PERUInvesting inFINANCIAL TIMES SPECIAL REPORT | Wednesday September 21 2011

Beware Brazilians bearing giftsPeruvians havemixed feelingsabout their neighbour’sinfluence

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Markets have applaudedOllanta Humala’s decisionto swap his signature redT-shirt and revolutionaryrhetoric for a sombre suitand pledges to protect therights of investors.

However, the Peruvianpresident’s abrupt shift inmessage has left observers,and some of his own sup-porters, waiting to see whathe does next.

“Humala is a work inprogress,” says MichaelShifter, president of Inter-American Dialogue, theWashington policy forum.

“The initial signs arebasically positive on eco-nomic and social policy.The concerns are more in

terms of his statements onhuman rights and some ofthe advisers he has on secu-rity and democracy issues.”

The new president haspromised “more action andfewer words” than AlanGarcía, his predecessor.

Mr Humala’s first actsincluded the brokering of a$1.1bn windfall mining levy,the creation of a new minis-try of social inclusion andthe signing of a law grant-ing communities the rightto be consulted over invest-ments.

His choice of cabinet andadvisers casts more light onhis thinking on policy, andhow he plans to balance theradical leftist elements ofhis support base with themoderates who helped himwin the election.

Luis Favre, an Argentinecommunist-turned-socialistadviser sent to Peru lastyear by Brazil’s Workers’party, has been instrumen-tal in Mr Humala’s politicalmakeover.

Mr Favre’s experience –he worked closely with thecampaign that carriedformer Brazilian presidentLuiz Inácio Lula da Silva tovictory – helped him turn aradical ally of Venezuela’sPresident Hugo Chávez intosomeone the business com-munity could warm to.

For the role of prime min-ister, Mr Humala chose hisclosest adviser, SalomónLerner, a 65-year-old mil-lionaire businessman. MrLerner has had a long his-tory on the fringes of Peru-vian politics, and hasheaded a state-owned fish-meal company, a radio sta-tion and a bank, in betweenrunning a helicopter busi-ness. He says the govern-ment regards the privatesector as an importantmotor of development.

The appointment ofHarvard- and Johns Hop-kins-educated Luis MiguelCastilla as finance ministerhas been greeted as astrong sign of continuity in

macro-economic policy. MrCastilla, who served as dep-uty finance minister in theprevious administration, isprioritising private invest-ment in major infrastruc-ture works.

“We need to sustaingrowth of 6-7 per cent forpoverty reduction alongwith our social pro-grammes,” he says. “With-out growth it’s very diffi-cult to reduce poverty. Andthat’s a fundamental objec-tive of ours.”

As head of the new minis-try of development andsocial inclusion, Kurt Bur-neo, a former director of thecentral bank, will becharged with fulfilling

Well­balanced choice ofadvisers favours growthPoliticsPresident selectscabinet from leftand right, reportsNaomi Mapstone

Prime Minister Lerner

Continued on Page 2

Ollanta Humala admits hesometimes looks in the mir-ror and cannot believe he ispresident. Members of the

exclusive Club Nacional, styled on theEnglish gentleman’s model and situ-ated a few hundred metres from thepresidential palace in central Lima,feel the same way.

It has been less than four monthssince Mr Humala, a former armyofficer with no government experi-ence, unexpectedly won the June 5run-off. His narrow victory over cen-tre-right candidate Keiko Fujimori,the daughter of a former president,sparked a record sell-off on the Limastock exchange.

Since then, Mr Humala has dis-pelled many of the concerns held byinvestors – including the buttoned-down businessmen lunching in theClub Nacional’s chandeliered diningrooms. “There is a mood of cautiousoptimism,” admits one.

Even by Latin American standards,it has been a remarkably volatile yearin Peru. It is the world’s second-big-gest producer of copper, silver andzinc, and one of the globe’s fastest-growing economies, having trebled insize since 2000.

Electoral tensions really began toheat up in April, after centrist candi-dates split the electorate and MrHumala scooped up their votes in thefirst round. Local debt markets subse-quently clammed up. Some feared MrHumala’s rise in the polls might jeop-ardise the $42bn of investment thatinternational mining companies –such as BHP Billiton, Xstrata andFreeport-McMoRan – were set to pourinto Peru’s $168bn economy.

Since then, markets haverebounded, the country’s debt ratinghas been upgraded and pledges ofeven more foreign investment havecome in, after the little-known MrHumala has proved not to be thebogeyman many feared he was.

The 49-year-old has assembled arainbow cabinet consisting of leftwingradicals and former military men,admixed with orthodox economists.Luis Miguel Castilla, the finance min-ister, served in the previous govern-ment. Julio Velarde, the widelyrespected head of the central bank,has been reappointed.

“We are all very non-ideological,”says Salomón Lerner, a millionairebusinessman who is Mr Humala’sprime minister. “What’s important isnot the colour of the cat, but that itcatches mice.”

If at times Peruvians’ worries haveseemed hysterical, it is with good rea-son. In 2000, Mr Humala, then a colo-nel, led a failed revolt against AlbertoFujimori, the president at the time.After he was pardoned, he ran in the2006 elections, espousing the kind ofsocialist rhetoric bellowed by Vene-zuela’s radical president Hugo Chávez– and only narrowly lost.

This year, advised by Brazilianpolitical image-makers, he adopted amore moderate approach. Followingformer Brazilian president Luiz InácioLula da Silva’s lead, he dropped talkof nationalising companies and spokeinstead about economic centrism andsocial-inclusion policies for the poor.

The rhetorical switch helpedMr Humala win the election. But it

also left doubts about where histrue instincts lay and whether hispolitical makeover masked a latentauthoritarianism.

Such concerns are particularly per-tinent in a country that is still trau-matised by recent hyperinflation,insurgency and authoritarianism.After all, it was only in the mid-1990sthat former president Fujimori, nowserving a 25-year prison sentence forhuman rights abuses, suppressed theShining Path guerrillas and broughtorder to the macroeconomy.

Everyone is wondering if there areany more shocks on the way, saysHernando de Soto, the internationallyacclaimed Peruvian economist. “Yet,so far, the change in Mr Humala’sapproach shows he realises he has tobe the president of all Peruvians. Thatshows he is a smart politician.”

Certainly, the president is going toneed all the good ideas he can assem-ble if he is to deliver on his centralpromise of social inclusion, whilekeeping Peru’s commodity-heavyeconomy thrumming.

Nobody disagrees with his govern-ment’s patently reasonable desire tofight corruption, beat crime andreduce poverty by expanding socialservices to the poorest regions, espe-cially the Andes and Amazon. There,more than 200 social conflicts haveflared up this year as indigenousgroups have protested the impact ofnew mining projects.

It will still be a delicate balancingact, however, to keep public financestrim, while meeting the high expecta-tions Mr Humala has nurtured amonghis core constituency – the third ofPeruvians who live on less than $4 aday.

So far, the ramp-up in social spend-ing he promised during his campaignhas been well calibrated and carefullytargeted. The government budget,which is running a surplus, can easilymeet the extra $370m cost.

A tax on windfall mining profits hasalso proved digestible – and followed avery un-Chávez-like consultationbetween the government and miningcompanies. Instead of seeking to raise$2bn-3bn as companies had feared, theextra tax bill is about $1.1bn.

As a political outsider, Mr Humalahas so far turned to a close circle foradvice, in particular his wife, NadineHeredia, and the prime minister. The35-year-old Ms Heredia is telegenic,grew up in the same area as MrHumala and accompanies her hus-band to all high-profile state func-tions. She has his ear.

The president’s appointment offormer military colleagues to keyadvisory positions has been more con-troversial. “This stirs understandablefears,” says one western diplomat.“But it’s also understandable that Mr

Humala has gone first to those heknows best – and it may be that theywill also prove good at their jobs.”

It is all part of the ambiguity thatsurrounds Peru’s new president. Hewants to strengthen the role of thestate, but at the same time the state isrenowned for its corruption and ineffi-ciency. Improving it is the work ofgenerations, not a single presidency.

Indeed, as consecutive terms are notallowed under the constitution, manywonder if his wife might run in 2016,allowing Mr Humala to return againin 2021 – just as the Kirchner hus-band-and-wife team sought to do inArgentina. When asked, he repliesthat it is too early to say.

For now, high commodity pricesgive his new government the financialelbow room to be all things to allpeople. Growth remains high – a 6-7per cent expansion is forecast for thisyear and 5-6 per cent for 2012.

A “strategic alliance” with Brazilwill see the continent’s largest coun-try build roads linking its agriculturalmarkets to the Pacific, benefitingfrom Peru’s many free-trade agree-ments with the US and Asia. Thiscould even turn Peru into “one of themost dynamic regions on earth”, saysWalter Molano, head of research atBCP Securities, the emerging-marketsfocused investment bank.

Nonetheless, sceptics worry about

what would happen if Mr Humala’spopularity sagged, or commodityprices collapsed. Then he couldlaunch into greater state interventionand become the populist authoritarianmany fear he is at heart.

“While commodity prices are high,he can be a Lula,” says Moisés Naím,a senior associate in the CarnegieEndowment think-tank’s economicsprogramme in Washington, DC.“Should they fall, he could become aChávez.”

So far, Mr Humala has followed theBrazilian script. He has been fiscallyprudent and politically pragmatic.There is little evidence – yet – that hewill not continue that way.

Mood of cautious optimism takes holdBusiness slowly acceptspresident as early fears ofan authoritarian approachseem to fade away, saysJohn Paul Rathbone

Inside this issueTaking the long view Hernandode Soto talks property rights Page 2

Guest column Felipe Ortiz deZevallos hopes the president’smoderate rhetoric will unite Peru’spolitical factions Page 2

Food and drinkChef Gastón Acuriotakes on New YorkPage 3

Exchanges Cross­trading platform hasrocky start Page 3

Ethanol Sugar­based industry setfor rapid growth Page 3

Retail Growth in domestic spendingpower is attracting interest Page 3

CommoditiesMining remains themain source ofwealth Page 4

Juniors andsmall capsGood returns onexploration Page 4

Pensions Reform is crucial toaddress social inequality Page 4

More on FT.comConflicts New law seeks todefuse tensions between developersand indigenous communities

Smart mover: President Humala has so far shown a moderate approach on policy, although sceptics are worried he may launch into greater state intervention if the economy falters Getty

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2 ★ FINANCIAL TIMES WEDNESDAY SEPTEMBER 21 2011

Investing in Peru

Mr Humala’s key electoralpledges. Mr Burneo, who beganthe 2011 campaign as the headof former president AlejandroToledo’s economic team, willoversee implementation of apension scheme targeting poorover-65s, and the broadening ofJuntos, the conditional cash-transfer scheme.

In the key portfolio of miningand energy, Mr Humala choseCarlos Herrera Descalzi, anengineer who briefly held thepost in 2000 after the collapse ofthe Fujimori government. MrHerrera has moved swiftly tobroker the new mining levy anddemand that Camisea, the coun-try’s flagship natural gasproject, operated by a consor-tium led by Pluspetrol of Argen-tina, must prioritise domesticmarkets. He will also reviewPeru’s multibillion-dollar agree-ment with Brazil to build up tosix hydroelectric dams in theAmazon. “We respect commit-ments, but the previous govern-ment approached this in a verybad way. I want to see how farit has advanced,” he said in aninterview.

To alleviate lingering con-cerns that he was about to makea radical turn in economic pol-icy, Mr Humala also persuadedwell-respected banker JulioVelarde to remain as centralbank governor.

Humberto Speziani, presidentof Confiep, Peru’s employers’association, says Mr Humalamanaged to “dispel the doubts”with his cabinet picks.

“We’re very satisfied. Thepresident has been pragmatic,acting in the interests of thecountry. He’s shown that Peruwill have continuity in eco-nomic policy,” he says.

Business approval came at theexpense of discord among themore radical elements of MrHumala’s base, who mutter thatthe president is allowing “theenemy to steer the ship”.

Aída García Naranjo, a promi-nent feminist activist and edu-cator, and the new minister forwomen, is flying the flag for theleft in the cabinet, backed up byvice-ministers such as the tradeunionist Pablo Checa in thelabour ministry.

Susana Baca, a renownedsinger and the first female Afro-Peruvian minister, was a popularchoice for the culture ministry.

Mr Humala’s selections for theministries of the interior anddefence have been more contro-versial, prompting criticism thathe fudged electoral promises toappoint civilians.

The president tapped tworetired military officers, DanielMora and Oscar Valdez Dan-cuart, to head defence and theinterior respectively. Homeaffairs is particularly sensitivein Peru, given the recent dra-matic rise in coca production inremote zones controlled by rem-nants of the Shining Path insur-gency of the 1980s and 1990s.

Mr Humala also raised eye-brows with the appointment ofAdrian Villafuerte, once a closeassociate of Vladimiro Montes-inos, the disgraced former spy-master, as a military adviser.

More than a little shy, MrHumala favours scripted publicappearances and the occasionaltweet over interviews. Whenpressed, he tends fall back on awatch-this-space-style message.“More than words, judge me forwhat I do,” he said this month.The world is watching.

Choice ofadvisersfavoursgrowth

ContributorsJohn Paul RathboneLatin America Editor

Naomi MapstoneAndean Correspondent

Jack FarchyCommodities Correspondent

Martin BriceCommissioning Editor

Philip ParrishLiz DurnoJearelle WolhuterSub­Editors

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details, contact:John Moncure on:Phone +1 212 641 6362Fax +1 212 641 6544Email: john.moncure@ft.comor your usual representative

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Who is Ollanta Humala? Agood question – and one towhich Standard & Poor’s seemsto have an answer.

Peru’s controversial newpresident had only been inoffice for a few weeks whenthe credit rating agencyupgraded his country’s debt.

But then the upgrade cameafter Mr Humala had made amoderate inauguration speech,after he had appointed a“rainbow cabinet” and after hisprime minister, SalomónLerner, gave a well-receivedpresentation of the newgovernment’s programmeto Congress.

S&P’s vote of approval wasreflected in other ways too: MrHumala currently enjoys a 55per cent approval rating – highby Peruvian standards, even ifthat approval is not across theboard. While Mr Humala scoresa rating in the mid-60s fromthe country’s poor, wealthierclasses are less convinced andgive him just 40 per cent or so.

Their misgivings areunderstandable. Mr Humala ledan army revolt in 2000. He wasa radical pro-Hugo Chávezpresidential candidate in the2006 election, which henarrowly lost. He then enteredthe 2011 presidential campaignin much the same form.

However, after his ratherradical platform only looked setto win him 15 per cent of thevote, Mr Humala graduallychanged his political messagefrom à la Chávez to à la Lula –coached by Brazilian advisers.

Mr Lerner, then acting asMr Humala’s campaignmanager, played a crucial rolein persuading him to drop hisoriginal radical “plan” andadopt a more moderate “roadmap”. All this helped MrHumala to eventual victory.After he won, Mr Humala wasalso wise enough to insist onMr Lerner accepting thepremiership.

Where is Mr Humala from?His family is from Ayacucho,a proud but poor Andeanregion, where the Shining Pathguerrilla movement had itsroots. His father was a member

of the Communist Party in the1950s and he instilled a senseof political destiny in his sons.Indeed, Ollanta means “far-seeing warrior” in Quechuaand is a name of which MrHumala feels proud.

He is happily married toNadine Heredia, a distantrelative who, some believe, haspresidential ambitions.

What does Mr Humala think?That is unclear. At first, hecalled for a new constitutionthat would increase the state’srole in the economy, comparedwith the current 1993 version.Although Mr Humala sworehimself in as president on “thedemocratic spirit of the 1979constitution”, he has sincedropped plans to change the1993 constitution. This,however, may be simplepragmatism, given that helacks sufficient votes inCongress to do so.

Elsewhere, he has shown asimilarly pragmatic streak. Awindfall tax on mining profitsfollowed negotiations with theindustry. The result onlypartially lowered thecompetitiveness of the mining

sector while raising more than$1bn to be spent on socialinclusion projects in some ofthe poorest regions.

To reassure financialmarkets, Mr Humala also askedJulio Velarde, the orthodoxCentral Bank governor, to stayfor another term. And heappointed Luis Miguel Castillaas finance minister. Mr Castillais respected, having worked

previously at the AndeanDevelopment Corporation, amultilateral lender, and asvice-minister of finance in theprevious administration.

True, some otherappointments – in the militaryand the foreign service – havebeen controversial. There havealso been some hiccups andreversals in government policytowards coca growers andfighting drug traffic. But these

are perhaps the teethingproblems of any newgovernment. There have beenno major mistakes, as yet.

Mr Humala has a variedpolitical base – much of itcomprises centre-left moderates,although leftwing radicals forman important but smallerproportion. The latter are likelyto want to see big changes toPeru’s economic model; theformer may be content withminor adjustments.

The model has beensuccessful, by and large. Overthe past decade, the economyhas grown at 6 per cent a yearand some 3.4m Peruvians havebeen lifted out of poverty. Still,the state remains remarkablyinefficient. Partly as aconsequence, this hasgenerated a widespread sensethat corruption has flourished.Social inequality remains high.

For many analysts, Peru is acountry with great potential.One reason is its extraordinarydiversity. Such diversity,however, also makes it difficultto govern. Politicalrepresentation is scarce.Indeed, Peru’s main political

party, the APRA, now onlyaccounts for four seats of the130 in Congress.

Three months after theelection, Mr Humala’spresidency presents morequestions than answers.

Can a former military officer,imbued with a messianiccalling but with limitedadministrative experience, walkPeru’s political tightrope?

What will his instincts bewhen he confronts his firstcrisis? Hold to the centre – orhew to his original and moreradical constituency?

More importantly, will helearn from what he has beenachieving by continuing tobroaden his political vision?

This is the main unknown:whether Ollanta Humala willrise to the Quechua meaningof his name.

For the moment, after avolatile first half of the year,Peru is enjoying a mood ofcautious optimism.

Felipe Ortiz de Zevallos ischairman of the Apoyoconsultancy and Peru’sformer ambassador to the US.

New president moderates his inner warriorGuest ColumnFELIPE ORTIZ DE ZEVALLOS

Felipe Ortiz deZevallos saysthat, so far,Humala hasbeen a unifying,rather than adivisive, force

Two graceful alpacas are graz-ing in front of Hernando deSoto’s home, but there is nosign of his pet dogs, Marx andEngels, so named because “theyare German, hairy and have norespect for property”.

The Peruvian economist firstcame to fame with his 1987 best-seller The Other Path. Now, heis everywhere. So far, some 30governments – from Afghani-stan to Mexico and Russia –have sought his advice on howto harness his brand of popularcapitalism.

When the FT met Mr de Sotoon a typically grey Lima after-noon, he was suffering from jetlag. Yet despite his globe-trot-ting, the wellspring of much ofhis thinking remains Peru.

The lights are low in thestudy. History books and eco-nomics tracts are piled high ona glass table and on the shelves.The subject of the day is the

new president, Ollanta Humala,a former army officer.

Yet Mr de Soto prefers to takethe long view on local politicsand the closely fought second-round vote against Keiko Fuji-mori, daughter of the formerpresident. He advised Mr Fuji-mori until they fell out when theleader made a grab for power.

“A notable point about thisyear’s election is that – howevercontroversial it was – the losersrespected the result. That’s agood sign,” Mr de Soto com-ments. “And if people do worryabout Mr Humala’s militarybackground, that’s also positive:being sensitised is a way of pro-tecting themselves.”

Another of Mr Humala’s moreunusual features is his uncon-ventional family. The presi-dent’s father believes in Que-chuan racial superiority, andone brother is serving a prisonsentence, having led a 2005coup. Mr Humala himself led arevolt in 2000.

“Jimmy Carter and Bill Clin-ton had brothers, MargaretThatcher a son,” observes Mr deSoto drily. As for Mr Humala’seconomic policies, early signsare positive, although it is tooearly to tell for sure.

“Both Keiko and Humala cam-paigned on a reform platform,and were a vote for change.Humala’s difference is that hebelieves the state has an eco-nomic role to play. The questionis, how much will he tinker?”

Mr de Soto’s most heartfeltcurrent subject, though, is thePeruvian Amazon. In a countrythat is the world’s second-larg-est producer of copper and sil-ver, the Amazon is the scene of

some 200, often bloody, socialconflicts.

Some of these are crude bat-tles for local power, fomented bysmugglers. But most relate toprotests by local indigenousgroups against foreign invest-ment in mining and hydrocar-bons. How to anticipate and pre-vent them is the theme of Mr deSoto’s next book, The Amazon isnot Avatar.

Its provocative title shows hisundiminished promotional flair.But, contrary to popular mythand James Cameron’s block-buster movie, Mr de Sotobelieves indigenous life and glo-balisation are compatible.

After months of fieldwork, Mrde Soto found that indigenouspeople do feel their poverty andisolation, do want better educa-tion and health services, and dowant property and businesses.

When conflict arises, it is usu-ally because of a feeling of pow-erlessness.

Mr de Soto’s solution is betterproperty rights, a view thatdraws on his original insight inThe Other Path. Most poor peo-ple, given the chance to partici-pate fairly in a capitalist sys-tem, would do so rather thanstay outside. Yet any sense ofinclusion also requires a legalsystem that people feel is ontheir side. One way of ensuringthis is to give full legal protec-tion to poor peoples’, usually defacto, property rights.

A common example is untitledslum dwellers. For the Amazon,Mr de Soto gives this example:“A foreign investor comes toPeru. He secures title to aproject under Peruvian law.

Moreover, because of tax trea-ties, this legal title carries mul-tilateral weight. With that inhand, the investor can raisefunds easily, anywhere.

“Contrast that with whatindigenous people have: prop-erty titles unrecognised outsidetheir communities. We know ofa case of a mahogany tree soldfor 3kg of sugar, about $3. Bythe time it reached California,that same tree was worth asmuch as $50,000.”

Critics might say shaky prop-erty rights have not stoppedChina’s booming economy. Mrde Soto admits the Amazonpresents special problems. Manyindigenous titling systems donot provide precise locations,contain naming errors and areinaccessible. Communal-owner-ship rules often differ, evenbetween neighbouring groups,which in themselves are diffuse.

Nonetheless, Mr de Soto saysthat attempts to confer legiti-mate title must be made if thereis to be a real attempt to avoidthe kinds of protests that leftmore than 30 people dead in theAmazonian town of Bagua twoyears ago.

Mr Humala’s government isequally sensitive to the subject.

One of its first pieces of legisla-tion was a consultation law,which gives local communitiesthe right to be consulted aboutproposed investments.

“That’s all every well, butwho do you consult with?” asksMr de Soto.

The implication is that thiscan never be clear while prop-erty rights remain insecure. It isonly with secure title that indig-enous groups can choosebetween turning their backs onthe world economy, or engagingwith it.

“Once title has been estab-lished, at least you have achoice,” he says. “Without ityou have nothing.”

Property rights are key to fair inclusionTaking the long viewHernando de Soto,the economist, talks toJohn Paul Rathbone

‘A notable point aboutthis year’s electionis that the losersrespected the result.That’s a good sign’

De Soto: land title is everything

From a distance, the huge statueof Jesus that gazes out at thePacific on Lima’s seafrontappears identical to the more

famous Christ the Redeemer in Rio deJaneiro that overlooks the Atlantic. Itis almost the same size, and Christ’sarms are outstretched in almost thesame way.

The resemblance is no accident. The36m-high Cristo del Pacífico statue wassculpted in Brazil, and its $1m cost wasalmost entirely met by Odebrecht, theBrazilian construction company.

More importantly, the statue, whichwas inaugurated on June 29 this year,is a symbol of Brazil’s growing pres-ence in South America’s fastest grow-ing big economy. It is also a reminderof why Brazil’s presence in Peru isincreasing so quickly: China.

“In the 20th century, the world econ-omy was all about the Atlantic,” saysMiguel Veja Alvear, head of the Brazil-Peru chamber of commerce in Lima.“In the 21st century, it’s all about thePacific: more than half of all globaltrade is there.”

The statue is one of a number ofprojects under way as part of Brazil’s“strategic alliance” with Peru. This isdesigned to bring their economies closetogether and provide a commercialbridge for Brazil into the Pacific on theback of Peru’s free-trade agreementswith China, South Korea and the US.

The initiative dates back to 2005under former Peruvian president Ale-jandro Toledo, when Luiz Inácio Lulada Silva was his Brazilian counterpart.It continued under Peru’s next presi-dent, Alan García. But it is under theirsuccessors – Ollanta Humala in Peruand Dilma Rousseff in Brazil – that thealliance is likely to take off.

“Over the past 10 years, there havebeen more presidential meetingsbetween Peru and Brazil than over theprevious 180,” says Mr Veja approv-ingly.

Three vast infrastructure projects,largely financed with subsidised fund-ing from BNDES, Brazil’s state-owneddevelopment bank, are planned thatwill link – by canal, road and train –Brazilian markets to Peru’s Pacificports and thence Asia. The southern-most one, the Interoceanic highway,built by Odebrecht, is almost complete.

Meanwhile, Brazil’s VotorantimMetais, the mining company, has pur-chased zinc mines as well as Cajamar-quilla, Peru’s biggest refinery. Vale,another mining company, operates aphosphates concession in northernPeru. Petrobras, the state-controlled oilcompany, has investment plans. AndGerdau bought Peru’s biggest steelplant in 2006 and says it plans to invest$120m over the next three years.

The idea behind the alliance is sim-ple: Brazil provides technology andinvestment. Some $15bn of Brazilianinvestment is pouring in, comparedwith the $10bn that China is due toinvest, although that is still less thantotal US or Spanish investment.

In return, Peru can offer labour andmarket access. The early results havebeen startling: bilateral trade hasincreased sevenfold in just six years to$3.4bn.

Nonetheless, Brazil’s growing pres-ence worries many Peruvians. Brazilmay enjoy a cuddly image in Lima,thanks to its football and carnival, andits social-democratic economic model,now apparently being copied by MrHumala, is seductive in a countrywhere more than a third of the popula-tion lives in poverty.

Yet many Peruvians are askingwhether they really want their countryto be “Brazilianised” – and not withoutreason: in the past 10 years, Peru’s eco-nomic growth has been higher and pov-erty has fallen faster than in Brazil.

As one letter-writer to Peru’s LaRepública newspaper has pointedout, when it comes to the World Bank’sannual Doing Business report, Peruranked second among Latin Americancountries, in the number 36 spotglobally, while Brazil was 127th out of183.

Another problem is the environment.Brazilian utility companies have been

exploring the possibility of buildinghydroelectric plants along the border.Understandably, local inhabitants won-der why their communities should beflooded to send electricity elsewhere.

“Brazil is very important to Peru,”says Rafael Roncagliolo, Peru’s newforeign minister, who describes hisapproach as “absolutely pragmatic”and as focused on “strengtheningregional ties”.

He adds: “Nonetheless, while thereare many opportunities, there are alsoproblems and threats. One problem isthe need to remove commercial barri-ers and tariffs. One threat is drugs: wedon’t want to have the same supplyrelationship with Brazil as Mexico doeswith the US.”

Peru is currently the world’s largestproducer of cocaine and Brazil – a ris-ing consumer in its own right – isincreasingly an important onward ship-ment point to Europe’s fast-growingmarket for illegal drugs.

Whatever the concerns, it appearsthat the links are only going to getstronger, especially if Brazil’s earlycourtship of Mr Humala is anything togo by.

Political image-makers from Brazil’sPartido dos Trabalhadores (Workers’party) advised Mr Humala oncampaigning strategy and tactics. Afterhe won the election, the first visit MrHumala made as president was toBrasília.

What is most extraordinary is thatperhaps no country other than Brazilwould have been able to get away withthe same strategy. It would have beenunthinkable for Venezuela or the US,for example, to have played a similarrole in Peru without a huge outcry.

It speaks to the might of Brazilian“soft power” – and the country’s hugegravitational pull on a continent whereit accounts for half the landmass andits neighbours cannot help but spininto its orbit.

Brazilianinf luencegrows everstrongerForeign relations‘Strategic alliance’ helpsprovide route to boomingPacific markets, writesJohn Paul Rathbone

Seeing double: the gift of a Pacific almost­twin to Christ the Redeemer has raised questions about Brazil’s role in Peru Reuters

Continued from Page 1

FINANCIAL TIMES WEDNESDAY SEPTEMBER 21 2011 ★ 3

Investing in Peru

Ethanol Production takes offPeru’s fledgling sugar­basedethanol industry is set totake off this year, with theentry of new players MapleEnergy and Gloria, writesNaomi Mapstone.

“Peru is arguably the bestplace in the world toproduce sugar cane interms of yields. The yieldsare phenomenal,” says RexCanon, chief executive ofAim­ and Lima­listed MapleEnergy.

Constant sun andnegligible rainfall give canegrowers on the north coasta year­round season,leading to yields of about150 tonnes of cane perhectare, compared withabout 80 tonnes in Brazil.

Until the 1960s, when aleftist military regimenationalised the sector,Peru’s arid northern coastwas home to one of theworld’s most efficientsugar industries.

Now a new lawmandating a 7.8 per centblend of ethanol in gasolineand the signing of anumber of free­trade deals

have given sugar growersa boost, creating domesticand export markets forethanol producers.

“When Brazil goes to theUS, there’s a substantialimport tariff; when we gointo the US, there will be noimport duties. The same istrue of Europe – we can gointo Rotterdam duty­free,”says Mr Canon.

Given that Peru’s entiredomestic market willultimately require about25m gallons a year andMaple’s plant will have acapacity of 35m gallonsa year, the companyis principally focusedon exports, startingwith Europe.

Maple’s $254m projectnear the deepwater Pacificport of Paita is on track togo into production in thefourth quarter. Thecompany is planting7,800ha in its first phase,and aims to increaseproduction to 10,000ha.

“Our goal is to be thelowest­cost producer of

ethanol,” saysMr Canon.

The ethanolfacility has

$148.5m in project­finance debt from

lenders such as theAndean Development

Corporation, the Inter­American Development

Bank, Interbank of Peruand FMO, the Dutch

developmentbank.

Sugar cane grows verywell in Peru’s climate

It has been a slow start forthe Mercado IntegradoLatino Americano (Mila),the cross-trading platformthat links the exchanges ofPeru, Chile and Colombia.

The tie-up created LatinAmerica’s second biggestmarket after Brazil, with amarket capitalisation of$614bn and forecast dailytrading volumes of $300m.

But Mila has racked uponly $2m in cross-bordertrades since its Maylaunch. Francis Stenning,director general of Lima’sexchange, says launchingamid global market turmoiland one of Peru’s mostdivisive presidentialelections did not help.

“Mila is the beginning ofa very interesting processof integrating the region,”Mr Stenning says.

“We are still in the firststages, perfecting tune-ups[of regulation and tax]. Wewill look at going intoother markets, such asfixed income or derivatives.We will [also] be looking atadding new members.”

The most likely newpartners are Brazil and

Mexico, especially giventhe latter’s participation inthe proposed “Arc of thePacific” economic blocwith Colombia, Chile andPeru.

All four have trade dealssigned or in train with theUS and Canada, and all arelooking to Asia for growth.Of the four, only Colombiais yet to join the Asia-Pacific EconomicCo-operation forum.

Mr Stenning says Milawill also build productsaround Standard & Poor’snew Mila 40 index of thebiggest, most liquid stockson the three exchanges.

Several mining andenergy initial publicofferings are in the works,aside from the government’stouted offering of shares instate-owned oil companyPetroperu, he adds.

“We’ve had an IPO everyother year or so in thepast decade,” he says. “Avery long election processcaused delays, so weexpect to see some come tomarket in the next coupleof months.”

Daniel Gamba, thePeruvian-born head ofLatin America and Iberiafor BlackRock, the assetmanager, says a reluctanceto go public is commonamong the region’soligopolistic markets, buthe finds it “hard to seePeru in a bear marketfor too long.”

Cross­border stocksstart trading slowlyProfileExchangesMila launches amidturmoil, writesNaomi Mapstone

Retail Chileans cash in on consumer boomChilean retailers used to sayPeru reminded them of Chile inthe 1990s. Lately, Peru and itspopulation of 29m has beenlooking more like Chile in thesubsequent decade.

Surging domestic demand, therapid expansion of regionalmarkets and new social policiesto alleviate poverty are expectedto propel Peru’s retail sales to$48.8bn by 2014, up 22.1 percent from this year, according toBusiness Monitor International.

“Private consumption will bethe main driver of Peruviangrowth in 2011 and 2012,supported by increased accessto consumer credit and a rise insocial security payments,” BMIsays in an August report.

Chilean department stores,supermarket chains and malloperators already have footholdsin Lima, where a third of Peru’spopulation lives.

Ripley and Saga Falabelladominate the department storesphere, which includes a thrivingcredit card financing market.They face increased competitionfrom fellow Chilean groupCencosud, which announced lastmonth it would invest $70m in10 department stores by 2014.The company already operatesWong, the upmarket Peruviansupermarket chain, after a2007 takeover.

Meanwhile, Saga Falabella isinvesting $100m in its

department stores, its Tottussupermarkets and Sodimachome improvement centres.Ripley is pouring $56m intoeight new department stores inthe next two years.

Chile’s SMU Group joined therush in January, snapping upsupermarket operator Alvia,which has 11 stores in Peru.

Both retailers and malloperators, including ParqueArauco and Mall Plaza, arelooking beyond Lima to boomingregional centres such as Ica,Piura, Arequipa and Trujillo.

Forum, a Chilean car loancompany, has sized up thebuying power of Peru’s growingmiddle class and announced a$48m investment in the market.

New­car sales tripled between2006 and 2010, and Peru’sautomotive association isforecasting 170,000 sales thisyear after the signing of free­trade agreements with Japan,China and the US significantlylowered the tax on imports.

The growing number ofPeruvians with the means totravel has also cemented thecommitment of LAN, the Chileanflagship carrier, to its LatinAmerican hub. Over the nextfive years, LAN will invest$700m in Peru, including theconstruction of a corporateheadquarters.

Naomi Mapstone

When Gastón Acurioopened the doorsof La Mar, hisMadison Square

Park restaurant, in New Yorkthis week, the Peruvian chefmoved a step closer toachieving a global goal.

Mr Acurio now has 33restaurants spread acrossLatin America, Europe and theUS, making him a veritablemini “multilatina”.

While the cordon bleu-trainedchef’s interests represent afraction of Latin Americanmultinationals such as Alicorpof Peru, América Móvil ofMexico and Embraer of Brazil,his expansion has been noless aggressive.

“Our mission is to bringfine Peruvian cuisine to theworld, and New York is ourbiggest battle,” Mr Acuriosays. “There’s a valuablemarket for Japanese cuisine,French, Chinese – we wantthat for Peru.”

Mr Acurio has used his homecity of Lima as a testingground for new concepts,launching everything fromPeruvian fast-food outletsserving yellow potato chips toChinese-Peruvian fusion.

The food revolution he hassparked at home has turnedLima into Latin America’sleading gastronomic destination

and has created a thrivingindustry of cooking schools.

Manhattan’s La Mar hassome big shoes to fill, movinginto the space formerlyoccupied by Danny Meyer’sTabla.

“He has the best location inNew York,” says Mr Acurio.“All of our colleagues theresaid, ‘How did you get this

place? There were a hundredpeople interested, why didthey choose you?’ I said, ‘Theworld is changing – thelandlords were looking forsomething new’.”

Peruvians will recogniseManhattan’s upscale cevicheriaas a blend of Mr Acurio’spopular Lima eatery of thesame name and his five-star

Astrid y Gastón, which hasbeen known to serve confit ofguinea pig.

Mr Acurio’s right-hand man,Victoriano Lopez, is theexecutive chef, and will focuson trademark ceviches (seafooddishes) and reinterpretationsof classic Limeño dishes, suchas sliced potatoes with yellowchilli sauce.

Manhattan tastes the best of LimaProfileFood and drinkGastón Acurio faces histoughest test, writesNaomi Mapstone

Chef Gastón Acurio wants to bring Peruvian gastronomy to the world Reuters

4 ★ FINANCIAL TIMES WEDNESDAY SEPTEMBER 21 2011

Investing in Peru

Pensions Hope for reforms without politics

Beatriz Merino likes achallenge. Having completedfive turbulent years as thenation’s human rightsdefender, the new head ofthe private­pension fundmanagers’ association,who was also the country’sfirst female prime minister,is turning her sights topension reform.

“It is unacceptable thatseven out of 10 Peruvianshave no kind of pension,”she says. “Now is the timefor reform. I ask two things:that the debate be technical,not political, and that theyname a commission ofindependent experts whocan propose a reform tothe state.”

The country has LatinAmerica’s highest rate ofinformal employment and35 per cent of thepopulation live below thepoverty line, so keepingpolitics out of the equationis likely to be a challenge.

Peru’s four private pensionfunds (AFPs) have alreadymobilised once this year tofend off a radical proposalby Ollanta Humala, when hewas still a presidentialcandidate. Even before hiselection on June 5, heretreated from the plan,which would have created amandatory national publicpension scheme anddecimated the private

system. Instead, he is rollingout a scheme that targetspoor Peruvians over 65.

But reform of the pensionsystem remains a key testof the president’smission tobring social inclusion to oneof the world’s fastest­growing economies. “Oneof the main objectives ofwhatever reform we puttogether is to deepencoverage,” says Luis MiguelCastilla, the finance minister.“We’ve had the system forclose to two decades, andsome overhauling is needed.”

Ms Merino would like tosee Peru follow the“magnificent” example ofChile, which revamped itspensions system in 2008.

Chile encouraged gradualentry to its private system,restructured fees andincentivised women to joinup by paying them a $600­a­child bonus.

Peru’s funds – AFPHorizonte, AFP Integra, AFPProfuturo and Prima AFP –have been criticised forlevying high fees, creatinganother barrier to entryfor the country’s growingmiddle class.

“You have to be carefulthat this reform will notfoster tax evasion; that inorder not to pay the pensionfund, you might end upmaking informal who isformal today,” says Ms

Merino, who has been onfact­finding missions to Chileand Colombia.

Despite failing to attractmore than 30 per cent offormal workers, the funds’financial success andvoracious appetite for high­quality investments hasexposed the lack ofdomestic investmentopportunities.

Together the fundsmanage $30bn in assets –23 per cent of grossdomestic product. This isexpected to increase to$50bn in five years, putting

pressure on the governmentto play its part in expandingthe country’s investmentopportunities.

The funds already accountfor almost a third of sharestraded on Lima’s mining­heavy stock exchange.

“We still have very shallowcapital markets and there’sa long way to go to deepenmarkets and competition.There’s also a lack ofinstruments,” Mr Castilla says.

In the dying days of theprevious administration,Ismael Benavides, former

finance minister (and MrCastilla’s former boss)pushed legislation throughto increase the limit on thefunds’ overseas investmentsfrom 30 per cent to 50per cent.

Ms Merino says thecentral bank will approve thepercentage of funds to flowabroad, but in themeantime, “we need thegovernment to provide agreater offer of investmentsand the necessaryguarantees to invest”.

Mr Castilla and thepresident have alreadyannounced they will seeksignificant private investmentin big­ticket infrastructureinvestments in roads,airports, water and energy.

Jose Antonio Blanco,country officer of Citibankfor Peru, welcomes the newadministration’s emphasis onpublic­private partnerships inthe infrastructure sector.“For the past 30 years, Peruhas been financing its short­term needs by postponinginvestments in infrastructure.The country is ready toinvest,” he says.

Ms Merino says she isconfident Mr Humala will notbe tempted to go back onhis word and nationalise theprivate­pension sector, asArgentina did in 2008.

Naomi Mapstone

José Marún’s workplace isremote by almost any stand-ards. The manager of Xstrata’sSouth American copper opera-

tions spends his time shuttlingbetween an office in Lima and thehigh Andes mountains, where,spurred on by record prices, the Lon-don-listed company is rushing to buildnew mines.

Two of those mines, Tintaya andAntapaccay, are reached by a bumpyplane ride to the ramshackle town ofYauri. Other than mining, the area’smain industry is cheesemaking.

A third Xstrata project, Las Bam-bas, “is the most remote ore body inthe country”, says Mr Marún. “Whenwe came [here], there was no electric-ity. Until 2005 there was no telephonecommunication.” Workers commuteby helicopter.

In recent months, Mr Marún andother mining executives have hadanother frontier to navigate: the corri-dors of power at the presidential pal-ace in Lima.

Since the election in June of OllantaHumala, who had campaigned on apromise of a 40 per cent windfall taxon the mining sector, the most impor-tant project for the industry has beendamage limitation. The possibility ofsharply higher taxes in Peru threat-ened to derail $42bn of planned min-ing investments in the country, whichis among the world’s largest suppliersof metals (see box).

Peru is central to the growth plansof companies such as Xstrata.Together, Antapaccay and Las Bam-bas will add approximately 500,000tonnes to its annual copper produc-tion by the end of 2014, at a projected

cost of $5.7bn, giving the company thelargest growth pipeline in this metalin the industry.

In the fortnight after Mr Humalabecame president, Xstrata saw itsshare price fall 8 per cent. The sharesof companies with higher Peruvianexposure fell even further and theLima stock exchange was forced toclose after some local miners fell 15per cent in a day.

But the country is of broader signif-icance to the global economy thanmerely as a destination for foreigninvestment: with its large, untappedreserves, Peru could determine thebalance of the market for metals suchas copper, which are crucial to thegrowth of emerging economies.According to Macquarie, the Austral-ian bank, Peru will be the source of athird of the planned new copper sup-ply over the next five years.

Since the election, however, theminers’ lobbying efforts appear tohave paid off. At the end of August,Salomón Lerner, the prime minister,announced that a decision had beenreached on a new tax structure thatwould raise an additional 3bn soles($1.1bn) from the mining sector eachyear. Miners expressed relief that theplan, whose details were still beingfinalised as it passed through Con-gress, would calculate a royalty basedon their profits rather than revenues,and so shield them in periods of lowprofitability.

The uncertainty over taxes hasnonetheless delayed much-neededprojects in the country’s mining sec-tor. By July, Southern Copper hadinvested just $160m of the $800m capi-tal expenditure it had planned for theyear in Peru, according to OscarGonzalez Rocha, the chief executive.Peru’s copper production was 3.1 percent lower in the first half of 2011than a year earlier.

Mr Marún of Xstrata says: “Themoment you have uncertainties, youstart to have rocks on the road andprojects get delayed.”

But tax is not the only challenge forthe industry in Peru. Protests fromcommunities, whose villages oftenneed to be relocated due to miningsites, have grown more vocal. InApril, the outgoing government ofAlan García cancelled Southern Cop-per’s Tia Maria project and in June itrevoked the licence of Bear Creek’sSanta Ana project.

At the site of Xstrata’s Antapaccaymine, trucks and cranes move amonghomes dotted along the valley floor.

The company is building new homesfor 370 families whose church, schooland community hall will be disman-tled to make way for the mine.

Tintaya’s previous owner, BHP Bil-liton, sold it to Xstrata in 2006 after itwas invaded by an armed mob. NowLuis Rivera, general manager of thetwo mines, says he spends 70 per centof his time dealing with the communi-ties, rather than day-to-day miningoperations.

“I have had to learn how manylitres of milk it takes to produce akilo of cheese, and how long it takesto mature a gourmet cheese,” hechuckles.

Others are less cheerful about theirengagement with communities. MrGonzalez Rocha of Southern Coppersays the company is exploring inArgentina, Ecuador and Chile: “Weare trying to do more diversificationwith other countries, in order not tohave everything in one country thathas problems like Peru.”

Most, however, are cautiously opti-mistic on the prospects for the miningindustry under Mr Humala – investorsincluded. Since the election, the min-ing-heavy Lima general index has ral-lied 7 per cent, bucking a crash inmining shares in almost every otherworld market.

In the same week as Mr Lernerannounced the new mining tax, thegovernment passed a long-awaitedlaw on community engagement. Cru-cially for the miners, however, it didnot give communities a veto over newprojects.

Voicing a sentiment common inmining circles all over Peru, EduardoHochschild, executive chairman of theLondon-listed precious metals minerthat shares his name, says: “We’re notcheering that it has passed – but it’snot nearly as bad as it could havebeen.”

Miners exploitrich seams inspite of tax andlocal protestsCommoditiesLobbying efforts set to putsector’s expansion back ontrack, writes Jack Farchy

Despite the often remote locations of mines, Peru is one of the world’s largest producers of metals Bloomberg

When Alex Black was trying to raisemoney to develop a goldmine in cen-tral Peru, no investor in the tradi-tional markets of Toronto or Londonwas interested.

It was 2009 and most were still chas-tened by the experience of the finan-cial crisis, so Mr Black did somethingthat, at the time, was rather unusualfor a non-Peruvian: he raised all thecapital for his exploration company,Rio Alto, in Lima.

“The reason we’re listed here inLima is because nobody in Canadabelieved our story,” he says.

For juniors (miners focused onexploration) and small-cap miningcompanies in Peru, that is an increas-ingly common story.

Companies such as Minera IRL (alsolisted on London’s Alternative Invest-ment Market), Alturas, Rio Cristal,Candente Copper and Panoro arelisted in Lima, and in many cases,Peruvian shareholders represent agrowing proportion of their investorbase.

Exploration is booming. The coun-try’s rich geology has been exploitedfor centuries, but, because of the vola-tile political situation of recent dec-ades, it has not been thoroughly sur-veyed until now. According to MetalsEconomics Group, a consultancy,Peru was the third-largest destinationfor exploration investment in 2009.

The growth in investment has gonehand-in-hand with a rise in thenumber of companies raising moneyin the domestic market. AlbertoArispe, chief executive of Kallpa Secu-rities, a Lima-based brokerage, esti-mates there are some 90 Canadianjuniors with Peruvian assets, of which15 are listed in Lima. Indeed, someargue there are more funds availableto mining companies in Lima than inmore traditional hubs.

Mark Cruise, chief executive ofTrevali, a Canadian miner that hasjust raised $10m from South Americaninvestors, says it is “absolutely” eas-ier to raise money in Peru than inEurope or North America – most ofthe world’s mining markets are in thethroes of a punishing bear market.

It is not only junior companies thatare seeing the benefits. Larger Lima-listed companies such as Buenaven-tura, Volcan and Milpo enjoy forwardprice/earnings multiples of 9-12 times– well above the 6-8 times of the largeLondon-listed diversified groups.

That is largely thanks to the boom-ing economy that has created muchwealth. Citizens in formal work mustinvest in pension funds, whose assetshave been growing at an annual rateof 19 per cent, according to StandardChartered, the investment bank. Thefunds must invest half their assets inthe domestic market, so valuationshave been lifted.

“The market here is small,” says MrArispe of Kallpa. “Demand is muchhigher than supply; there are not somany companies to invest in.”

Pension funds cannot invest in jun-ior companies, but Kallpa is consider-ing launching a fund to allow them anindirect investment into the sector.

The capital available has caughtthe interest of foreign miners. “Ifone wanted to go to the effort, itwould be very easy to go and raise$100m,” says an executive at an inter-national mining company with assetsin Peru. “It’s a market that throwsmoney at you.”

Explorationcatches eyeof investorsJuniors and small capsSearches are beingfunded increasingly fromLima, with earnings sofar looking healthy,writes Jack Farchy

BeatrizMerino: sevenout of 10Peruvianshave no kindof pension

Money in metalsPeru rides the boom

●Copper The red metal, used inthe wiring of almost every building orhousehold appliance, is Peru’s mostimportant commodity. The country isthe world’s second­largest producer,although it looks set to lose that titleto China, as output was down 3.1 percent in the first half. Investors andmining executives are bullish aboutthe longer­term prospects for copper.Booming demand led by emergingeconomies helped push the metal toa record above $10,000 a tonneearlier this year.

●Gold and silver Peru is theworld’s sixth­largest gold producerand second­largest silver producer.Both metals have been on a tear inthe past year as investors have lostfaith in paper currencies. Gold hit arecord above $1,900 a troy ounce inSeptember. Analysts believe gold andsilver prices will stay high as long asthe eurozone sovereign­debt issuesremain and monetary policy in theUS remains loose.

●Zinc Peru produces 12 per cent ofthe world’s zinc, behind only China.There are few large zinc projectsplanned in the coming years, leadingsome to believe the metal could bepoised to rally sharply.

●Lead Peru is the world’s fourth­largest lead producer, with 6 percent of the market. Lead prices arebelow their 2008 record, currentlytrading at around $2,400 a tonne.The outlook for the metal is cloudedby an environmental clampdown onlead­acid battery makers in China,which accounts for 45 per cent oflead demand.