COUNTRY PROFILE - PERU -

AN ATTRACTIVE FRONTIER MARKET

• The country benefits from its massive exports in copper and silver, its re energizing oil and gas sector and its growing consumer market. With 29mln people and a 20 points decrease in poverty level from 44% to 24% of the population living under the poverty level, Peru’s middle class is expanding.

However, close to 60 percent of the rural population remained in poverty. Urbanization is going up and driving a boom in construction with cement production rising 16 % this year. The urban population rose from a 34% in 1940 to 74% in 2005.

Being the third largest country in South America with the fifth biggest population. The country must heavily invest in its infrastructure. For example transportation costs account for 30% of agriculture products compared to 6% in Chile.

PERU -COUNTRY PROFILE The story of a very small economy with a lot of room

to grow

• Today’s focus is on Peru. Since the end of the 90’s and the military forces victory over the Light Path, the country went through a long period of political troubles with the demise of president Fujimori while undergoing a true wave of modernization and political structural changes that liberalized the economy, tamed inflation and helped raised the level of exported commodities mainly copper and silver.

After the Fujimori era, the new administration continued the wave of strict monetary policy, investment in infrastructure though limited and poverty fighting.

The result is an economy that grow for an everage of 6% a year. The country weathered the financial crisis correctly even if GDP dropped to .9% in 2009 but rebounded to 6% in 2010 and is projected to hit 9% next year.

• “The story of a very small economy with a lot of room to growWe’re a very small economy with a very high potential for growth in comparison to many countries in the region,” said Leoncio Altamirano, a trader at Lima-based Juan Magot y Asociados SAB. “The market has been spectacular.”

• A Peru climbed from 110th to 97th position in the World Economic Forum’s infrastructure ranking. Despite some recognizable efforts in highways and airports,

Peru invests only 1% of its GDP in infrastructure. The consensus between economists is that a level of 4% is necessary in a developing country to sustain its growth. Overall, the level of infrastructure is weak, even by Latin American standards, corruption, inefficient public services, unjustified and time consuming or too rapid procedures with too few planning are crippling Peru’s infrastructure development.

To sustain the sector Peru’s Ministry of Economy and Finance (MEF) has launched the country’s first infrastructure fund, with total commitments of US$ 460mn. Peru’s economy has been steadily growing for the past ten years

Source: Worldbank

GDP (2009): $127.22 billion. Annual growth rate: 9.8% (2008); 0.9% (2009); 6%(2010); 9%(2011 exp) Per capita GDP (2009): $4,365.

• 1-A strict monetary policy that resulted in a controlled inflation the past ten years.

To many analysts surprise, the Peru’s central bank kept on tightening its economic policy by raising rates from 3% to 3.25%, yesterday. The decision to cool the economy will make corporate loans more expansive and will restrain the banking sector ability to perform while cooling foreign investment by making loans more expansive.

Even though inflation’s annual increase is well within the target range set out by Peru’s Central Reserve Bank (BCR), which aims to keep inflation within a band of one to three percent, the Central Bank decided to raise its rates. Note that Peru’s sovereign debt was rated investment grade in 2008 by Moody’s.

Peruvians lived through hyperinflation in the mid-80s so they are very conservative in their monetary policy. Amid strong inflows of “hot money” that have pushed the Nuevo Sol to a two-year high of about 2.8 per dollar, the seven-member bank board had been holding rates at 3 per cent for the past three months.

• The growth drivers of Peru 1 - Inflation has been tamed thanks to efficient monetary policies

2 – Huge exports gains thanks to raising commodity prices

3 – Growing manufacturing and construction sectors thanks to expanding consumer market

4 – High level of public and private Investment

PERU -COUNTRY PROFILE The story of a very small economy with a lot of room

to grow

2-Peru is the world’s leading producer of silver, and its second biggest copper producer.

Natural resources: Copper, gold, silver, zinc, lead, iron ore, fish, petroleum, natural gas, and forestry. Peru is the world’s top producer of silver, second in zinc, third in copper and tin, fourth in lead, and sixth in gold. Look at the DJ copper Subindex performance.

A look at The Philadelphia Stock Exchange Gold and Silver Index, a capitalization- weighted index which includes the leading companies involved in the mining of gold and silver. The index was developed with a base value of 100 as of January1979.

According to consulting firm Maximixe Peru’s mineral exports are expected to have reached US$ 24.2 billion in 2010, with earnings from mineral resources totaling over US$ 21 billion and those from crude oil and its derivatives reaching US$3 billion.

• 3- Manufacturing, construction, utilities production, private consumption, are leading growth thanks to a dynamic consumer market

The manufacturing sector grew 14.66% in 2010 and electricity and water production increased 8.22%. The construction market grew 16.5% in 2008, 6.1% in 2009, and 10.71% in 2010 and an anticipated 10% in 2011.

For example: Peru’s largest construction firm, gained 135 percent in 2010 to 6.65 soles. Cementos Pacasmayo SAA, the Hochschild Group’s cement producer, advanced 135 percent to 7.51 soles in 2010, its biggest ever yearly advance.

Telecoms mobile revenue will grow by 6.6 % over the next five years, going from generating $2.2 billion in 2010 to $3.1 billion by 2015,

In a move to benefit from the market’s growth China Tel has announced that it will invest $62 million to sell internet protocol telephony services in Peru through its subsidiary, Perusat

• The balance of trade is positive (2009 Government of Peru customs statistics): Exports--$26.66 billion: Imports--$20.4 billion:

Here is a detailed look at Peru’s imports and exports products and parthers

Exports--$26.66 billion: gold, copper, fishmeal, petroleum, zinc, textiles, apparel, asparagus,coffee, others.

Major markets--U.S. (17%), China (15.3%), Switzerland (14.9%), Canada (8.7%), Japan (5.1%), Germany (3.9%), South Korea (2.8%), Chile (2.8%).

Imports--$20.4 billion: petroleum and petroleum products, vehicles, plastics, steel, telephones, wheat, soy oil and soy products, commercial machinery, processed food.

Major suppliers--U.S. (19.7%), China (15%), Brazil (7.7%), Ecuador (4.9%), Chile (4.6%), Colombia (4.4%), Japan (4.1%). Source: CIA- factbook

PERU -COUNTRY PROFILE The story of a very small economy with a lot of room

to grow

• 4- High level of investments are supporting the country’s growthThe government of Peru has launched a vast plan of affordable housing construction to cope with the growing urbanization of the population. The government launched a “stimulus plan” in 2008. The country is compensating for deficiencies in housing, bridges and highways. Under the plan, the government has authorized the emission of sovereign bonds worth over 2.45 billion soles until January 31 of 2010 to finance projects of regional governments from the 2.6 billion approved in total. In 2008, Peru decided to spend $13.2bln in housing, highways and other projects.

For the first time in more than five years the country was witnessing a trade deficit. Demand in the US and China had faltered and prices for copper and other minerals were down from 11.5% compared to 2007. The government had to react to sustain its economy.

The plan was divided in three tiers. The first tier was an increase of $3.2bln in government spending, the second tier was finalizing another $3bln in previously signed loans and the third tier was to take another $7bln in loans.

• The boom in manufacturing, construction and exports of minerals and hydrocarbures is supported by a two factors. The first is a heavy investment plan by the government, the second is a huge inflow of foreign direct investment.

• In public expenditure Transport represent (72.5%) followed by the water and sanitation sector with (16.7%).

These two type of investments are known for their ability to generate a high effect on employment in the short-term and act as poverty reducers during crisis.

According to Central Reserve Bank (BCR) President Julio Velarde Investment projects planned in Peru will total over 40.46 billion US dollars during the 2010-2012 period,.

Projects in hydrocarbons, minerals and infrastructure will total an estimated US$ 12.7 billion according to figures provided by private companies. [i] Peru’s Central Bank estimates that the stock of foreign direct investment (FDI) was $37 billion at the end of 2009. We can clearly see that Peru is significantly lagging behind regional leaders, including not only Chile, but also Brazil, Mexico and Colombia in terms of infrastructure investment needs and quality gaps.

• Here is a look at Foreign Direct investment Inflows on the long term.

PERU -COUNTRY PROFILE The story of a very small economy with a lot of room

to grow

• The risks of investing in PeruThe country is still largely poor: per-capita gross domestic product (GDP) of $8,600 at purchasing power parity (PPP), well below Chile’s $14,700 or Brazil’s $10,200

Political risk is high, the daughter of the imprisoned former president is running for the April 2011 presidential election.

The current front runner has just been taken in a corruption scandal in which one of the member of his ticket allegedly paid him a quarter million dollar to run along his side.

The US is also worried by a resurgence of the Lighting Path in the country side, this time as a more social entity, kindler and gentler, that opted for corruption instead of assassination.

Corruption is rampant in the whole country from the public servants at local and national levels to military officials. Faud Khoury, Peru’s comptroller, estimates the state loses at least 6 billion soles ($2.15 billion) per year due to corruption, newspaper Los Andes reported.

• Peru main problems in the infrastructure investment field are

a lack of visibility on legislation concerning contractual conditions in the Public to Private Projects sector(PPP,),

a need for procedures simplification, contract standardization

• In public expenditure Transport represent (72.5%) followed by the water and sanitation sector with (16.7%).

These two type of investments are known for their ability to generate a high effect on employment in the short-term and act as poverty reducers during crisis.

According to Central Reserve Bank (BCR) President Julio Velarde Investment projects planned in Peru will total over 40.46 billion US dollars during the 2010-2012 period,.

Projects in hydrocarbons, minerals and infrastructure will total an estimated US$ 12.7 billion according to figures provided by private companies. [i] Peru’s Central Bank estimates that the stock of foreign direct investment (FDI) was $37 billion at the end of 2009. We can clearly see that Peru is significantly lagging behind regional leaders, including not only Chile, but also Brazil, Mexico and Colombia in terms of infrastructure investment needs and quality gaps.

• Here is a look at Foreign Direct investment Inflows on the long term.

PERU -COUNTRY PROFILE The story of a very small economy with a lot of room

to grow

• In the same category you can also look at Compania de Minas Buenaventura SA (NYSE ADR: BVN), Compania de Minas Buenaventura S.A.A. (Buenaventura) is a precious metals company engaged in the exploration, mining and processing of gold, silver and other metals in Peru.

• Stocks to look for in Peru Southern Copper Corp. (SCCO, SCCO.VL) Copper prices are going up tracted by the growing demand of emerging countries, India, China mainly are the biggest copper consumers thanks to their growing middle class.

Technology, electricity consumption, telecom infrastructure are major drivers of the demand for copper cables. Analysts predict that copper consumption will grow 11.5% this year to 6.8 million tons.

A supply deficit is predicted for 2011. In the mining sector, blue-chip copper company Southern Copper Corp. (SCCO, SCCO.VL) rose some 42% last year,

The Company produces copper, molybdenum, zinc and silver. All of its mining, smelting and refining facilities are located in Peru and in Mexico, and it conducts exploration activities in those countries and Chile.

• The third mining company to watch is Volcan Compania Minera SA Volcan.Compania Minera SA operates as a mining company in Peru. It engages in the exploration and exploitation of mining concessions; and related extraction, concentration, treatment, and commercialization of polymetalic minerals. The company produces primarily zinc, gold, iron, lead, copper, and silver.

In the Banking sector the company to watch is Creditcorp. The stock performance is 47% for the year.

Credicorp Ltd. (Credicorp) is a financial services holding company. The Company is engaged principally in banking, insurance (including commercial property, transportation and marine hull, automobile, life, health and underwriting insurance), pension funds (including private pension fund management services), and brokerage and other (including brokerage, trust, custody and securitization services, asset management, and trading and investment).

• Funds to look for with Peru’s exposure1- iShares MSCI All Peru Capped Index ETF (EPU) The fund performance since inception is 51.74%. The fund seeks investment results that are similar in performances and prices to the MSCI All Peru Capped Index.

2- Funds that will start in the coming months. Market Vectors Andean Equity ETF Market Vectors Andean Equity ETF (the “Fund”) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Andean Index (the “Index”).

Global X FTSE Andean 30 ETF This proposed fund would track the FTSE Andean 30 Index, a benchmark that includes the 30 largest companies in Chile, Colombia, and Peru. The index is free-float adjusted and weighted by market capitalization.

• So Peru is one of the catching up economy of the beginning of this century. The country still has plenty of room to grow. Poverty is declining but the majority of the population is still living in the informal economy. The government needs to step up its infrastructure investment and make sure that the population is benefiting from the country’s growth. Mining is subject to volatility and the country’s dependence to its natural resources is one of its weaknesses. Another one is mismanagement and corruption that could be a huge impediment for future growth. Overall, the picture is attractive, the consumer market is growing, the middle class is slowly building, telecoms are big tracted by mobile usage, housing is booming and tourism and agriculture are modernizing and expanding. The monetary policy is conservative and institutional investors have faith in the country’s economic model.Saturday Jan 8th – New York – Melvin Manchau

PERU -COUNTRY PROFILE The story of a very small economy with a lot of room

to grow