Chilean investments in Peru grow despite a leftist government

RIO DE JANEIRO, BRAZIL – On July 19, 2021, after three weeks of electoral uncertainty, Pedro Castillo -from the Marxist-oriented Peru Libre party- managed to be proclaimed president of Peru, defeating the right-wing candidate Keiko Fujimori and giving rise to the hope of putting an end to a period in which there were four presidents for four years, marked by corruption scandals and presidents removed from office before their time (as was the case of Pedro Pablo Kuczynski and also Martin Viscarra).

Castillo had made of the great leftist slogans and the promises of change his main campaign capital for the 2021 elections with a profile different from that of a professional politician. A teacher, peasant, and union leader, he criticized the cities’ luxury and the Andean villages’ misery.

His campaign slogans included strong criticism against the Pension Fund Administrators (AFP) system -a model implemented in Chile and Peru to pension retired workers- insinuating to eliminate them; he has also had positive words for the past Venezuelan government of Nicolás Maduro. However, as his chances of becoming President of Peru grew -mainly because of the second round of the presidential election- his discourse became more moderate than Gabriel Boric’s campaign in Chile.

When he was sworn in as President, Castillo swore “for the people of Peru, for a country without corruption and for a new Constitution”, thus showing the persistence of his idea of changing the 1993 Constitution, promulgated by Alberto Fujimori.

As in many countries where the left is beginning to have a chance of success in coming to power, the fear of the markets and investors grew at the same time as the popularity of Peru Libre’s candidate in the polls. Castillo was quick to give signals to the center: he defined himself more as a progressive than a Marxist, decided to stop referring to the Venezuelan government, and also emphasized in several speeches his willingness to respect private property, encourage investments, and give signals to the private world that his government would not be extreme left.

Undoubtedly, one of the most critical signals, in this sense, was the appointment of the prominent economist Pedro Francke as Minister of Economy and Finance.

As in the Chilean case, where Mario Marcel was appointed as future Finance Minister; in Peru, Castillo also used the formula of looking for a moderate, technocratic economist who would give confidence to the markets. Not only that, but Francke was also the president of the Central Bank until before becoming Castillo’s minister, and he also worked for the World Bank.

Francke has been the one who had shown the greatest signs of moderation in the government, which had even translated into his statements against Castillo’s promise to seek a new constitution, as when he said that the constituent assembly “is not part of the General Government Plan”. It prompted Vladimir Cerrón, Marxist ideologue and principal of Perú Libre, to point out that “it is natural that he [Francke] does not know who is not from the party, nor was he in the campaign, but the Constituent Assembly is a promise and a banner of struggle, it cannot be a swindle to the people!”, he said in his social networks.

It has broken Castillo’s party into those who demand that he return to positions more to the left, motivating several power disputes and distrust from both sides, making the government unstable. However, these signs of instability do not seem to intimidate Chilean investors.

SIGNS OF CHILEAN INVESTMENT

It is probably the signals given by Francke that have made Chilean capital continue to see Peru as an attractive market.

It is the case of Falabella, which on January 11 of this year announced a plan that contemplates investments of US$711 million by 2022, focused on “technology, logistics, and stores to continue strengthening its physical and digital ecosystem”. In terms of the physical expansion of its business, Falabella’s plan includes US$135 million for the opening of 19 stores in Latin America. Four of these are in Peru, where new Tottus supermarkets and Hiperbodegas will be opened.

In addition, the investment plan focuses strongly on investments to improve logistics to continue developing digital commerce through platforms such as Linio and Fazil. In addition, a large part of this US$711 million corresponds to the “launch of the Falabella.com integrated platform in Peru and Colombia”.

Gastón Bottazzini, Falabella’s general manager, said that “we want to consolidate Falabella.com as the leading e-commerce platform in the Andean region”.

According to the company’s latest annual report (published in 2021, but related to the 2020 financial year), Gross Merchandising Volume (GMV), a measure used to quantify the monetary value of retail merchandise sold online, had grown by 95% in Peru, a higher figure compared to all the other countries in which Falabella has a presence except Chile.

According to several publications, together with the financial business -under the hand of Banco Falabella- digital commerce has been the one that has saved the year for Falabella in 2021, considering that it had an impressive rebound in revenues in that year given the comparison with 2020, the year in which the pandemic caused more problems to the business; Peru being the leading country in adopting in a good way this form of commerce after Chile.

In conversation with INTERFERENCIA, Falabella said that “we have confidence in the long-term development of Peru and believe it is one of the high potential markets in the region”.

They added that “our investments aim to build long-term relationships with customers. We have been able to do this collaboratively with governments of different political orientations over time”.

However, the Peruvian Central Reserve Bank projected that by 2022 there would be a 0% growth in private investment due to the contraction of projects in various areas, which was projected based on satisfaction surveys conducted with companies, which would cut their investment rather than expand them.

In any case, Julio Velarde, president of the entity, pointed out that the most significant investments will surely be in mining and that “it does not seem pessimistic to me to put a projection of 0% with investment endowment. The investment will continue, even not within the mining sector, as there are quite large private infrastructure projects”, and added that it is necessary for the markets to “recover confidence”.

It is the case of Chilean Oil Company (Copec), a company owned by the powerful Angelini family, whose mining arm recently invested in Peru. It is a millionaire investment in Mina Justa, “a world-class initiative, which meant an investment of close to US$1.6 billion in a privileged location on the southern coast of Peru (…) Mina Justa has an estimated 432 million tons of mining resources, an average annual production of more than 100,000 tons of fine copper, and attractive exploration potential for its future growth”, said Roberto Angelini in a shareholders’ meeting last year.

Although this is an investment prior to Castillo’s arrival in power, the project is certainly on track. Thus, in July 2021, the same month in which Castillo became governor, Copec was communicating on its networks that the Mina Justa project had made its first copper shipment at the port of Matarani, consisting of 22 thousand metric tons of refined copper. In 2021, the same copper company had entered into operation.

“It is exciting that, after so many years of study, construction, and the complexities of the pandemic, we are starting to sell the first tons of copper,” said Erwin Kaufmann, manager of Alxar, a mining company of the Copec Group.

There is also the case of the pension business, in particular AFP Habitat in Peru, which has accumulated successful numbers since it entered that market in 2012.

In September 2021, AFP Habitat, controlled by Inversiones La Construcción – of the Chilean Chamber of Construction – and the US insurance company Prudential, indicated that it would separate its corporate structure to create Habitat Andina, which would control the AFP’s businesses in Colombia (Colfondos) and Peru (AFP Habitat Peru).

It was a signal that was perceived by the markets as a way to protect itself mainly from pension fund withdrawals in Chile, and thus separate the results of businesses that are in a thriving phase – as is the case of Habitat in Peru and Colombia – from the firm’s businesses in Chile, where they have been strongly questioned after the social outbreak.

The Diario Financiero recently published that in 2021, Habitat’s businesses in Peru and Colombia increased their weight in Habitat’s results, contributing 22.5% of the Chilean administrator’s profits.

It contrasts with the original motivations of Pedro Castillo to put an end to the AFP business, which in any case remains with the more left-wing supporters of Peru Libre, who a few weeks ago introduced a bill in parliament to withdraw 100% of the pension funds.

However, as has been made clear in communications from Pedro Francke – Castillo’s Minister of Economy and Finance – Castillo’s proposals would have more to do with a reform that would provide Peruvians with more alternatives when it comes to saving for their old age pensions, including a state administrator, which would allow them to have options as opposed to the four AFPs that operate in the neighboring country.

“The first thing we should point out is that any pension system reform requires a law. Therefore, it has to go through Congress and requires understanding the composition that the future Congress will have and its conditions. A reform of the pension system in Peru cannot be applied by decree of the Executive Branch,” Francke told a Peruvian media outlet, showing moderation compared to the more aggressive positions against the AFPs in Peru.

The story contacted AFP Habitat; however, they declined to refer to the subject, stating that they cannot refer to political aspects of the countries in which they do business.

With information from Interferencia