Peru has experienced strong economic growth during the past decade, making it one of the fastest-growing economies in Latin America, with an average growth rate of 5.9% in a low-inflation environment that is averaging 2.9%.
This growth has been mainly due to Peru’s open market strategy, which has established new free trade agreements with 38 countries, including the Association of Southeast Asian Nations (ASEAN), China, and the European Union. In addition, Peru is negotiating trade agreements with nine other countries, including Australia, New Zealand, Thailand, and Turkey.
Nearly 95% of Peru’s exports are covered by free trade agreements.
Moreover, the country has engaged in several bilateral and multilateral trade agreements that have opened new markets for its exports. Peru joined Mercosur in 2005, and between 2006 and 2016 it signed several bilateral treaties with other Latin American and Caribbean economies, as well as with the United States. In 2016, the Pacific Alliance, a trade agreement including Chile, Colombia, Mexico, and Peru came into force.
In terms of the automotive market, the fleet market in Peru for calendar-year 2017 was approximately 10% of total automotive sales of 184,000 units. The total number of vehicles in operation in Peru, including private fleet, is 4,264,114.
Companies are looking to increase market share with the introduction of new products. One example is General Motors, which will be introducing a new pickup truck in the Peruvian market.
“One new opportunity in 2018 is that we will launch the Chevrolet Colorado (S10) in Q1 of 2018. Currently we do not have a pickup in our product portfolio in Peru,” said Marcelo Tezoto, Senior Manager - Fleet Sales for General Motors “Along with the opportunity presented by the new pickup, there are new mining projects expected in the southern part of the country, which require the purchase of additional vehicles.”
The mining industry in Peru is a major buyer of fleet vehicles. Peru is the world’s third-largest producer of copper, zinc, and silver. Its economy is highly dependent on mining and vulnerable to the vagaries of volatile commodity prices.
The non-mining sectors of the economy are stagnant due to weak domestic demand and depreciation of the Peruvian currency, the sol, against the U.S. dollar, which has increased the cost of imported products.
To stimulate economic activity, Peru’s President Pedro Pablo Kuczynski, who formally took office on July 28, 2016, has introduced a broad agenda of policies to stimulate economic activity to offset the decline in commodity prices, which will stimulate fleet vehicle sales.
President Kuczynski intends to increase public investment in infrastructure and has announced that Peru is likely to raise funds on international financial markets to finance these projects.
Public investment rebounded significantly as key infrastructure projects restarted, following disruptions due to the Coastal El Niño phenomenon.
One major disruptive force in the Peruvian automotive market has been the flood of Chinese imported vehicles.
“In Peru, many Chinese brands are offered at prices well below the market average, although their resale value is low, more and more companies (small and medium) are betting on these brands. These SMEs (small and medium enterprises) are the majority of businesses in the country, but many are also informal and their access to credit and financing is limited or with very high interest rates,” said Tezoto of GM Mercosur.
One impact of the flood of the low-priced Chinese vehicles has been to depress used-vehicle prices.
“The used-car market has fallen a lot, because there is a lot of low-priced new cars. These new cars a selling for US$6,900 and they are mainly Chinese brands,” said Tezoto. “Likewise, the requirements to obtain credit for new vehicles have decreased. Only one bank (BBVA) finances used cars, but at higher interest rates than new cars.”
State of the Economy in Peru
The Peruvian economy is the seventh largest in Latin America. The annual GDP of Peru grew as a result of stronger domestic demand for products and services.
In addition, higher commodity prices boosted private investment in the mining and hydrocarbon industries, which also benefited from a significant increase in long-term foreign investment inflows.
Business confidence has increased, credit growth accelerated, and mining investment grew robustly. On Nov. 20, 2017, the Peruvian Congress approved the federal government’s 2018 budget, which included funding to increase public infrastructure spending.
Currently, the services sector is the main contributor to the country’s GDP, with nearly 60% of GDP stemming from this sector. Telecommunications and financial services are the main branches of the services sector; together they account for nearly 40% of GDP. Industry, which represents around 35% of GDP, has undergone a process of modernization, which has translated into increased employment in the country’s primary industrial areas.
In Peru, ores and minerals exports make up over 50% of total exports, food accounts for 21%, and mineral fuels account for 12%.
Low Inflationary Pressures
The Central Bank of Peru (BCP) reported that consumer prices in Peru rose 1.36% year-on-year in December 2017, compared to a 1.54% increase in November. It was the lowest inflation rate since May 2010. On a monthly basis, consumer prices went up 0.16%, slightly below market expectations of a 0.19% rise. The inflation rate in Peru averaged 282.37% from 1970 until 2017, reaching an all-time high of 12377.32% in August 1990 and a record low of -1.11% in February of 2002.