Previous Quarterly Editions
Expropriation Risk: 52 53 53 52 ►Political Violence Risk:59 67 66 51 ▼Terrorism Risk:33 33 30 30 ▼Exchange Transfer and Trade Sanction Risk: 55 45 55 44 ▼Sovereign Default Risk:37 27 47 37 ▼
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
China is Peru’s most important trading partner, having overtaken the U.S. in this regard in 2011. In 2021, exports to China totalled nearly USD17 billion, of which more than 90% consisted of minerals, mainly copper. Imports of Chinese goods have also grown greatly over recent decades, facilitated by a free trade agreement signed in 2009. China is also a key investor in the Peruvian economy, mainly in the mining sector. Two of the country’s largest mining complexes, Toromocho in Junin region, Chinalco, and Las Bambas in Apurimac (MMG) are Chinese owned.
In addition, China also has significant investments in Peruvian infrastructure, and in 2019 Peru signed up to China’s Belt and Road Initiative. The country occupies a strategic position in terms of trade between Brazil and China. However, the construction of a terrestrial highway linking Peru with Brazil has produced disappointing results.
On the health front, China played a key role during the COVID-19 pandemic in supplying Peru, one of the countries most heavily affected, with vaccines and medical equipment.
China has displaced Peru’s traditional dependence on the U.S. as its key investor. European investment in Peru, particularly in mining, has also grown rapidly since the 1990s. However, in its diplomatic relations, the U.S. remains a key player. Peru has sought to balance its ties with Beijing with those with Washington in recent years. Peru sided with the U.S. in seeking to isolate Venezuela, playing a key role in the so-called Lima Group. Peru never became involved in the sort of anti-U.S. nationalism that characterised neighbours Bolivia and Ecuador during the ‘pink tide’.
Washington retains a substantial diplomatic presence in Lima, particularly given Peru’s role as the world’s second largest producer of cocaine after Colombia. To this end, Washington has sought to uphold democratic governance in Peru, playing a major role in 2021 in support of President Pedro Castillo against an opposition that was claiming that the elections were fraudulent. Washington has discreetly sought to encourage Castillo into abandoning his initially radical agenda.
With Russia, Peru has maintained a distance in recent years. Unlike China, Russia is not a significant economic partner. Although Russia gained significant influence in the country in providing military hardware during the left-leaning military dictatorship of the 1970s, those days are long gone. Although respectful, diplomatic relations with Moscow remain cool. Peru has criticised Russia’s February 2022 attack on Ukraine, from which it has suffered economically through higher prices for oil, grains and fertiliser.
Peru will seek to maintain a balance in its foreign policy towards China and the U.S. and is unlikely to heed pressures from Washington to reduce exposure to Beijing. Economic ties with China will become increasingly important given China’s bid to play a key role in the development of energy-saving technologies. These will involve massive supplies of copper and other strategic minerals. Peru is keen to attract Chinese investments in manufacturing since this will help Peru to diversify its economy. However, the relationship is not entirely problem-free. Peru, for example, has been highly critical of incursions into its territorial waters by Chinese fishing fleets. Peru’s relations with Russia are likely to remain polite but distant.
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Despite his initial threats to nationalise extractive industries, Castillo has used his appointments to the finance ministry (MEF) to reassure investors. In July, he replaced Oscar Graham, a technocrat from the MEF, with Kurt Burneo. In early September, Burneo published a list of 36 legislative proposals designed to appeal to the private sector. Absent were moves to increase the burden of mining taxation mooted by Pedro Francke, a predecessor, at the end of 2021.
With Julio Velarde, an orthodox economist, as central bank president, the main economic decision-making offices are in pro-business hands. While the stability of the Castillo government remains at risk of far-right attempts in Congress to remove him, Castillo would probably be replaced by the new speaker of Congress, Jose Williams, a former army general from the far-right Avanza Pais party.
Risks of violent confrontations between communities and mining companies remain. These led to lengthy suspensions of production in the first half of 2022 at Las Bambas and Cuajone, among Peru’s largest mines. Government ministers have sought to mediate these and other conflicts but have so far failed to resolve the underlying issues. These include the use made of community land and scarce water resources. The Ombudsman’s Office (Defensoria del Pueblo) plays a significant role in trying to avert conflict. Larger mining operations recognise 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. 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 annual inflation of 8.4% in August, due to increased import prices for fuels, grains and fertiliser, the central bank has raised interest rates to 6.75%. The exchange rate, which fell abruptly with Castillo’s election, has stabilised at around PEN3.85 to the U.S. dollar. Inflation is expected to end the year at around 7.5%.
Despite political uncertainties surrounding the future of the Castillo government, GDP growth is holding up and should be in the region of 3% in 2022. 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 2022. Fiscal difficulties, exacerbated in 2020 and early 2021 by the effects of the COVID-19 pandemic, have dissipated, and the deficit for 2022 is likely to be in the region of 2.5% of GDP.
The outlook for mineral exports, a key source of both foreign exchange and tax income, will benefit from the entry into production in late 2022 of Anglo American’s large Quellaveco copper mine.
