Previous Quarterly Editions
Expropriation Risk: 56 56 54 54 ►Political Violence Risk:57 57 57 57 ►Terrorism Risk:33 30 30 28 ►Exchange Transfer and Trade Sanction Risk: 45 45 45 45 ►Sovereign Default Risk:47 55 55 55 ►
TREND ►
Protest intensity to date* 2022 2023 High Very HighUnrest risk in 2024**Cost of living: MediumAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
In spite of the COVID-19 pandemic, which was particularly severe in Peru, government indebtedness has remained well within margins of sustainability. At just over 32% of GDP at the end of the second quarter of 2023, the public debt was well below other Latin American countries, such as Brazil, Colombia, Mexico and even Chile. The foreign public debt was roughly half the total, at 15.8% of GDP, at the end of the second quarter. This grew as a consequence of the pandemic to 19.4% of GDP at the end of 2021, falling back to 17.8% at the end of 2022. Peru’s net foreign reserves at the third week of September 2023 stood at US$72.7 billion, or 29% of GDP, underlining the country’s overall solvency.
The policies of Dina Boluarte’s administration and the central bank (known as BCRP) since December 2022 have been to maintain regular debt payments and avoid rescheduling arrangements with foreign creditors. The main emphasis of policy has been to promote foreign investment and to minimize the impact of inflation, exacerbated by the Russian war in Ukraine and the consequent increase in prices of imported oil and foodstuffs. The BCRP has maintained high interest rates since the beginning of the year, with its base rate fixed at 7.75%; however, amid signs by the end of the third quarter of 2023 that inflationary pressures were abating, the bank reduced this marginally to 7.5%.
The main victim of high interest rates has been growth. GDP growth in 2023 is officially expected to be down to 0.9%, well below the Latin American average; however, this may prove to be an overly optimistic assessment. As of the third quarter, clear signs indicate a return of El Nino — the climatic phenomenon (possibly exacerbated by climate change) that can severely affect agriculture, fishing and physical infrastructure. Non-official expectations expect growth of around zero or even to be negative. El Nino may also have negative consequences for 2024, challenging official expectations of a 3% recovery.
Slow growth rates mean that the economy will fail to absorb new entrants into the labor force. Along with Bolivia, Peru has one of the largest informal sectors of well over 70% of the labor force. Poverty rates have also been increasing since the onset of the pandemic, along with other indices of social deprivation. High rates of inflation in 2023, reaching 8.7% in January 2023, have seriously eroded real standards of living. Slow growth rates have also affected government finances, with the tax take falling to 15.7% of GDP in the second quarter.
These factors further exacerbate feelings of antagonism toward the Boluarte administration, already stimulated by the way in which it replaced the government of elected President Pedro Castillo in December 2022. The new government confronted weeks of serious rioting in December 2022 and January 2023, with over 50 protestors killed. The government remains precariously dependent on the goodwill of right-of-center parties in Congress, which have shown a strong appetite for using their leverage to gain political influence at the expense of the executive and judiciary. Many members of Congress face accusations of having links to corruption.
Peru remains intent on achieving full membership of the Organisation for Economic Co-operation and Development (OECD). This would further lock in the liberalizing reforms that have taken place since the 1990s; however, this remains highly uncertain. The weakness of the Boluarte administration, coupled with challenges to the rule of law, remains a bone of contention. Also, the OECD points to the low tax take, the size of the informal economy and the spread of corruption. In a recent report published in September 2023, while praising aspects of the country’s economic policies, the OECD is critical of what it sees as the deteriorating rule of law.
The Boluarte government’s term ends in July 2026. The prospect of early elections has receded, and the government seems committed to serving out its full term; however, its ability to do so remains in doubt. Levels of public hostility toward President Dina Boluarte remain high (over 80% in opinion polls) and are even higher toward Congress (over 90%). Peru’s political institutions remain weak and representative parties virtually non-existent. Further upsurges of public protest cannot be ruled out in the medium term.
Pedro Castillo’s removal as president in December 2022 reduces the risk of expropriation. Although in his election campaign he had promised to nationalize extractive industries, in practice his government did nothing to realize this objective. Since taking office, the Boluarte administration has adopted pro-business policies explicitly designed to attract foreign investment, particularly in the mining sector. Alex Contreras, the minister for economy and finance, is a technocrat, whose policy moves are supported by Confiep, the main business confederation. The government has discarded attempts by the Castillo administration to raise the burden of mining taxation.
With an orthodox economist as central bank president, the main economic decision-making offices are in pro-business hands. The main risk comes from fiscal profligacy within Congress and the attempts by Congress to assert itself over areas of competence within the responsibility of the executive. For example, Congress has threatened to decapitalize further the pension system by enabling families to draw down their savings early. The OECD, of which Peru aspires to become a member, issued a recent report backing the overall direction of macroeconomic policies but criticizing Peru’s failure to curb corruption and tackle high rates of informal employment. OECD membership would add to guarantees against expropriation.
The period since Boluarte took over from Castillo in December 2022 has been marked by recurrent protests at the way the former president was removed from office; however, these have diminished in intensity since the first quarter of 2023. Roadblocks paralyzed activities in several of Peru’s larger mines in January and February, although production was back to normal by midyear.
Risks of violent confrontations between communities and mining companies remain. These have forced suspension of production, especially along the “mining corridor” linking mines in the Apurimac and Cuzco regions with ports on the Pacific coast in the Arequipa region.
Some large projects remain frozen due to the failure of companies to receive a “social licence” to develop mining operations. The Ombudsman’s Office (Defensoria del Pueblo) plays a significant role in trying to avert conflict. Larger mining operations recognize the high costs of conflict and have sought to pre-empt them through negotiating with communities.
The remnants of the Sendero Luminoso insurgency remain active in an area known as the Vraem, where the majority of Peru's coca is produced. The group is now primarily involved in drug trafficking. There have been periodic attacks on police and army patrols. Though coca cultivation is not as widespread in Peru as in Colombia, it is on the rise. The government is trying to encourage a switch from coca to legal crops, but the lack of state presence on the ground continues to make progress difficult.
Peru remains committed to free trade principles, and, despite its unpopularity, the Boluarte government has resisted pressures to introduce anti-dumping measures to protect local industries from the surge in textile and clothing imports from China.
The government is negotiating free trade agreements with several Asian trading partners, including India. Increased world prices for fertilizer and oil have increased Peru’s import bill, but exports in 2022 reached a new record of US$66.2 billion, up 4.2% on 2021.
The exchange rate, which fell abruptly with Castillo’s election, has stabilized at around 3.70 Peruvian sols to the U.S. dollar. There is no real risk of exchange controls being introduced.
Return to contents Next Chapter
Buoyant exports, coupled with high reserves, signify little chance of balance of payments difficulties in what remains of 2023. Fiscal difficulties, exacerbated in 2020 and early 2021 by the effects of the COVID-19 pandemic, have dissipated, and the deficit for 2023 is likely to be in the region of 1.6% of GDP.
Peru’s tax take as a proportion of GDP remains low by Latin American regional standards. The outlook for mineral exports, a key source of both foreign exchange and tax income, has benefited from the entry into full production this year of Anglo American’s large Quellaveco copper mine in the Moquegua region.
