Previous Quarterly Editions
Expropriation Risk: 53 52 56 56 ►Political Violence Risk:66 51 57 57 ►Terrorism Risk:33 30 30 30 ►Exchange Transfer and Trade Sanction Risk: 55 44 45 45 ►Sovereign Default Risk:47 37 47 55 ▲
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Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : High LowAll protest: Medium Very High
Cost-of-living protest risk in 2023*Wage protest: LowFood/fuel policy protests: 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 calculations, see the introductory essay.
Inflation (the Lima Consumer Price Index) recorded an annualised 8.65% at the end of February, up from 7.88% for 2022 and 3.98% for 2021, according to figures from the central bank (the acronym for which is BCRP). Excluding fuel and food from the index, annual inflation was running lower in February at 5.62%, suggesting items particularly sensitive to poorer sectors of the population were running higher (12.05%) than other prices. Inflation outside Lima was generally higher than in the capital.
Monthly inflation is expected to be higher in March than in February, due to shortages of some foodstuffs due largely to unseasonal rains causing damage to transport infrastructure through landslides and widespread flooding. Inflationary pressures were also generated in 2022 by the effects of the Russian/Ukraine crisis since February 2022, on energy, fertilizer, and grain prices.
High inflation has been a contributory but subsidiary cause of widespread protests and rioting throughout much of Peru during the last three months. These were triggered by the removal of the left-wing President Pedro Castillo following an impeachment vote in Congress. Protestors were rejecting the government of President Dina Boluarte who replaced Castillo. Although Castillo’s vice-president and therefore his constitutional successor, Boluarte lacks the grass-roots support enjoyed by Castillo among the large swaths of poorer voters who backed him as ‘the people’s candidate’ in the 2021 elections.
The Boluarte administration’s use of strong-arm police and army tactics to confront demonstrations in the south of the country has been widely condemned. Some 60 people were killed in protests during December and January. Boluarte’s popularity ratings plumbed new lows in late March when, according to the Institute for Peruvian Studies (or ‘IEP’), only 15% of those interviewed approved of her performance in office. Her disapproval rating reached more than 82% in the south of the country.
Boluarte lacks any organized backing in the Congress and is dependent on the votes of centre-right and far-right parties. Congress is even more unpopular than the President with a disapproval rating of 91%, according to the IEP. Congress has evaded public demands for presidential and congressional elections to be brought forward to this year or 2024. Boluarte has also refused to resign, a move that would trigger fresh general elections.
The economic climate is not such as to help boost support for the government. Despite official projections of growth this year of over 3%, it seems unlikely GDP will exceed last year’s lacklustre 2.7%. A 1.1% decline in January’s monthly GDP variation reflected the effects of disturbances and roadblocks, particularly in the mining (minus 3.6%) and construction (minus 11.7%) sectors.
The BCRP, under its conservative President, Julio Velarde, has maintained high interest rates in response to the rise in US rates. The BCRP’s basic rate remained at 7.75% in March, up from 4% a year earlier. The BCRP expects inflation will fall to its 3% long-term target by the end of the year. This would enable a reduction in its basic rate and thus help foster medium-term GDP growth in the domestic economy.
Peru’s international credit standing remains relatively strong with high international reserves and a modest debt profile. Revival of growth in China bodes well for the all-important mining sector in Peru, with average copper prices fairly buoyant at just under USD4 per tonne in the first three weeks of March.
TREND ►
Castillo’s removal as President in December 2022 reduces the risk of expropriation. Although in his election campaign he had promised to nationalise extractive industries, in practice his government did nothing to realise this objective. The Boluarte administration has adopted pro-business policies more 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 have been constrained by the right-wing majority in Congress. The government has thrown out attempts by the Castillo administration to raise the burden of mining taxation.
With Velarde, 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 hitherto the responsibility of the executive. For example, Congress has threatened to decapitalize further the pension system by enabling families to drawdown their savings early. The Constitutional Tribunal, recently elected by Congress, has also ruled the tax authority, known as SUNAT, should not charge interest on late payment of taxes owed by companies.
The period since Boluarte took over from Castillo in December 2022 has been marked by widespread political protests at the way the former President was removed from office. Though still ongoing, especially in the south, the scale of protests diminished in March. Roadblocks paralysed activities in several of Peru’s larger mines in January and February, although production was back to near-normal at the end of March.
Risks of violent confrontations between communities and mining companies remain. These have forced suspension of production, especially along the ‘mining corridor’ linking mines in Apurimac and Cuzco regions with ports on the Pacific coast in Arequipa region.
Some large projects remain frozen due 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 fertiliser and oil have increased Peru’s import bill, but exports in 2022 reached a new record of USD65.8 billion, up 4.3% on 2021. The exchange rate, which fell abruptly with Castillo’s election, has stabilised at around PEN3.80 to the US dollar.
There is no real risk of exchange controls being introduced.
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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. The outlook for mineral exports, a key source of both foreign exchange and tax income, will benefit from the entry into full production this year of Anglo American’s large Quellaveco copper mine in Moquegua region.
