Peru: Investment Opportunities

Peru: Investment Opportunities Luis Miguel Castilla Minister of Economy and Finance March, 214

Outline Peruvian Outlook Strong macroeconomic buffers to face external shocks Investment opportunities Challenges & Reforms 2

Peruvian Outlook

Peru will continue leading macroeconomic performance among LA6 1/ economies in 214-215 Consensus Forecasts: LA6 GDP 214-215 (Annual % change) Consensus Forecasts: LA6 Inflation 214-215 (% change, Dec/Dec) 6 5 214 215 9 8 7 214 215 4 6 3 5 4 2 3 1 2 1 Peru Colombia Chile Uruguay Mexico Brazil Peru Chile Colombia Mexico Brazil Uruguay 1/ The LA6 countries refers to the six Latin American countries that have adopted a formal inflation targeting framework and have relatively more developed domestic capital markets. The list includes: Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Source: Consensus Forecasts, February 214. 4

Structural reforms over last two decades have led to sustained high GDP growth Per Capita Real GDP Growth in the World (% Change) 12 2-213 45 line 1 8 CHN Did worse 6 4 2-2 Did better PER ARG CHL BOL BRA ECUURY COL VEN MEX USA JAM 1981-1992 -4-6 -8-8 -6-4 -2 2 4 6 8 1 12 Source: IMF, WEO October 213 5

Investment has been a fundamental factor in explaining economic growth over the last two decades 14 12 1 GDP and Private Investment (Average % change ) Growth after investment surpassed 25% of GDP (Annual % change) GDP Private Investment 12,5 Year when Investement to Country GDP reached 25% Avg. Growth of World avg. Growth the 5 next years of the next 5 years 8 6 4 4,3 6,3 6,6 Peru 212 6, 3,4 Chile 1989 7,3 2,6 2 Taiwan 198 6,4 2,9-2 -,5 -,3 1983-1993 1994-23 24-213 Total Investment LA6 1 : 199 (% GDP) Singapore 198 5,9 2,9 Total Investment LA6 1 : 213 (% GDP) 3 25 26.5 3 25 23.7 24.2 25.7 27.8 2 16.5 18.4 19.9 2.4 2 19.2 19.7 15 13.5 15 1 1 5 5 Uruguay Peru Brazil Colombia Mexico Chile 1/ The LA6 countries refers to the six Latin American countries that have adopted a formal inflation targeting framework and have relatively more developed domestic capital markets. The list includes: Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Source: BCRP, MEF, IMF WEO October 213. 6 Brazil Uruguay Colombia Mexico Chile Peru

Average Inflation (%) Supporting high productivity gains in a context of low inflation Total Factor Productivity Growth and Inflation 1 (2-211) 23 21 19 TUR VEN IRQ SRB 17 15 13 IRNECU DOM RUS UKR 11 9 7 5 3 MEX CHL CAN CRI URY BRA COL BOL PHL KOR USA PER CHN KAZ 1 JPN HKG -1-3 -2 2 3 5 6 Total Factor Productivity Growth During 2-211, Total Factor Productivity grew at an average annual rate of 1.6% (among the highest in Latin America), with an average annual inflation rate of 2.6% (among the lowest in Latin America). Source: PENN WORLD TABLE, IMF, MEF. 7

International integration with the rest of the world fosters trade and investment Peru: Over US$ 41 billion of Total Exports to the World in 213 (US$, % of total exports 213) US$ 1.1 billion North America 1 (24.1%) US$ 8.4 billion LAC (2.1%) US$ 1.1 billion Europe (23.9%) US$.2 billion Africa (.5%) US$ 12.7 billion Asia (3.5%) 3,9 % 26,3 % 21,6 % 18, % Trade agreements foster investment and business US$.4 billion Oceania 1, %,3 % Peru has implemented trade agreements with USA, UE, People s Republic of China, Republic of Korea, Mexico, Canada, Chile, Singapore, Costa Rica and Panama. Peru has signed agreements with Japan and Thailand. 1/ Without Mexico. Source: BCRP, MEF, MINCETUR. 8 (.9%) There are ongoing negotiations with Honduras, El Salvador, Turkey and others. Peru already has some form of preferential access to 73% of the world GDP (92% of world trade).

Economic growth has generated greater upward social mobility and smaller social gaps More adequate employment (Metropolitan Lima,% of total employment) Peru: Real Income (Index 24=1) 65 6 55 5 63 14 13 12 36.7% 45 11 4 35 3 Adequate Employment Underemployment Nov-jan3 Aug-oct5 May-jul8 Feb-apr11 Nov-jan14 Peru: Middle class and Emerging middle (% of population) 37 1 9 8 24 26 28 21 211 212 Poverty and Extreme Poverty (% of population) High Class Middle class Emerging Population Poor 7 12 1 8 6.6 2.1 25.9 24.8 Middle class From 25.9% to 48.9% 48.9 6 5 4 3 58.7 25.8 24 212 4 2 48.7 21.2 27.8 2 1 16.4 6. 25 211 Total poverty Extreme poverty Source: MTPE, INEI ENAHO, IDB - Technical note. Middle Class in Peru: quantification and recently evolution.. 9

Strong macroeconomic buffers to face external shocks

Stronger fiscal performance than the average Baa1 and Baa2 countries in the last decade Overall Fiscal Balance 23-213 (% of GDP) Overall Fiscal Balance 213 (% of GDP) Public Debt 23-213 (% of GDP) Public Debt 213 (% of GDP) Source: Moody s. 11

Worse Better Outstanding macroeconomic environment (among the top 2 in the world) Peru: Ranking in the WEF Macroeconomic Environment pillar 1 2 21 2 3 4 5 6 7 59 78 67 63 75 52 8 9 26 27 28 29 21 211 212 213 This position in the ranking is due mainly to improvements in key macroeconomic variables such as: o Government Budget Balance o General Government Debt o Gross National Savings o Inflation Source: World Economic Forum - Global Competitiveness Report 213 214. 12

Solid macroeconomic buffers to shield against exogenous shocks Peru: Net International Reserves 1/ (US$ Million) Net International Reserves 213 1/ (% of GDP) 7, 6, 65,62 31.5% GDP 4 31.5 5, 3 4, 3, 2, 1, 8,18 15% GDP 17,275 19% GDP 2 26 Feb-14 2 1 11 13 Colombia Mexico Chile Brazil Peru 14 17 Peru: Fiscal Stabilization Fund 2/ (US$ Million) LATAM: Gross Public Debt 213 (% of GDP) 12 1 8 6 4 2 336 485 1 87 1 814 2 114 5 626 7 169 8 59 1/ In the case of Peru, updated to February 21, 214. 2/ As of February 214. Source: BCRP, IMF, Central Banks. 1 53 26 28 21 212 214(e) 4,6% GDP 13 8 7 6 5 4 3 2 1 68 Brazil 52 Latin America 44 32 19 13 Mexico Colombia Peru Chile

Capital flows are mainly long term and mostly finance physical investment External Vulnerability Indicator 213 1 (% of Total External Debt to Foreign Int l Reserves) Net Foreign Direct Investment 213 (% of GDP) 18 16 14 12 1 8 6 4 2 19,6 2,9 Brazil (Baa2) Average Baa1 Peru (Baa2) Average Baa2 29,4 Russia (Baa1) 57,6 Mexico (Baa1) 94,1 Chile (Aa3) 14,2 Kazakhstan (Baa2) 6 5 4 3 2 1 5,7 Kazakhstan (Baa2) 5, Peru (Baa2) 2,7 2,7 Chile (Aa3) Brazil (Baa2) Average Baa2 Average Baa1 1,8 Mexico (Baa1),1 Russia (Baa1) Peru: Balance of Payments (% of GDP) Peru: Annual Inflow of Capital (% of GDP) 12 1 8 6 4 2-2 -4-6 Current account Financial account 21 23 25 27 29 211 213 Average 2/7 Average 28/12 213 1/ (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves Source: Moody s, BCRP. 14 8 7 6 5 4 3 2 1-1 -2 3,4 7,2 5,4,1,3 -,6 -,2 -,2-1, Private long-term Public Short-term

Lower fiscal exposure to volatility in commodity prices than peers Commodity Revenue (% of total GDP, Average 26-21) Estimated impact on total revenue caused by a fall of 25% in commodity prices Peru 4 Ecuador Chile 6 Bolivia Trinidad & Tobago Ecuador Mexico 7 8 Venezuela Mexico Chile Bolivia Trinidad & Tobago 11 17 Peru Colombia Argentina Venezuela 19-4.5-4. - 3.5-3. - 2.5-2. - 1.5-1. -.5. Percent of potential GDP Sources: IMF, 212, Fiscal Frameworks for Resource Rich Developing Countries, May. IDB, 213, Rethinking reforms, How Latin America and the Caribbean Can Escape Suppressed World Growth, March. 15

Which makes us less vulnerable to disruptions in foreign capital flows External Vulnerability indicator (Baa1 to Baa3 countries) (%) Note: Index consists of : (Short-term external debt + Currently maturing long-term external debt + Total nonresident deposits over one year) / Official foreign exchange reserves. Source: Moody s Sovereign Statsbook (November 213). 16

Upward trend in credit ratings attests to credibility and supports ample access to financing LATAM: Sovereigns Rating 1 (Long term debt in foreign currency) Peru: Sovereigns Rating (Long term debt in foreign currency) Country Moody's S&P Fitch Chile Aa3 AA- A+ Mexico A3 BBB+ BBB+ Peru Baa2 BBB+ BBB+ Brazil Baa2 BBB BBB Panama Baa2 BBB BBB Colombia Baa3 BBB BBB Bolivia Ba3 BB- BB- Argentina B3 CCC+ CC Ecuador Caa1 B B Venezuela Caa1 B- B+ BB 19 BB-17 B+ 15 BBB+ 27 BBB25 BBB- 23 BB+ 21 S&P Fitch Moody's Investment Grade S&P Fitch Moody's Outlook Stable Stable Positive 22 24 26 28 21 212 214 Peru's upgrade is underpinned by the strength of the sovereign's external and fiscal balance sheets, continued growth outperformance in relation to 'BBB' peers and a long track record of macroeconomic and financial stability. Peru's established track record of policy coherence and credibility as well as the sovereign's fiscal and external financing flexibility underpin its strong shock absorption capacity. Fitch. October 23, 213. 1/ Sorted by Moody s rating. Source: S&P, Fitch, Moody s. 17

Investment opportunities

Friendly environment for doing business (ranked 2 nd in the region) Doing Business 214 (Ranking) Venezuela Colombia Ecuador 135 Peru 43 42 Chile 34 181 Guyana 126 115 Argentina Paraguay 19 Uruguay 88 Suriname 161 Brazil 116 Bolivia 162 Position Country 1 Chile 2 Peru 3 Colombia 4 Uruguay 5 Paraguay Source: World Bank, Doing Business 214: Understanding Regulations for Small and Medium-Size Enterprises. Washington, DC:, 213. 19

Goals in the investment agenda Streamlining the investment processes Enhancing efficiency in public administration Stimulating the economy through the promotion of PPPs Strengthening business confidence and boosting the investment climate Reducing public services and infrastructure gaps Improving competitiveness Our goal: To further promote the economy s attractiveness to investments as a conduit to sustainable growth 2

Broad investment pipeline for the short and medium term Source: BCRP, MINEM, PROINVERSION, Apoyo Consultoria, PERUPETRO. Mining Las Bambas (Xstrata Copper) Cerro Verde extension (Freeport-MacMoran Copper) Toromocho (Chinalco) Constancia (Hudbay) Marcona extension (Shougang) Hydrocarbons Block 67 (Perenco Peru Petroleum Limited) Block Z-2B (Savia Peru) Block 88 (Pluspetrol Peru Corporation) Block Z-1 (BPZ) Energy security and southern gas pipeline (Called) Gas distribution system extension (Calidda) NGL & gas pipeline extension (TGP) LNG Supply System for the Domestic Market (Called) Mass use of natural gas (Gas Natural Internacional/ Consorcio Promigas - Surtigas) 21 Region Apurimac Arequipa Junin Cusco Ica Loreto Piura Cusco Tumbes Cusco, Arequipa, Moquegua Lima, Callao Cusco Lima Nationwide Electricity Chaglla Hydroelectric 46MW (Odebrecht) Huanuco South energy node of Peru (Samay I and Enersur) Arequipa, Moquegua Cerro del Aguila Hydroelectric 42MW (Inkia Energy) Huancavelica Molloco Hydroelectric 3MW (Corsan /Engevix/Enex) Arequipa 22 kv Moyobamba Iquitos transmission line (Called) Loreto, San Martin Cheves Hydroelectric 168 MW (SN Power) Lima 5 kv Mantaro Marcona Socabaya Montalvo transmission line (Electrical Interconnection - ISA) Huancavelica, Ica, Arequipa, Moquegua Infrastructure Metro of Lima & Callao Section 2 (Called) Muelle Norte port modernization (APM Terminals) New international airport of Chinchero (Called) Longitudinal de la Sierra road Section 2 (Consierra Section 2) Via Parque Rimac (OAS S.R.L.) Vias Nuevas de Lima, rehabilitation of highways (Odebrecht) Main works and conduction of drinkable water supply for Lima (Not called) WWTP & Outfall La Chira (Acciona Agua/GYM) Matarani port extension (Tisur) Yurimaguas port terminal (Hidalgo and Hidalgo) Agriculture Chavimochc irrigation project (Called) Telecommunications 171-177 MHz and 211-217 MHz (Blocks A and B) Band (Movistar and Americatel) National Optical Fiber Backbone Network (TV Azteca-Tendai) Lima, Callao Lima Cusco Cajamarca, La Libertad Lima Lima Lima, Junin Lima Arequipa Loreto La Libertad Nationwide Nationwide

We expect to continue with the promotion of PPP investment during 214 Adjudicated projects and for adjudication by Proinversion (2 214) 17 25 13,657 3 5 11 12 9 4,322 5 12 5,21 88 346 1,85 1,86 2,49 828 26 27 28 29 21 211 212 213 214-215 Total investment (Millions of USD, VAT included) Number of projects In 214, we estimate to adjudicate 22 projects for an amount of over US$ 13 billion. (*) Includes projects in different investment modalities. Source: PROINVERSIÓN. 22

Investment projects aim to reduce infrastructure gap and increase productivity Airports Ports Cusco International Airport : estimated investment of US$ 42 millions. Transportation Salaverry Port Terminal: US$ 13 millions. San Juan de Marcona Port Terminal: US$ 139 millions. General San Martin Port Terminal: US$ 11 millions. Transcontinental Railroad Brazil-Peru (Atlantic- Pacific): US$ 28 millions. Road Panamericana Sur: Ica-Frontier with Chile: US$ 6 millions. Source: PROINVERSION 23

Peru, an investment destination for miners Only 2% of the potential mining territory has been exploited. Peru is a polymetallic country, with proven mineral reserves (gold, copper, silver); besides there are also non-metallic mineral deposits to exploit. Peru 212: Share of global mining production (Rank) 22,2% 11,2% 8,9% 7,2% 6,3% 4,2% 4,1% Plata (1ro) Cobre (3ro) Plomo (4to) Zinc (3ro) Estaño (6to) Oro (8vo) Molibdeno (4to) Source: Morgan Stanley. U.S. Geological Survey, U.S. Department of the Interior. 24

Peru has important competitive advantages due to lower cash and electricity costs Copper and Gold Cash Cost 212 (cus$/lb & US$/oz) Electricity Cost for 22 (cus$/kwh) Kazajastan Canada Mongolia Peru Zambia USA Argentina Australia Mexico Chile Congo 2.6 5.3 6.1 6.6 7.4 7.5 Peru generates around 6% from hydro and 35% from natural gas 7.8 8.8 9 Chile generates 2% from diesel 12.1 14.1 Source: Wood Makenzie. 25

With strong potential in other sectors as well Agrobusiness Seasonal windows in the most important markets. The current cultivated hectares used for agroexports are expected to double as a consequence of large irrigation projects in portfolio. Hydrocarbons There are proven and potential reserves through 228 of around 35 Cubic Feet. Main projects Chavimochic Project (3rd stage): US$ 5 millions. Hydroelectric Exploitation of Majes-Siguas: US$ 8 millions. Main projects Gas pipeline to Trujillo (Natural Gas): US$ 1 77 millions. South energy node: US$ 1 534 millions. Source: PROINVERSION 26

Challenges & Reforms

Challenges ahead 1. Economic growth with social inclusion. 2. Quality human capital accumulation in order to achieve greater productivity: o Education o Health o Nutrition o Gap closing 3. Diversification and adding value to the extraction of natural resources. 4. Public Sector Modernization. o Avoiding over regulation and regulatory uncertainty. o Effective public policy, administrative simplification and accountability. 5. Priority reforms: o Effectiveness of decentralization o Labor informality o Security 6. Consolidating a long term vision: Peru 25. 28

Major Reforms SUNAT (Tax Collection Agency) Strengthening Act (Act No. 29816) Allows broader powers to better enable it to fight tax evasion and avoidance and to broaden the tax base. Private Pension System reform Act (Act No. 2993) Revamps investment regulations to allow for better fund performance, as well as other regulations to expand coverage, competition and quality of service, in order to lower fees and increase pensions. Securities Market Promotion Act (Act No. 35) Reduces transaction costs in order to broaden the investor base and promote capital markets access for small and medium sized issuers. Civil Service Act (Act No. 357) Introduces merit based evaluations for promotions and salary increases throughout the public sector in order to create a modern Civil Service. Government Procurement Act (SD No. 138-212-EF, SD No. 16-213-EF) Aimed at strengthening the Government Procurement Agency (OSCE) and to improving hiring procedures for public sector institutions. New Fiscal Responsibility Act Introduces a expenditure rule based on cyclically-adjusted fiscal balance, sets new rules for subnational governments and improves transparency. 29

Pipeline of further structural reforms Labor market reform Tools for improving the quality of human capital: Qualification system, improvements of the quality of the educational supply, improvement of human capital financing. Flexibility on costs of formality: Vacation period at the regional average, moderate severance pay and the compensation for working time at the regional average. Institutional improvement of the National Superintendence of Labor Control. Stabilization Funds for Canon and Mining Royalty (FOCAR) intended to mitigate the volatility in the transfers to the Subnational Governments in order to improve the multiannual planning and the predictability of investments. Normative Productive Package Technical Standards. Peru is reinforcing its National System for Quality. The purpose of this policy is to promote and ensure that Peruvian made products can meet international standards. One of the main objectives is to increase our products access to trade partner s markets, who require compliance with these standards and technical requirements. Movable Collaterals. A Law Proposal for Movable Collaterals. It will enhance access to financing for companies whose main assets are movable collaterals (guarantees on machinery and equipment, etc). Improvements in Public Acquisition Act Has the purpose to enforce the efficient use of the public resources through management by results. Customs Agency Modernization Simplifies customs operations and cut down on time and costs for the foreign trade operators. 3

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