Peru Expands Economy Through Trade Agreement with Mexico

Bernama: Peru Signs 10th Trade Agreement (FTA) With Mexico

Bloomberg: Mexico, Peru Negotiating Free Trade Agreement, Ferrari Says

Economist: The Pacific Players Go To Market

FoxNews Latino: Peru, Mexico Sign Trade Deal

This month Peru continued to expand its international trading capabilities by signing a free trade agreement (“FTA”) with Mexico. Peru now has ten FTAs with the United States, China, and other nations. It will also sign an agreement with the EU by mid-April.

Mexico’s yearly exports exceed $300 billion, while its imports exceed $320 billion. However, Peru’s trade with Mexico accounted for only a negligible percentage of Mexico’s total trading capacity. With the new FTA, Peru hopes to increase the amount of trading with Mexico to tap into Mexico’s large export and import capabilities. Mexico’s population is four times that of Peru’s and will provide a large market for Peru’s exports.

Peru will gain many benefits by trading with Mexico. In the past ten years, trade between Peru and Mexico grew from $414 million to $1.4 billion. With the new FTA, the countries expect this amount to double in the next five years alone. In the first year after the FTA’s implementation, trade between the two nations is expected to increase by 40 percent. Also, the FTA increases Peru’s total market reach to 2.7 billion people.

The Peruvian President stresses the importance of the FTA in recognizing “qualifications and degrees” to allow a greater flow of skilled and educated workers between the two countries. Both countries speak the same language and workers will now be free to pursue their professions in either country because their education will be recognized in both.

Mexico also benefits from the FTA. Trade with Peru creates an estimated 23,000 jobs for Mexican workers. The Mexican Economy Secretary predicts that the increased trade from the FTA will result in the creation of 17,000 more Mexican jobs over the next five years.

Although it accepted the FTA, Mexico still protected some of its domestic interests. It excluded 193 products from the agreement to encourage domestic production. Items such as coffee, dairy products, sugar, beef, chicken, and rice do not fall under the free trade agreements terms because they constitute a large part of the Mexican domestic market. Another contentious aspect of the FTA was agricultural products. However, the two countries agreed to build a solution around seasonal trading. There will be lower tariffs for exporting during certain times of the year when production is high in one country and low in another. This solution will also help keep prices down in the importing country.

This agreement is part of a larger plan by South American countries to jointly reach out to China, which also borders the Pacific Ocean, making shipping between the continents relatively easy. The other countries involved are Chile and Colombia. By integrating trade, South American countries and Mexico intend to bundle together sufficient products to meet the amounts sought by Chinese importers. Mexico and these South American countries hope to become more important global traders by increasing exports to China, which is the world’s second largest economy. The FTAs between them are the first step in increasing their global competitiveness.

Colombia and Peru Plan Stock Market Merger

FT: Peru suspends integration with Chile, Colombia

FT: Colombia and Peru plan bourse merger

FT: Peru’s bourse wins tax stand off with congress

WSJ: Colombia, Peru Stock Exchanges Plan Corporate Merger

Reuters: Colombia, Peru stock markets to merge

Reuters: Peru Congress passes bill on stock mkt integration

NASDAQ: Direct Trading Between Chile, Colombia, Peru Bourses Delayed

Colombia and Peru are planning to merge their stock markets in the first cross-border union of stock markets in Latin America. The two stock markets have agreed, in a memorandum of understanding, that Colombia will have 64-percent control and Peru will have 36-percent control in the new exchange. Initially, the companies that trade in the new market will have a cumulative value of $378bn. The merger proposal still needs to be approved by regulatory bodies as well as the exchange boards, but if all goes well, the merger may occur as early as March.

Both Colombian and Peruvian officials are optimistic about the merger. The president of the Colombian exchange expects the merger to strengthen both countries’ positions in the international economy. By combining the two stock exchanges it will allow investors to more easily trade within both exchanges and will simplify a future merger with Chile.

Later this year, Colombia, Peru, and Chile plan to integrate trading between their stock markets in a project called Mila, which is separate from the Colombian and Peruvian merger. Nonetheless, the Colombia-Peru merger is expected to strengthen the three-country stock-market integration when it occurs. Mila will be Latin America’s second largest stock exchange behind Brazil. It will have 563 companies with an estimated worth of $614 billion. Similar to the merger between Colombia and Peru, Mila will make trading between the three stock exchanges easier. Shares will be cross-listed on each exchange, allowing investors direct access to the other markets. Officials also say that the integration will make it easier for companies to receive financing in the three countries.

If tax rates in Columbia, Peru, and Chile were not standardized for locals and foreigners, Peruvian investors would be at a disadvantage because investors in the other countries would receive a lower tax rate on their gains. Therefore, near the end of 2010, Peru’s stock market threatened to withdraw from Mila if the Peruvian Congress did not agree to more favorable tax rates for capital gains. However, in a late Congressional session, Peruvian lawmakers voted to standardize the tax at 5 percent for locals and foreigners alike. Before, other Latin American countries had lower capital gains tax rates than Peru. The chairman of the committee explained that the favorable tax rate will help create symmetry among the three exchanges.

The heads of the stock markets stress the large scale of the two merger projects and recognize the obstacles ahead in completing them. For example, the test period for Mila was extended another six weeks because of the capital gains standoff in the Peruvian congress. The complexity of the project, as well as the amount of technology needed to complete it, will also cause further delays. Although these mergers will face obstacles, the presidents and managers of the exchanges remain optimistic about the integrations and foresee them benefiting each country.

Discussion: Will this move make Peru, Colombia and Chile more competitive on a global scale, or only more competitive within South America? What other issues may delay the integrations?

After Boom Year Latin America Turns Thoughts to Bust

Sources:
BBC.com: Latin America Sees Uncertain 2011
Economist.com: So Near and Yet So Far
Economist.com: Waging the Currency War
FT.com: Risk of Bust After Boom Haunts Latin America
MercoPress.com: Lack of Rainfall in Argentina is Pushing up Prices for Corn and Soybeans

Latin America just finished one of its best economic years in history to wrap up one of its best economic decades in history. Nearly every country in the region experienced growth rates above 3% of GDP for the year, with Brazil and Peru setting the pace with near double digit growth rates. For the decade, every country experienced average annual GDP growth of between 1.8% (Mexico) and 5.6% (Cuba). Some observers have hailed the news as proof that Latin America has finally turned the page on its disastrous economic history. Recent news, however, suggests that Latin American leaders have not forgotten their history lessons just yet.

Latin America has historically suffered through the boom-bust cycles associated with commodity driven economies. No other region of the world has complained so much about its natural resources than Latin America, a region rich in precious metals, oil, and agricultural land. Because of that history, Latin American leaders are currently very aware of the fact that the high commodity prices prevalent today will not last forever and that they carry risks equal to their potential rewards. Many politicians and commentators are claiming that this is the year the world will find out if the region has developed truly mature economies.

The fear of the end of the boom began in the fall of last year with the talk of an impending currency war coming out of Brazil. Latin American countries began expressing concerns that appreciated currencies would spell doom for their exports, and thus drag down their entire economies. Since that time several countries in Latin America, including Brazil, Chile, and Peru, have moved to prevent their currencies from appreciating. This may actually be a good sign of economic maturity.

For example, Chile could easily sit back and do nothing while the price of copper remains at a record high (Chile is the world’s largest copper producer), but the appreciation of its currency that comes with the increased foreign investment in the mining industry has begun to negatively impact other industries, including the wine and agriculture industries whose products are less competitive on the global market with a higher currency. Though the idea seems fairly basic, these currency moves seem to show Latin America’s realization that a diversified economy is necessary for continued growth, and thus moves must be made to protect broad portions of the economy, not just the largest, often commodity-based, portion.

At the same time, the risk still exists that none of these measures or any other measure put in place over the last decade will work to prevent another period of economic bust. The region cannot prevent the poor weather that has lead to lower crop forecasts in Argentina and Brazil, (which generally provide the world’s soy and wheat crops during the North American winter) nor can it accurately predict when and if China, the country currently consuming all of Latin America’s commodities, will reduce its production levels and subsequent demand for Latin America’s resources. Only when uncontrollable and unexpected economic shocks occur will the world be able to accurately determine whether Latin America has moved away from its past, or if it is still stuck in the boom-bust cycle that has defined it to date.

Discussion:
1) How do Latin American countries’ moves to protect their currencies show economic maturity? How might they be examples of the region’s economic instability?
2) How should Latin American countries plan their economies considering the natural resource wealth and the boom-bust cycles that accompany commodities?

Lima Looks to Future

Sources:
Correoperu.pe: Empiezan estudios para el metro de Lima
Elcomercio.com.pe: ¿Es factible un metro subterráneo en Lima? Harán estudios de factibilidad para comprobarlo

The mayor of Lima, Peru, Luis Castañeda, announced this week that the French government will give the city $900,000 USD to finance studies about the feasibility of a subterranean train in the capital city. The studies will take between 3–4 years and will be undertaken in two phases. First, the two foreign companies in charge of the studies (the American firm Systra and French firm Ingerop) will determine what areas of the city are in the most need of subway access based on population movement patterns. The second phase will identify the exact routes the trains will follow, as well as the more technical aspects of the project like cost, financing, environmental impact, etc.

By the time the studies are completed, Mr. Castañeda will no longer be the city’s mayor. He is currently leading early polling for presidential elections that will take place next year. The plan will likely need the support of the central government to help fund the project, which the central government appears currently able to do with increased revenues resulting from robust economic growth. Unfortunately Peru is still a largely undeveloped country so there is much need across the country for potential government development dollars. With most of the country’s poor residing in the central highlands or the Amazon basin, many would claim that the money would be better spent on infrastructure in those regions instead of in the more affluent coastal capital that is already building an extensive bus and electric train system to serve its population.

The second problem facing the project is that it would require the support of the future mayor. The city recently held elections and is still awaiting the final results. One candidate supported the idea of a subway system for the city throughout her campaign, though her challenger (and leader in the count so far) did not. Either candidate will have to cater to a constituency that includes many poor residents concerned more with first getting a job than finding transportation to a job, but an informal poll on a Peruvian newspaper’s website shows 93% of votes in favor of the idea.

Discussion:
1) Peru is one of several countries in Latin America currently experiencing robust growth and in need of extensive development if that growth is to continue. What should these countries be doing with the increased government funds? Considering that few, if any, parts of Latin America are fully developed, does it matter where government development is targeted? Should development be targeted mostly for the areas that need it the most (like the highland and rainforest areas in Peru)?

Chile, Colombia, and Peru to Integrate Stock Exchanges

Sources:
Counciloftheamericas.org: Stock Market Integration: Chile, Colombia, and Peru
Mercopress.com: Peru, Chile, Colombia Integrate Stock-Exchange Operations
UPI.com: Three-Nation Stock Exchange Deal Agreed
WSJ.com: Peru’s Stock Market Draws Chilean, Colombian Investments

Chile, Colombia and Peru are making the final preparations for combining their individual stock exchanges into one larger stock market beginning November 22. The move will make the stock market the second largest stock market in Latin America following Brazil’s Bovespa. The new stock exchange could reach a total stock value of $460 billion.

Currently the Chilean stock exchange is the largest of the three, with a total stock value of $34.7 billion. The majority of these shares come from the services sector, though the mining sector also contributes a healthy amount of stock to the exchange as well. The Colombian market is made up of mostly manufacturing stocks and has a total value of $16.5 billion. Peru currently has the smallest exchange at only $4 billion in stock value, but has grown 24% over the last two months. It is made up mostly of mining stocks and, like the Chilean exchange, is rated as investment grade.

Peru’s stock exchange is currently the cheapest, making it the most desireable of the three, but all three countries seek to gain from the integration. Chile and Peru are interested in each others’ consumer and mining stocks. Current tax laws and other regulations make it difficult for investors in one country to invest in the others, although the countries have similar economic industries (mining being the most obvious common thread). A more open exchange will create more investment in all three countries.

The integration will take place in two steps and will not result in a complete amalgamation into one exchange. Each exchange will still operate under the relevant regulatory body in each country. The first step, called “intermediate routing,” will give investors in each country access to the other countries’ securities through each country’s regulatory body. This will start on November 22. It is not until the second step (scheduled to start at some point in 2011) that traders will have direct access to all three trading markets. This is also when the market rules and regulations will become standardized.

All three countries are confident in the project, and have already mentioned the possibility of expanding the agreement in the future to include other countries, specifically Argentina and Panama, who have already expressed interest in joining the market.

Discussion:
1) How might this project help smaller economies grow in a way that will increase development?
2) Free trade agreements have been seen as a key to global economic growth over the last 20-30 years. Is stock market integration the next logical progression for the liberal economic project of making markets more open? What risks are involved, both for the economies of each country and for their citizens?

Latin America Surges Forward in the Face of the Continued Global Recession

Sources:
Elcomercio.pe: La economía peruana crecerá más de 6% este año, aseguró la ministra Mercedes Aráoz
WSJ.com: Mexico’s Economy Expands in Second Quarter
Estadao.com.br: Serasa: economia brasileira desacelera no 2º trimestre
Mercopress.com: Peru and Chile Will Lead Latam Expansion in 2011 with 6% Growth Each
Mercopress.com: Argentine Economic Activity Expands 11.1% in June Over a Year Ago
Businessweek.com: Venezuela Economy Down 3.5 pct in First Half 2010

Despite the fact that most of the world has still not completely shaken off the global recession, Latin America has clearly set itself apart as countries across the region are experiencing their best growth rates in years. The International Monetary Fund (IMF) is predicting that Chile’s economy will expand by 6% this year (in terms of Gross Domestic Income). This growth is thanks to effective reconstruction spending following the massive earthquake on February 27 of this year and a rise in commodity prices. This growth will far outstrip the IMF’s prediction for global expansion of only 4.2% for the year.

Peru and Mexico are experiencing equally impressive levels of growth as well. Standard & Poor’s is predicting growth of 7.5% (in terms of Gross Domestic Product) for the year in Peru, though the Peruvian government is predicting only 6%. Peru is also benefiting from high commodity prices, but the Minister of Economy credits higher domestic demand and private investment as the main source of growth. The Bank of Mexico is predicting an annual growth rate between 4-5% (GDP) this year driven by a strong recovery in the country’s manufacturing sector. Mexico’s economy expanded at the fastest rate in over a decade in the second quarter this year.

The industrial sector pushed Brazil’s growth to 8.4% (GDP) in the first half of 2010 compared to the first half of 2009, and the IMF is predicting a growth rate of 4.1% (GDP) for the year. Ironically, like most of Latin America, second-half growth rates will likely decline in Brazil due to the fact that the country had already exited the recession and was again experiencing growth by the end of last year, making the year-to-year comparison less favorable. Even Argentina, a country with a less-than-stellar economic record since its 2001 economic collapse, saw growth of 11.1% (GDP) in June 2010 as compared to June 2009 after an excellent agricultural harvest.

One country bucking the growth trend is Venezuela. The Venezuelan economy shrank 3.5% (GDP) in the first half of 2010 after shrinking 3.3% in 2009. The government blames its financial woes on low global oil prices (oil makes up 95% of Venezuela’s export earnings), while government critics blame the country’s socialist economic policies and low consumer demand and investment for the poor showing.

Discussion:
1) After famously suffering through the “Lost Decade” of the 1980’s many Latin American countries have shifted to more democratic governing systems and have experienced subsequent economic growth. Does the fact that Latin America appears to have already exited the global recession and returned to the excellent growth rates it had been experiencing in recent years signal that the region as a whole is on a path to first-world status, or should the world continue to be wary of the historically troubled region?