Previous Quarterly Editions
Expropriation Risk: 44 45 52 52 ► Political Violence Risk: 48 48 48 59 ▲ Terrorism Risk: 33 33 33 33 ► Exchange Transfer and Trade Sanction Risk: 55 45 45 45 ► Sovereign Default Risk: 37 37 27 37 ▲
TREND ▲
Congressional approval of the left-wing cabinet in a vote of confidence on August 27 provided temporary political relief to the Castillo administration from opposition pressures. Congress voted 73 to 50 (with no abstentions) to approve the government’s programme as previously outlined by Prime Minister Guido Bellido.
The government, which lacks a parliamentary majority, benefitted from splits in the opposition. Hard-line right-wing parties, including Renovación Popular (Popular Renovation, RP), Fuerza Popular (Popular Force, FP) and Avanza País (Forward Country, AP), voted against granting a vote of confidence. They characterise the government as Marxist and aligned with Venezuela and Cuba.
However, several centrist and centre-right parties endorsed the new administration. They included Acción Popular, (Popular Action, AP), the Alianza para el Progreso (Alliance for Progress, APP) as well as some other smaller parties. Together with the ruling Perú Libre (Free Peru, PL) party and its left-wing Juntos por el Perú (Together for Peru, JPP) allies, this was sufficient to win by a larger-than-expected majority in the unicameral 130-seat Congress.
Despite this fillip for the government of President Pedro Castillo, it is only a temporary respite, with the far-right opposition threatening to impeach individual ministers one by one. One such likely victim is Iber Maravi, the labour minister. It is unclear whether those parties who ended up supporting the vote of confidence will back such moves; in doing so they argued that it was necessary for the new government, which was sworn in on July 29, to prove itself.
However, political instability is likely to dog the Castillo government going forward. Castillo has yet to show his ability to exercise presidential authority and steer a consistent policy course. While facing a hostile legislature, he is under pressure from the far left to maintain the radical programme of reforms on which he was elected and PL emerged as the largest single bloc in parliament.
PL’s general secretary, Vladimir Cerron, exercises considerable power over Castillo and the cabinet from the political margins. However, he still faces the possibility of being jailed for corruption in his former role as governor of Junin region.
The government has already retreated from its initial promises, such as nationalising all extractive industries. Instead, it is seeking to restore economic stability. This emerged as a priority in Bellido’s speech to Congress on August 26-27. The speech also suggested that the controversial proposal to rewrite the constitution through an elected constituent assembly has been relegated as an immediate priority.
As a result of COVID-19, the economy contracted by 11% in 2020, with a resultant loss of some 2 million formal sector jobs, with average incomes falling significantly.
TREND ►
Despite business alarm caused by the election of Castillo as president, the government has moved to try to reassure business opinion as to its intentions. Economy Minister Pedro Francke has shrunk from policies that would put investor confidence at risk. He has invited the long-serving orthodox economist, Julio Velarde, to stay on as president of the central bank.
Initial proposals to nationalise extractive industries have been abandoned. Instead, Francke has sought to calm business nerves with announcements about the need to maintain relatively conservative fiscal and monetary policies. He has consistently stressed the need to attract foreign investment, especially in the all-important mining sector. Mining Minister Ivan Merino has been swift to hold meetings with mining executives to reassure them about the government’s intentions. Fears about creating macroeconomic instability will trump the more ‘populist’ orientations, at least over the short to medium term.
The election of the new government, coupled with 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 and new tensions have emerged especially in southern Peru.
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 quick approval now seems unlikely. 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. Tensions remain along the so-called ‘mining corridor’ in Apurimac and Cuzco along which copper is transported to port from the Chinese-owned Las Bambas mine.
The Castillo government has outlined its criteria for siting new mining developments, known as ‘social profitability’ (rentabilidad social). This involves limiting mining to areas where mining activity brings demonstrable and sustainable economic benefits to local communities. Despite past attempts to introduce policies to reduce conflicts over mining, these have had little practical effect. The state lacks the political ability to forestall protest, especially in more remote areas, as well as the ability to quell protests without risking a recourse to violence once they occur. Once violent conflict erupts, it becomes difficult to restore trust.
COVID-19 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. Protests in Lima in November 2020 at the impeachment of President Martin Vizcarra led to days of demonstrations in which two people died and many were injured. This year’s elections also saw violent conflict on the streets of Lima.
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 raised its reference rate to 0.5%, having previously held it at 0.25% since the pandemic first struck in March 2020. Despite central government interventions, capital flight since Castillo’s victory has fed through into faster depreciation of the sol. This stood at 4.10 to the US dollar, compared with 3.60 prior to the election. This is likely to push up inflation, already above the central bank’s 3% target ceiling.
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. Improved trade performance is expected to lead to balance or even a slight surplus on 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 8.9% of gross domestic product. With favourable global economic conditions, this should fall in 2021, aided by increased export activity. In the meantime, the government has resorted to increased borrowing to cover spending needs. High international reserves mean that, despite increased foreign borrowing, Peru should not face immediate debt repayment problems.
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.
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