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Expropriation Risk: 44 44 45 52 Political Violence Risk: 48 48 48 48 Terrorism Risk: 33 33 33 33 Exchange Transfer and Trade Sanction Risk: 55 55 45 45 Sovereign Default Risk: 37 37 37 27
TREND ►
The first-round presidential election victory of Pedro Castillo, who won just over 19% of the vote in April 2021, reflects deep antipathy towards the political class, especially in areas outside Lima. This has been exacerbated by a legacy of corruption scandals affecting senior politicians and several past presidents and by the effects of the COVID-19 pandemic on Peru’s most vulnerable people.
Support for Castillo, who far surpassed that of Veronika Mendoza, the more established left-wing candidate, was particularly strong in those parts of the highlands where indigenous communities have confronted mining companies. Castillo was in contention with no less than 17 other candidates. Failure to win a plurality of votes means he will confront his runner-up, Keiko Fujimori, in a second round in early June 2021.
Although Fujimori won only 13% of the vote, she is likely to receive support from other right-wing candidates opposed to Castillo, widely viewed as a left-wing firebrand. These include Rafael Lopez Aliaga, a far-right candidate; Cesar Acuna, founder of the Alliance for Progress party; and the liberal economist Hernando de Soto.
However, the second round of Peruvian elections is a separate contest from the first, with each candidate shifting towards the centre in seeking to attract support as the lesser of two evils. Fujimori, who narrowly lost in the second round in 2011 and 2016, is likely to suffer from identification with corruption scandals. She has spent over a year in jail, accused of receiving large illicit donations to her previous campaigns from Odebrecht, the Brazilian construction firm at the centre of the Lava Jato scandal. She, in turn, depicts Castillo as a dangerous radical who would put Peru’s post-pandemic economic recovery at risk by scaring away investors.
Fujimori receives strong support from the business sector as well as the conservative press. Castillo appeals to support from those who have suffered most from the pandemic and Peru’s halting response to it. The contest is proving vitriolic and polarising.
Whoever wins the presidency will face a fragmented Congress with ten or eleven parties represented in it. Most parties are ill-disciplined and unrepresentative of public opinion. Within the unicameral Congress, Castillo’s party, Free Peru (Peru Libre, PL) will be the largest with 35 out of 130 seats. Fujimori’s Popular Force (Fuerza Popular, FP) will have 24 seats. However, with support from other conservative groups, Fujimori would come close to counting on a parliamentary majority. Governability will prove problematic, and politics may become more unstable.
TREND ▲
The election result places considerable doubt as to the course of future policy. If Castillo wins, it is likely to lead to a more interventionist administration which could seek to extend public ownership. He has promised to reform the pro-business constitution of 1993, or at least its economic chapter. This would lead to confrontation with Peru’s powerful business elite and could prove politically destabilising.
If Fujimori wins, it will reinforce the status quo and provide significant guarantees to private property. She would seek to facilitate private investment in the mining sector, although deregulation of state controls over mining could provoke further conflicts between companies and communities in the vicinity of mining operations. Whoever wins, there are likely to be moves to raise the threshold of taxation and this will affect both companies and individuals.
The gradual easing of COVID-19 lockdown rules will increase the prospects for political violence arising from conflicts between communities and mining companies. These are the most common source of contention, according to the Ombudsman’s office. Restrictions and the impact of COVID-19 on communities led to reduced incidence of conflict. However, few cases of conflict have been resolved.
A state of uneasy tension persists in Arequipa, where Southern Peru Copper’s controversial Tia Maria mining project awaits a government decision on go-ahead, but this is unlikely before a new administration takes over in July 2021. In Cuzco, conflict has persisted through lockdown at Glencore’s Antapaccay project over the use of earmarked funds normally for community development to provide local communities cash payments to offset the effects of the pandemic. Development of a controversial gold project at Tambogrande, in Piura region, has been postponed because of community opposition.
The outgoing Sagasti government has sought to introduce a scheme to fund infrastructure in those communities willing to negotiate in good faith with mining companies. It will fall to a new government, however, to look for ways of reconciling the interests of communities with those of mining companies. The state lacks the political ability to forestall protest, especially in more remote areas, as well as the practical ability to quell protests without risking a recourse to violence once they occur.
The COVID-19 pandemic has led to increased unemployment and a rise in those living in poverty, only partly mitigated by subsidies to vulnerable groups. This may result in increased social tension once restrictions on mobilisation are removed. In November 2020, the protests in Lima, in reaction to the impeachment of President Martin Vizcarra, led to days of demonstrations in which two people died and many were injured.
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.
The central bank has maintained its reference rate at 0.25%, having lowered it from 1.25% when the pandemic first struck in March 2020. It has also accelerated its depreciation of the sol. Economic activity in 2021 is set to recover from its 11.1% contraction in 2020, but output is unlikely to regain pre-pandemic levels until well into 2022. With COVID-19 still raging, much will depend on the speed at which vaccinations can be rolled out. Recovery has been spurred by increased external demand for minerals- especially copper, for which prices have risen.
TREND ▼
Peru’s dependence on China as the main market for its minerals has led to a sharp increase in exports of copper and other minerals. Most of Peru’s major mines were able to recover pre-pandemic output levels by the end of 2020, with the government moving early to release them from strict lockdown rules.
Improved trade performance is expected to lead to balance or even a slight surplus on the current account. The government’s expansive COVID-19-related spending, coupled with a sharp drop in tax receipts, pushed up the fiscal deficit substantially in 2020 to 9% of gross domestic product, but this should fall in 2021, aided by increased export activity.
The government has resorted to increased borrowing to cover spending needs. High international reserves mean that, despite increased foreign borrowing, Peru does not face immediate debt repayment problems.
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