Humala calls for tax reform as part of stimulus package

The first quarter of 2014 saw Peru’s economy experience a slowdown following a decade of annual six percent growth. Faced with the potential for economic contraction, Peruvian President Ollanta Humala has begun to institute a series of fiscal reforms in order to address the weaker rate of growth.

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Specifically, in order to stimulate foreign investment— which has been at the core of Peru’s decade-long expansion period—Humala has called for the establishment of new tax stability legislation for mining corporations and investors.

The proposal—which Humala presented to Congress on Thursday—is part of an array of stimulus plans meant to reinvigorate the decelerating economy.

As reported by Marco Aquino of Reuters, President Humala has put forth a proposal for, “… a new tax stability contract for mining companies that would lock in taxation rates for 15 years on investments of at least $500 million.”

If approved by the legislature, the tax initiative is meant to boost foreign investment in the South American nation so as to help the economy rebound in the latter half of 2014. While tax stability contracts already exist in other sectors of the Peruvian economy that handle foreign investments, this particular application would extend tax stability legislation to mining enterprises.

Mining plays a central role in Peru’s export sector, and has therefore been targeted as the most promising catalyst for a revitalized economy.

According to Reuters, “Mining makes up about 15 percent of Peru’s gross domestic product and 60 percent of the Andean economy’s total exports.” Abundant in gold, silver, and copper, Peru handles over $60 billion in mining investments annually.

Humala’s hope is that the new legislation will expand this stream of revenue by enlarging already-established operations and facilitating the establishment of new mining enterprises. Over the past several months, multiple multinationals—including Southern Copper, MMG Ltd, and Newmont Mining—have announced major mining projects in upcoming years which could benefit tremendously from the proposed tax stability resolution.

Beyond the new tax stability bill aimed at the mining sector, Humala’s stimulus package also includes several other fiscal and government reforms. Amongst these, some of the most significant are a push to reduce environmental regulations in order to create new streams of business revenue—specifically in the oil and gas industries, which have so far been inhibited by these same regulations—and an initiative to boost government transparency while reducing bureaucratic inertia.

Since the announcement of President Humala’s proposition, international reaction has been favorable as Moody’s Investor Services continues to maintain a positive outlook for the Peruvian economy by predicting 5.2% growth for the remainder of the years.

Further, Moody’s raised Peru’s sovereign foreign currency credit rating to Baa2 as a reaction to the proposals, and stated in a monthly report that, “Measures announced by President Ollanta Humala last week are expected to increase the country’s potential output and foster investment in the private sector.”

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