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by Joseph Hogue, CFA

Peru is by far the smallest economy within the investable region and much more affected by commodity prices, particularly copper, gold and crude oil. Pressure on the government for increased stimulus may come as demand from China, and other global importers, weakens in the first half of 2012.

The central bank has maintained rates through most of 2011 as inflationary pressures come down to their upper bound target of around 3%.

Peru is one of the few countries in the region, besides Chile, to have a fiscal budget surplus. This should help the government enact stimulus given a scenario of weakening global growth.

Though President Humala has largely come down on the side of investors in recent mining strikes, the possibility exists for more concessions from commodity producers. Humala had to declare a state of emergency earlier in the year as talks broke down between striking workers at a mining project run by Newmont Mining (NYSE:NEM).

A special mining tax implemented in 2011 will require an additional 750 million soles ($277 million) in fourth quarter taxes from mining companies.

Despite regulatory uncertainty, Peru still has the highest growth prospects and the most to gain from recent equity market integration. Inflows into the equity markets as foreign pension funds diversify holdings could act to support asset values. Data merits an overweight position relative to other countries in the region.

The only depository receipt available on the NYSE or NASDAQ is CIA de Minas Buenaventura (NYSE:BVN), a large metal mining company. Investors can gain exposure to the country through the Global X FTSE Andean Fund (NYSEARCA:AND) or the iShares MSCI Peru Index (NYSEARCA:EPU).

Disclosure: Long AND

Source: Peru In 2012: Commodities Still King