Previous Quarterly Editions
Expropriation Risk: 45 43 40 40 Political Violence Risk: 56 56 54 56 Terrorism Risk: 35 35 35 36 Exchange Transfer and Trade Sanction Risk: 40 39 39 38 Sovereign Default Risk: 38 38 38 39
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The suicide in April of two-time president Alan Garcia (1985-90 and 2006-11) focused attention once again on the corruption charges being levelled against other former heads of state and senior government officials. Garcia shot himself as investigative police arrived at his home to arrest him following new disclosures by Jorge Barata, the Odebrecht manager in charge of the Brazilian construction firm’s Peruvian operations. While Garcia had claimed he was the victim of a campaign of political persecution, most observers saw in his suicide further confirmation of his guilt following Barata’s confirmation that he had authorised payments of over 4 million dollars to Garcia’s close confidants. Other presidents subject to similar accusations include Alejandro Toledo (2001-06), Ollanta Humala (2011-16) and Pedro Pablo Kuzcynski (2016-18). Toledo is subject to a warrant to extradite him from the United States, Humala spent several months in jail having been arrested in July 2017, and Kuczynski has been allowed house arrest owing to his age and infirmity. Opposition leader Keiko Fujimori is also in jail, as is her father, former president Alberto Fujimori (1990-2000). Odebrecht and other Brazilian construction firms stand accused of systematically using bribes to secure lucrative contracts going back decades. On the positive side, corruption revelations have stimulated unparalleled attempts to root out malpractice in the judiciary and public prosecution service, over which Garcia’s party, the Alianza Popular Revolucionaria Americana (APRA), has long maintained significant influence. President Martin Vizcarra, who took over from Kuczynski following the latter’s resignation in March 2018, has pushed ahead with judicial and political reform in recent months having secured backing for his agenda in a referendum in December. Although his personal popularity rating dipped in the first quarter of 2019, he retains strong public backing that is rooted in the widespread antipathy towards Peru’s political class in the wake of the Odebrecht scandal. In March, Vizcarra reshuffled his cabinet, replacing Cesar Villanueva as prime minister with Salvador del Solar, a former actor. The main opposition party, Fuerza Popular (FP), despite its majority in Congress, has been weakened by Keiko Fujimori’s pre-trial detention and the wider suspicions surrounding the credentials of other senior party figures. FP has maintained close ties with APRA and was largely responsible for Kuczynski’s downfall. In April, the government introduced a package of political reforms designed to strengthen accountability and representative government. The opposition is likely to try and limit its effects as the moves would weaken FP’s control of the legislature, and this sets up an important test of Vizcarra’s ongoing ability to translate political support into action and del Solar’s ability to manage the legislature.
President Vizcarra appears keen to make greater use of public-private partnerships, even though several projects have been clouded by bribery allegations and cost over-runs. While prioritising the need for greater foreign investment to boost Peru’s potential for export-led growth, his government is also 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 mining 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 good track record in this area, having smoothed the way for Anglo American’s Quellaveco copper mine there. However, the longstanding dispute between MMG, the Chinese-controlled company running the giant Las Bambas copper mine and the surrounding communities in Apurimac region is continuing, with access roads to the mine again being blocked in May.
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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. The Las Bambas copper mining complex is proving a key test of this approach. With the help of the Catholic Church, a settlement was reached between MMG and local communities in April over compensation for damage to farmland. However, such agreements can easily unravel and this appears to have happened in May. There are several other outstanding conflicts in the nearby Cuzco region. Vizcarra now faces the political challenges associated with developing a major lithium and uranium mine in Puno, close to the Bolivian border, where an anti-mining candidate won in the October 2018 regional governorship elections. Puno has a history of violent protests against mining projects.
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While the Sendero Luminoso insurgency has been virtually eliminated as a terrorist threat, its remnants, together with other criminal groups, remain active along the valley of the Apurimac, Ene and Mantaro rivers in an area known as the Vraem, where the majority of Peru's coca is produced. Though cultivation is not as widespread as in Colombia, it is on the rise, increasing by 14% in 2017 according to latest UN figures. The government plans to invest 5.5 billion dollars in the area over the next three years in an attempt to promote both economic development and the rule of law by encouraging a switch from coca to legal crops.
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Annual inflation rose slightly to 2.25% during the first three months of 2019, up marginally on the previous quarter but still comfortably within the central bank’s 1-3% target range. The sol has been steady in recent months despite the recent political upheavals. Interest rates remain unchanged at 2.75% following last year’s cut of 25 basis points that was intended to stimulate growth.
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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 11% year-on-year in the first quarter of 2019, reversing the increase achieved in 2018 when their value rose to just under 15 billion dollars. The increase in mining revenues in 2018 helped to reduce the fiscal deficit to 2.5% of GDP from 3.1% in 2017, but reduced revenues may threaten that achievement. However, with foreign reserves rising above 65 billion dollars at the end of April, Peru does not face short-term balance of payments problems.
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