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Expropriation Risk: 43 40 40 44 Political Violence Risk: 56 54 56 57 Terrorism Risk: 35 35 36 35 Exchange Transfer and Trade Sanction Risk: 39 39 38 38 Sovereign Default Risk: 38 38 39 39
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President Martin Vizcarra used his Independence Day speech to Congress on July 28 to announce his intention to bring forward the 2021 presidential and legislative elections to mid-2020. Vizcarra’s proposal to move the elections is the latest chapter in the ongoing feud between the executive and Congress over passage of political and judicial reforms that Vizcarra argues are needed to curb corruption. Last year, he bypassed the legislature by putting a judicial reform package directly to the country in a referendum, which he won by a large margin in December. However, the Fuerza Popular (FP) has continued to frustrate political reform efforts and Vizcarra threatened in June to dissolve Congress if it continued to impede his proposals. The FP responded by passing a new law stripped of a central Vizcarra provision that would have seen the Supreme Court, rather than Congress itself, decide when to lift parliamentary immunity from individual members. Several FP members currently face accusations of illegal activities. New testimony continues to detail the extent to which Odebrecht, the Brazilian construction company, bribed the country’s leading politicians over many years to secure contracts. Those identified include four former presidents: Alejandro Toledo, now facing extradition to Peru from the United States; Alan Garcia, who committed suicide in April as police arrived at his home to arrest him; Ollanta Humala, who awaits trial; and Pedro Pablo Kuczynski, who is under house arrest. There are also allegations against FP leader Keiko Fujimori, currently in jail, and two former Lima mayors. Meanwhile, the economy remains heavily exposed to slowing growth in China, which is by far Peru’s largest export market and the main source of foreign investment. Domestic demand has been providing some strength recently but now seems to be faltering. Peru’s growth in the first four months of 2019 was just 1.7% year-on-year, compared to an annual rate of 4% last year, and forecasts for 2019 have been downgraded to around 3.5%. If growth continues to slow, unemployment and poverty levels will begin to rise, which may also factor into Vizcarra’s call for early elections. The deal reached in June to import Bolivian LNG should improve the energy situation for Peruvian companies while helping Bolivia to export its gas through Peru’s ports.
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Although Peru continues to rely heavily on the mining sector, new projects have been repeatedly held up at the local level and successive governments in Lima have waivered when faced with strong localised opposition. At the start of 2019 the government indicated that six mining projects with a total value of 3.4 billion dollars would start this year. However, one has already been abandoned by Barrick Gold, while Glencore's Coroccohayco is the subject of a dispute over prior consultation with local stakeholders. By far the most valuable at 1.4 billion dollars is Southern Copper's Tia Maria project located in the fertile Tambo valley in Arequipa. This has been on hold for nearly a decade awaiting a final government go-ahead. After heavy lobbying from business groups including Confiep, the private business confederation, which is seeking greater government support for mining companies, in July the Vizcarra administration gave qualified support for operations to start at Tia Maria. However, this was quickly rescinded in August after violent protests by local farmers. The prospect of early elections next year, which would feature a new generation of candidates, adds uncertainty to the business environment.
As a former governor of the southern mining region of Moquegua, President Vizcarra has a good track record in efforts to build an effective process to ensure that community consultation provides extractive companies with a ‘social licence’ to operate. This approach appeared to work at the Las Bambas copper mining complex earlier this year when the Catholic Church helped broker a settlement providing compensation for damage to farmland. However, such agreements can easily unravel. In August, there were violent protests in Islay province in Arequipa region against the government’s support for the large Tia Maria copper mining project, and several mining-related conflicts continue in the nearby Cuzco region. As Vizcarra concentrates on battling Congress over reform legislation, the mining sector has lost some of his attention. But he now faces the political challenges associated with developing a major lithium and uranium mine in Puno, close to the Bolivian border. An anti-mining candidate won the October 2018 regional governorship election, and Puno has a history of violent protests against mining projects.
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The remnants of the Sendero Luminoso insurgency remain active along the valleys of the Apurimac, Ene and Mantaro rivers in an area known as the Vraem, where the majority of Peru's coca is produced. Once an ideological terrorist group, Sendero is now primarily involved in drug trafficking. Though coca cultivation is not as widespread as in Colombia, it is on the rise. The government plans to invest 5.5 billion dollars in the area by 2021 in an attempt to promote both economic development and the rule of law by encouraging a switch from coca to legal crops.
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Annual inflation fell back to 2.1% in the first seven months of 2019. This is down from the first quarter figure of 2.25% and is comfortably within the central bank’s 1-3% target range. The sol has been steady in recent months despite the recent political upheavals. The central bank cut its key rate by 25 basis points in August to 2.5% after making a similar cut last year to stimulate growth, but does not expect to make a further cut again this year.
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The Peruvian economy remains tied to Chinese demand for its main mineral exports of copper, gold and zinc. Copper exports declined by 12% year-on-year in the first half of 2019, reversing the increase achieved in 2018 when their value rose close to 15 billion dollars. The increase in mining revenues has helped to narrow the fiscal deficit in the last two years but falling sales so far this year suggest that it will widen again. However, with total foreign debt at 25% of GDP and foreign reserves at around 30% of GDP, Peru does not face a short-term or even a medium-term balance of payments problem.
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