In late May, Peruvian president Alberto Fujimori was re-elected for his third term. But Fujimori, who is credited with many of Peru’s financial achievements, faced the toughest challenge of his political career. The US, the Organization of American States and members of the European community all declared his victory invalid. The election results following fraud charges and stern messages from the international community left foreign investors waiting for the other shoe to drop.
‘Peru still has a stable economy but people are not going to be jumping in that quickly because in the end we will have Fujimori and a very large opposition,’ admits Michael Henry, an economist with ING Barings.
Officially, Fujimori won by a wide margin, but critics called his victory illegitimate. His opponent, Alejandro Toledo, boycotted the race, claiming that conditions were wrong for a fair vote. A victory under such a cloud is problematic for Peru’s fragile economic progress.
Throughout the election, Fujimori tried to rally support by accusing Toledo of having populist tendencies. Toledo counter-attacked by cozying up to Wall Street and keeping foreign analysts well informed of his economic policy plans. An economist himself, Toledo also promised to reform the judicial system, a weak link in the Fujimori government, which Standard & Poor’s had cited as a potential risk for investors.
The sketchy victory has kept foreign investors skittish. ‘If sanctions are instituted they will affect the poor,’ Henry adds. Until the election, Peru was bursting with economic promise. Latin American countries in general have gained investor confidence following Mexico’s debt rating upgrade by Moody’s Investors Service. Furthermore, analysts saw Peru as a good market that performs better than other countries in the southern cone. ‘It is not a bad place to invest, with its liberal investment regime, fairly open economy and free exchange rate,’ Henry reports.
It wasn’t always thus, though. In 1990, Peru’s misguided economic policies sparked terrorist clashes that claimed lives by the thousands. After a few chaotic years the military eventually managed to re-establish order, capturing top guerrilla leader Abismael Guzman, and repelling the country’s two main terrorist groups.
The market saw its biggest growth during 1993-95, following Fujimori’s program of economic reform. He liberalized interest and exchange rates, as well as international capital flows. He also established an independent central bank and a vast privatization program to help eliminate public monopolies, all of which helped investor confidence.
‘Fujimori brought Peru to 20th century economic standards,’ says Vladimir Kocerha, US correspondent for the Peruvian financial daily Gestion. ‘The problem is he did it with shock treatment. Luckily the economy has overcome that period.’ But Kocerha is not so optimistic about Peru’s future under Fujimori. ‘I believe we will have some type of reaction from the international community that will certainly slow down our economy,’ he says.
Andean IR
As the Peruvian economy – and interest in its market – has grown, so has the demand for IR. Analysts agree that the country’s IR should exhibit certain characteristics: good information about politics, order flow and their views on the market. But analysts also believe that most Peruvian companies are on an IR learning curve. These companies tend to conduct their IR through PR departments and draw criticism for not being aggressive enough in contacting foreign investors when bad political news hits.
Some of those doing a better job are reaching the Street with ADRs. They are Compania de Minas de Buenaventura, Banco Weise Limitado, Telefonica del Peru, Southern Copper and Credicorp. According to Richard Simonelli, managing director of Citigate Dewe Rogerson, who works with Buenaventura and Telefonica, some are willing to spend money to hire the services of professional IR firms. ‘Typically, it depends on how much of the stock is outside the country,’ he observes.
Simonelli says that both Buenaventura and Telefonica do a good job reaching foreign markets with their IR programs. ‘As companies, they are at the two ends of the spectrum. But they realize the value of communicating regularly with investors and analysts.’
Despite some praise, however, analysts say few Peruvian companies see the value of extensive IR campaigns. When resources are limited, they cut corners. Kocerha agrees that good IR in Peru’s compact emerging market seems to be closely tied to financial well-being.
On a more positive note, the country’s economy is expected to grow this year, after taking a massive plunge during the Asian financial crisis. That crisis was exacerbated by the severe weather patterns of El Nino, which erratic affected Latin American mining and agriculture, two sectors on which Peru’s economy is heavily dependent. ‘Our markets were not diversified,’ admits Kocerha. ‘Unlike Chile, which was also hurt in the commodity sector, Peru had no other industries that could hold us up during the crisis. We still haven’t diversified the economy enough.’
Today, the Peruvian equities market is relatively small, with a daily trading volume of $5-10 mn. ‘We have about 30 stocks that are traded heavily in the local market,’ says Ismael Vasquez, chief economic analyst for Progreso, a Lima brokerage house. ‘Our market has very particular characteristics and we know them very well.’
Local investment houses are hoping that as the political situation evens out, the local investment pool will increase. Progreso, for instance, has opened a new internet investment service to attract Peruvians living outside Peru. ‘We believe there’s a lot of potential,’ Vasquez projects.
Telephone giant
Telefonica del Peru represents 39 percent of all the shares traded on the Lima stock exchange. The company has good returns, in part because its stock is affiliated with Spain’s Telefonica and has had little competition in the internal communications market. The latter’s tender offer earlier this year had a significant influence on Peru’s market. With a company so consequential, analysts had worried that the offer could unhinge the entire equity market. Telefonica de Espana did its part to stabilize the situation by announcing it would continue to trade Telefonica del Peru shares on the Lima stock exchange.
Until the tender offer, Telefonica had been aggressive in its IR efforts. The company’s management got out in front of investors with the help of internet technology and held a webcast of its recent conference call. ‘We were able to control the subject, so the analysts stayed focused on what our CEO or CFO was saying,’ says Raul Risso Basulto, Telefonica’s IR manager. Since the tender offer, however, the IR department in Lima has had less exchange with investors. ‘The investors now look at the company’s progress in Madrid,’ he admits.
Basulto observes a difference in style between foreign analysts and local ones. ‘In Peru there are few analysts who follow one particular company or sector. But mining and transportation are very different,’ he maintains. ‘The foreign investors and analysts want to know more,’ he says, and they spend time familiarizing themselves with individual sectors, developing economic models, and offering keen observations and questions. In short, foreign investors concentrate on a narrower area, though they dig deeper for information.
Growing up
The Peruvian equities market is relatively young and the economic changes instituted in the 1990s played an important part in the development of the capital markets. Telefonica was among the largest state monopolies privatized by Fujimori and the electrical sector followed, attracting investment from Canadian, Spanish and Chilean investors.
Mining has been robust, to the benefit of companies like Buenaventura, and locals estimate that mining investments this year will be over $350 mn, with a good portion of it from foreign sources. ‘Buenaventura has had an incredible growth period. It is mining gold at a time when gold prices are high and are not expected fall. It is doing better than those in zinc and copper,’ announces Gestion’s Vladimir Kocerha.
Despite political problems and the present economic volatility, Peru could very well survive the crisis. After three years of international debt and currency shocks, many analysts had predicted increasing investor confidence in this small market before the election. Morgan Stanley Dean Witter had projected 4.6 percent economic growth this year.
‘Foreign investors’ interests in Latin American emerging markets have been mostly concentrated in Mexico and Brazil. But for economic fundamentals, Peru is in a better situation than many others,’ says Carlos Janada, a vice principal of Morgan Stanley Dean Witter. ‘I still like the Peruvian story because Fujimori allowed reforms that are attractive,’ he adds. For example, Peru established a private pension fund in place of the public social security, which is now large and can potentially be invested abroad, as Janada goes on to explain. ‘They now have close to $3bn to invest outside the country.’
Michael Henry concurs: ‘Peru is not a bad place to invest. What is lacking is a big market. The government has to offer judicial stability so investors can feel secure.’ This subject has been the country’s Achilles’ heel.
‘Recent judicial decisions where the government was seen as affecting the principle of private property are worrisome for investors,’ observes Kocerha. Some investors fear that if companies run into problems, there isn’t enough independence in the judicial system to argue their case. Critics point to the example of Baruch Ivchner, a television owner who lost his television station after he criticized the Fujimori government.
From1990 to 1996 Fujimori attracted much attention from the foreign investment community because of his package of reforms. Public offers in the primary market increased sharply during this period. In 1996, Peru raised $631 mn through public issues, a massive increase from nearly zero raised during the 1980-84 period. The market for bonds also jumped from $9.5 mn in 1990 to $595.8 mn in 1996.
‘Since then our market has shrunk considerably,’ says Ismael Vasquez of Progreso. ‘Our economy didn’t even reach 1 percent growth in 1998. But we estimate the characteristics that make up our market should attract investors. The mining sector is very attractive today with very low prices and optimum levels.’ Vasquez reports that election jitters led to reduced trading volumes in the month of May, however, as local and international investors played safe.
Analysts say they are not sure how the government plans to confront further changes in privatizations, concessions and state reforms. Morgan Stanley’s Janada says Fujimori could win attention from foreign investors if he specifies his future reforms. Any of these elements, however, could be moot if investors estimate the risk is too high. ‘In that case, the ones who will benefit will be the speculators who will come in to buy low,’ he says.
With Fujimori in office for his third term and hostility growing within many sectors, foreign investors remain concerned. They are waiting to see if further political polarization will affect the overall investment environment. All agree that if there is a breakdown of order, Fujimori will not be able to carry out further economic reforms and the economy will shrink, despite the good prognosis.
