Previous Quarterly Editions
Expropriation Risk: 40 44 45 44 Political Violence Risk: 56 57 58 55 Terrorism Risk: 36 35 35 33 Exchange Transfer and Trade Sanction Risk: 38 38 37 40 Sovereign Default Risk: 39 39 39 43
TREND ▲ OUTLOOK ▲
The onset of the COVID-19 virus has had a deeply unsettling impact on prospects for the Peruvian economy but has reinforced, at least in the short term, the degree of public support for the government of President Martín Vizcarra. Although the virus spread relatively late to Peru, the extent of the impact was already becoming apparent at the end of March 2020. Overcrowding in Peru’s poorer neighbourhoods, where most work involves contact with others, increases the opportunities for infection, and the government’s aim has been to hold back demand on the country’s healthcare services. Peru's hospital system is divided into a relatively well-equipped private sector that has very limited capacity to deal with large numbers of cases and a public system with greater capacity but poorly provisioned with equipment and personnel. In mid-March 2020, President Vizcarra enacted a two-week state of emergency to deal with the pandemic, which was subsequently extended into April 2020. This closed Peru’s frontiers in a move that left large numbers of foreign tourists stranded in the country, suspended school and university classes, imposed a night-time curfew, and restricted families to their homes other than to shop for essential food or medicine. The decision to mobilise troops to patrol the streets alongside the police to enforce these rules might have been a risk if Vizcarra did not already enjoy strong backing, but having already fought and won a number of battles with the legislature last year with the help of public support, his prompt and draconian response pushed up his approval rating still further and helped to silence opposition. At the end of March 2020, Congress gave the government powers to legislate on an emergency basis for 45 days on matters relating to public health. In the elections that were brought forward to the start of 2020, parties supporting the government won a majority of seats. The outcome was a severe blow to the pro-Fujimori Fuerza Popular (FP) party which, since 2016, had enjoyed an absolute majority in Congress. Vizcarra had faced unrelenting opposition from the FP but managed to use his constitutional powers to close down the previous Congress last September (2019) and order fresh elections. Even with the seriousness of the virus situation, Congress will be under pressure to approve a range of president-supported reforms to the political system well in advance of the next elections. The first round of these is due to be held in April 2021, with a likely second round in May or June the same year. Vizcarra is not standing in next year’s presidential election, which strengthens his ability to take difficult political decisions in the coming months, but it also means that another issue underlying Peru’s response to the virus is who will succeed him.
TREND ▼ OUTLOOK ▲
Although the COVID-19 pandemic has led to an unprecedented extension of state powers, these will be temporary and are not expected to encompass any expropriation of private assets. Instead, the Vizcarra administration will continue the pro-business policies seen in recent years. The pandemic has led to localised disputes with mining companies generally being put on hold as operations shut down and emergency rules effectively prevent protests and demonstrations. However, these disputes remain unresolved and will continue to be a problem for local and national government. They include protests by local farmers against the Tia Maria copper project in Arequipa region operated by Mexican-owned Southern Peru Copper and the Las Bambas copper mine in Apurimac, owned by Chinese-owned consortium MMG. Lima’s prevarication in the face of these protests has led to criticism from business lobbies of its failure to pursue pro-investment policies with sufficient vigour, but the fall of global copper prices by 20% this year as a direct consequence of a virus-related collapse in demand may change the landscape for all sides once the crisis is over.
In the short term, President Vizcarra has widespread support for his tough measures to tackle COVID-19. Poor households have been offered a subsidy to offset social hardship and a programme of credit for affected firms has been announced. However, there have already been signs that street traders in Lima, which has the majority of the country’s cases, may resist attempts to dislodge them. Over 70% of the Peruvian workforce is in the informal sector, with many already in a precarious financial position. A protracted economic shutdown could generate violent protest, particularly in rural areas where poverty is deepest and health resources are scarce to non-existent. It is also likely that protests against mining projects will resume after the emergency, especially in the south of the country where dissident governors were elected in 2018 for regions such as Puno, which has a particularly contentious project involving lithium and uranium mining. The state lacks the political ability to forestall protest in more remote areas, and it also lacks the practical ability to quell protests without risking a recourse to violence once they occur.
TREND ▼ OUTLOOK ►
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, but the group is now primarily involved in drug trafficking. Though coca cultivation is not as widespread in Peru as in Colombia, it is on the rise. The government is spending heavily to encourage a switch from coca to legal crops but the lack of state presence on the ground continues to make progress difficult.
Ahead of the arrival of COVID-19, the central bank lowered its reference rate by a full percentage point to 1.25% in March 2020. The central bank has also accelerated depreciation of the sol. Economic activity is now being affected by a sharp decline in both domestic and external demand and the drop in production brought about by the lockdown, and hopes that growth would double from 2% in 2019 to 4% this year have been abandoned as the World Bank projects that the economy will contract by 4.7% this year.
Peru’s dependence on China as the main market for its minerals had already led to a sharp decline in exports before the impact of COVID-19 on Chinese demand. Peru’s copper exports had already fallen by 10% during 2019, reversing the increases seen in 2018, and the effect of the virus has already pushed global prices down by 20% this year. Lower mining revenues and lower domestic demand, coupled with higher social spending, will push up the fiscal deficit substantially this year from the modest 1.6% of GDP achieved in 2019. However, with total public sector debt of around 26% of GDP and foreign reserves at around 29% of GDP, Peru should not face immediate debt repayment problems.
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