Previous Quarterly Editions
Expropriation Risk: 44 45 44 42 Political Violence Risk: 57 58 55 56 Terrorism Risk: 35 35 33 33 Exchange Transfer and Trade Sanction Risk: 38 37 40 40 Sovereign Default Risk: 39 39 43 43
TREND ▼ OUTLOOK ▲
In spite of some of the most vigorous action taken anywhere in Latin America to contain the spread of COVID-19, Peru was ultimately overwhelmed by the virus. By mid-July 2020, the country had recorded over 12,000 deaths, second only to Brazil in Latin America, from over 330,000 cases. These figures may see another spike following an easing of lockdown restrictions in July 2020. Although the initial focus of the pandemic had been in Lima, COVID-19 has now spread widely, especially to the north and the Amazonian regions of Loreto and Ucayali. The high numbers reflect the weaknesses of the health system but also the difficulties in imposing social distancing in circumstances of overcrowded housing and informal patterns of employment. The economic impact has been brutal. Official figures show a year-on-year drop in output of 40% in April 2020 and a further 30% in May 2020. By June 2020, the central bank was projecting a contraction of 12.5% for 2020, the biggest drop since the 1930s, and figures from the national statistics agency showed that some 2.3 million people had lost their jobs. Many will remain without proper jobs when the virus finally recedes, further boosting the size of an informal sector that was already accounting for two-thirds of the workforce before the COVID-19 pandemic. Despite the social and economic stress, President Martín Vizcarra’s popularity has remained high, with polls in June 2020 showing 70% agreeing that he was pursuing appropriate policies, down only ten points from the outset of the crisis in mid-March 2020. His response has been centred on massive financial support for firms and individuals that totals 12% of GDP. In May 2020, the government began a cautious opening-up of the economy, with larger companies invited to restart production subject to health protocols. This was followed in June 2020 by further moves to encourage smaller firms to return to work, along with a new scheme for generating employment called Arranca Peru (Peru Start-up). However, members of Congress have increasingly adopted their own legislative initiatives, such as allowing savers to withdraw up to 25% of their pension plan investments. Keen to avoid a constitutional clash, the government has had to accept some of these initiatives. Some congressional leaders evidently plan to use this policy visibility to launch campaigns for the April 2021 presidential election. Vizcarra cannot stand for re-election, and the outcome of the election is far from clear. He may seek to endorse a centrist candidate to succeed him and, so long as his public support remains strong, he is likely to have considerable influence over who wins from what is likely to be a crowded field.
Although the COVID-19 pandemic has led to an unprecedented extension of state powers, these will be temporary and will not be used to make the business environment more onerous. Instead, the Vizcarra administration will not deviate far from the pro-business policies seen in recent years. The pandemic has led to localised disputes between some mining companies and unions but these centred on safety provisions for the workforce and opposition to longer shifts as mining activity resumed in May 2020. Otherwise, protests and demonstrations by communities against mining have been put on hold by the COVID-19 pandemic. 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. Proposed changes to legislation for the sector published in June 2020- which are intended to reduce conflicts with communities- are likely to run into opposition from mining companies.
TREND ▲ OUTLOOK ▲
President Vizcarra has managed to sustain support for successive government moves to prolong the tough lockdown measures introduced in March 2020. One-off payments are being made to vulnerable social groups, especially those in the informal sector and in rural areas, with the so-called 'bono universal' payment of around 230 USD being targeted at some 2.8 million families not in receipt of wages. However, as the virus has spread across the country, its economic impact has widened and poverty rates are rising. There is growing demand from indigenous communities for greater protection from the health and economic impacts of the pandemic and protests against mining projects will resume after the emergency is lifted. They are especially likely 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, 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 trying to encourage a switch from coca to legal crops but the lack of state presence on the ground continues to make progress difficult.
Faced with the slowdown caused by COVID-19, the central bank cut its reference rate to 1.25% in mid-March 2020 and again by a full 1% to 0.25% in April 2020. The central bank has also accelerated depreciation of the sol. Economic activity has been affected by a sharp decline in both domestic and external demand as well as the drop in production brought about by the lockdown. A speedy V-shaped recovery in the second half looks implausible and, despite government efforts, it may take years rather than months to fully restore output to 2019 levels.
TREND ► OUTLOOK ►
Peru’s dependence on China, as the main market for its minerals, had already led to a sharp decline in exports even before COVID-19 hit. Lima is hoping that an early revival in Chinese demand may lead to an export recovery by the end of 2020, especially for copper shipments as Peru’s main mines expect to restore production levels by the end of the third quarter in 2020. However, mineral prices will remain subdued, except for gold. The government’s expansive COVID-19-related spending, coupled with a sharp drop in tax receipts, will push up the fiscal deficit substantially this year (2020). Government borrowing will help at least part fund this. International reserves declined only modestly in the second quarter of 2020 and, despite increased foreign borrowing this year, Peru does not face immediate debt repayment problems.
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