Previous Quarterly Editions
Expropriation Risk: 47 45 43 40 Political Violence Risk: 58 56 56 54 Terrorism Risk: 35 35 35 35 Exchange Transfer and Trade Sanction Risk: 42 40 39 39 Sovereign Default Risk: 38 38 38 38
TREND ▼ OUTLOOK ▲
President Martin Vizcarra scored a major victory over the opposition-controlled legislature in December 2018 when voters overwhelmingly approved three of his proposals for constitutional reforms that are designed to tackle the pervasive corruption in Peruvian public life. They include changes to the way in which the body that appoints judges is elected, tougher restrictions on electoral funding for political parties, and measures to prevent members of Congress from being elected for consecutive five-year terms, instead forcing them to sit out an election cycle before standing again. A fourth provision was defeated after Vizcarra withdrew his original support. The changes to the constitution will not, of themselves, rid Peru of corruption, and pressure will build for further reforms. Vizcarra’s popularity has probably reached a peak from which it can only decline, with his centrist government increasingly having to choose between policies to please the business sector and those that provide greater social protection. However, the president’s success in the referendum came soon after Keiko Fujimori, the leader of the majority opposition party in Congress, Fuerza Popular (FP), was arrested and detained on corruption charges. Fujimori is accused of receiving illegal payments during the 2011 presidential elections from Odebrecht, the Brazilian construction firm now implicated in several other countries. She has also been cited for her alleged connections to a corruption scandal in the port of Callao involving leading members of the judiciary. Since July, when Vizcarra first announced the referendum on anti-corruption measures, the executive has been on a collision course with the FP leadership and its congressional allies in the Alianza Popular Revolucionaria Americana (APRA). Adding to the confusion, in January the chief public prosecutor resigned after being widely criticised for sacking two key prosecutors closely involved in the investigations into Fujimori and APRA leader Alan Garcia, a former president. In December, Garcia unsuccessfully sought diplomatic refuge in the Uruguayan embassy after being prohibited from leaving the country because of enquiries into alleged corruption during his 2006-11 administration. Several other recent presidents have been cited as receiving irregular payments from Odebrecht and other Brazilian construction firms. Although Vizcarra emerged from the referendum with his public support strengthened, he still lacks a political party with which to push through his legislative agenda in Congress. However, he looks likely to benefit from the disarray in the ranks of the FP caused by Keiko Fujimori’s arrest. The FP is now split between factions that would collaborate with the executive in the implementation of political and judicial reforms and factions that reject any cooperation with the Vizcarra administration. Regional and municipal elections held in late 2018 represented a further reverse for FP and APRA, with most elected candidates coming from local parties without a national presence. The candidate for the centrist Accion Popular (AP) party, Jorge Munoz, became the new mayor of Lima.
TREND ▼ OUTLOOK ►
President Vizcarra has publicly endorsed several key mining projects that he hopes will begin production by 2021, making clear his commitment to prioritising the foreign investment needed to increase Peru’s potential for export-led growth. Under Vizcarra, the government is seeking new ways to promote dialogue between extractive companies and communities affected by mining and other activities. New projects have been repeatedly held up by local opposition to development, and successive governments have prevaricated when faced with strong localised opposition. Vizcarra, a former governor of the southern mining region of Moquegua, has a much better track record in this area, having smoothed the way for Anglo American’s Quellaveco copper mine there. Vizcarra also appears keen to make greater use of public private partnerships, even though several projects have been clouded by bribery allegations and cost over-runs.
A number of large projects including Conga in Cajamarca, Rio Blanco in Piura, and Tia Maria in Arequipa remain suspended because of hostility from local communities. As part of reconciling corporate and local concerns in the extractive sector, Vizcarra appreciates the need to build an effective process to ensure that community consultation provides extractive companies with a ‘social licence’ to operate. This will become a more salient issue as copper prices recover and investors push to begin work. Meanwhile, protests continue to afflict the important copper mining complex at Las Bambas now owned by China’s Minerals and Metals Group, as well as mines in nearby Cuzco region. Vizcarra will face the challenge of developing a major lithium and uranium mine in Puno, close to the Bolivian border, where an anti-mining candidate won in October’s regional governorship elections. Puno has a history of violent protests against mining projects.
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The Sendero Luminoso guerrilla group is now primarily involved in the lucrative protection of drug traffickers in a country where coca cultivation rose by 14% in 2017, according to UN figures. However, it still has links to far-left politics and in 2017 helped to sustain a two-month nationwide strike by teachers that brought the education system to a halt and saw several clashes with police. Another strike by teachers remains possible in 2019.
Annual inflation was just above 2% at the end of 2018, up marginally on the previous year but still very much within the central bank’s target range. Devaluation of the sol has accelerated slightly, and this is reflected in the small uptick in inflation. Interest rates remain stable at 2.75%, following a cut of 25 basis points in 2018 that was intended to stimulate growth.
TREND ► OUTLOOK ▲
A protracted downturn in China would hit Peru hard as its main mineral exports of copper, gold and zinc remain linked to the state of the Chinese economy. However, copper exports in the first three quarters of 2018 were up 10% year-on-year, reflecting increased prices in the first six months of the year. The consequent increase in mining revenues should help reduce a growing fiscal deficit that had reached 4.1% of GDP in the third quarter of 2018. With foreign reserves now above 60 billion dollars, Peru will not face short-term balance of payments problems.
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