impact on the long tail of the population-- only a small portion of the population is directly involved in labor around this, and mostly in squalid / environmentally bad circumstances. See for example this Kiva loan-- and if you are further interested, Google the name of the town (Rinconada). You'll come across reports on child labor, etc. http://www.kiva.org/app.php?page=businesses&action=about&id=14886

Having said that, I have visited Peru on a regular basis over the last 10 years. The time of Fujimori's government was a transit period, from an economy that was in ruins (after Alan Garcia's first period in office) and from a period of civil upheaval (Shining Path terrorism was quite atrocious) to a more stable and peaceful time. The real proof of stability and growth came during Toledo's government, and the second term of Alan Garcia doesn't appear to be too bad from an economic growth point of view.

As you noted, the main issue appears to be the uncertainty that occurs around election season. In 2005, the #2 candidate was Ollanta Humala, a left-leaning ultra-nationalist (I didn't know you could combine these two), who on one hand was taking pages from Hugo Chavez's book, and on the other hand was fiercely anti anything non-indigenous. Very high on his list of enemies are the multitude of Chilean investors (who now own large part of the non-mining economy-- supermarket chains, fruit and wine industry, etc.), and anyone from the urban, non-indigenous population. His election would have meant an end to the relative open economy and foreign investment. Inflation and loss of values of investments (company stocks, property values, etc.) would have driven away any foreign investment and put the country back in what it was in the 1980s.

As you may have noted from my blog, I have become a believer in Hernando de Soto's call for governmental reform. Enabling the bottom class of the population (the long tail) to participate in the formal economy will unlock the potential for their growth and snowball the economic growth for the sector that has been deprived for a long time. Reform to encourage titling of property and businesses will help here. Other things that need to be done include enhanced infrastructure (roads, telecom, internet), education (especially in the rural / mountainous areas), and accessibility of health care. Other NGOs are active in those areas-- although I am concentrating my money on Kiva, they've got my moral support.

--Ramón