Previous Quarterly Editions
Expropriation Risk: 40 40 44 45 Political Violence Risk: 54 56 57 58 Terrorism Risk: 35 36 35 35 Exchange Transfer and Trade Sanction Risk: 39 38 38 37 Sovereign Default Risk: 38 39 39 39
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The fractious relationship between President Martín Vizcarra and the opposition-led Congress, which had been deteriorating during the first half of 2019, came to a head at the end of September when Vizcarra dissolved Congress and called new elections for the end of January. The central issue between the two branches was over appointments to the Constitutional Tribunal (TC), which Congressional leaders had threatened to pack with supporters who would block Vizcarra’s move to bring forward the elections. Vizcarra, like his predecessor Pedro Pablo Kuczynski, had been locked into the feud between his government and the pro-Fujimori opposition majority in Congress over the passage of political and judicial reforms intended to root out corruption in public life. In December 2018, those reforms were approved by a large majority in a referendum and public opinion has remained with Vizcarra during 2019. However, it remains unclear how much the new legislature elected in January will differ from the previous one. This is because, in a controversial decision, the electoral court decided in November to allow members of the previous legislature to seek re-election for consecutive terms. This is despite the fact that the 2018 referendum had strongly approved a measure to prevent consecutive terms, which are widely seen as being used by some members to prolong their immunity from prosecution. At the end of the year, new cases came to light of the illegal funding of political parties. A financial group that includes Peru’s largest commercial bank admitted paying 3.5 million dollars in illegal contributions to the 2011 election campaign of Keiko Fujimori, while a major agribusiness group admitted payments both to Fujimori in 2011 and to Kuczynski in 2016. At the end of 2019, Fujimori won her appeal to the TC to end a year of preventive detention on illegal financing charges, but she has lost the ability to distinguish herself from other politicians tainted by corruption. As Peru goes further than many Latin American countries in investigating corrupt political financing, it is learning of the extent to which drug traffickers, money launderers, and illegal mining operations, as well as legitimate businesses, have been seeking political influence through funding the campaigns of specific candidates. This, in turn, has been possible because political parties have largely lost touch with their original support bases, leaving them open to alternative sources of financing.
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The Vizcarra administration has continued with the pro-business policies of its predecessors. However, it has also continued Lima’s erratic responses to local protests against some of the large mining projects that promise to contribute to economic growth. Emblematic of these has been the ongoing dispute over Tia Maria, a large copper project in the Arequipa region. Local farmers have mounted protests, often violent, to stop development of the mine by Mexican-owned Southern Peru Copper. Another major dispute centres on the Las Bambas copper mine in Apurimac, owned by Chinese-owned consortium MMG. Communities have repeatedly blocked access roads following MMG’s decision to amend its environmental impact statement and use trucks for transporting minerals to port rather than build a conveyor pipeline as promised. Lima’s prevarication in the face of these protests has led to criticism from business lobbies for failing to pursue pro-investment policies with sufficient vigour. Moving legislative elections to January and the prospect of a presidential election in either 2020 or 2021, as well as the fallout from the political funding scandal, just adds to the prolonged period of uncertainty for businesses and investors.
When he was governor of the southern mining region of Moquegua, President Vizcarra had a good track record in efforts to ensure that community consultation provided extractive companies with a ‘social licence’ to operate. However, such agreements can easily unravel. In September and October 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. There remains great potential for unruly opposition to mining and other extractive projects, 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, Junín, and Moquegua, as well as Arequipa. 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.
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The remnants of the Sendero Luminoso insurgency remain active along the valleys of the Apurímac, 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. However, the lack of state presence on the ground continues to make pacification difficult.
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Inflation fell back below 2% during 2019 on lower than expected domestic demand and ended comfortably within the central bank’s annual target range of 1-3%. The sol depreciated by less than 1% during the year despite the continuing political upheavals. These two factors allowed the central bank to cut its key rate by 25 basis points in November to 2.25%, following a similar cut in August, in hopes of stimulating growth in 2020 above the 3% seen in 2019.
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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 10% during 2019, reversing the increase achieved in 2018 when their value rose close to 15 billion dollars. However, an overall increase in mining revenues has helped to narrow the fiscal deficit in the last two years to 1.6% of GDP. With total foreign debt at around 26% of GDP and foreign reserves at close to 30% of GDP, Peru does not face a short-term or even a medium-term balance of payments problem.
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