Previous Quarterly Editions
Expropriation Risk: 48 47 45 43 Political Violence Risk: 60 58 56 56 Terrorism Risk: 36 35 35 35 Exchange Transfer and Trade Sanction Risk: 43 42 40 39 Sovereign Default Risk: 39 38 38 38
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Giving his first annual Independence Day address to Congress on July 28, President Martin Vizcarra, who was elevated from vice president when Pedro Pablo Kuczynski stood down as president amid a corruption scandal in March, announced plans to hold a referendum on political and judicial reform. By doing so, he threatened to appeal over the heads of Congress, where the dominant Fuerza Popular (FP) led by Keiko Fujimori has been resisting institutional change. Vizcarra is pushing for the referendum to be held before the end of 2018 in hopes of capitalising on the release of large numbers of leaked audio tapes involving senior members of the judiciary that show judicial decisions being traded for money and other favours. The most egregious cases of corruption involved judges in Callao, Peru’s main port. Opinion polls indicate the extent of public outrage, not least because the tapes appear to show connections between corrupt judges and the FP. Vizcarra had begun his presidency showing himself anxious to appease the FP, which had played a key role in the downfall of his predecessor by linking him to the Odebrecht corruption scandal. However, by June he was becoming more assertive, opposing a number of moves by the left-leaning FP leadership in Congress that included the regulation of financial cooperatives. His call for a referendum followed the appointment of a top-level commission, headed by former foreign minister Alan Wagner, to propose measures to deal with judicial corruption. Previous initiatives have been derailed by vested interests within the judiciary and the public prosecution service, but Vizcarra senses that public sentiment is now too strong to be ignored. His popularity ratings, which had previously been falling, began to rise when he took up the cause of judicial reform, while those of Keiko Fujimori have been falling sharply. By the end of August, the judiciary was beginning to fight back, selecting an individual implicated on the tapes rather than a reform-minded candidate to head the public prosecution service. However, the evident concern among international investors about the state of the judiciary at all levels of government, which is also imperilling Peru’s prospective membership of the OECD, gave Vizcarra added impetus to push ahead and in September Congress agreed to a new mechanism for selecting judges. The scandal over judicial corruption has been effective in removing the spotlight from the senior politicians who still face charges for receiving bribes from Odebrecht and other leading Brazilian construction firms. These include two former presidents in addition to Kuczynski as well Keiko Fujimori. Many regional politicians are similarly tarred by corruption charges and will face the voters in regional elections in October. The effort to devolve government in recent years has increased the amount of public money available at the regional level and so increased the level of corruption, but it has also damaged links between the different tiers of government. This lack of coordination is one of the main reasons why Peru is recovering so slowly from the devastating floods in the first half of 2017.
In his Independence Day speech, Vizcarra identified several key mining projects that he hopes will come on stream by 2021, making clear his commitment to prioritising the foreign investment needed to increase Peru’s potential for export-led growth. This suggests that he will not allow objections by indigenous communities to frustrate investment. The central problem for the mining sector remains the extent to which new projects are held up by local opposition to development, and Kuczynski failed to act decisively to help companies in this situation. Encouragingly, Vizcarra, a former governor of the southern mining province of Moquegua, has a much better track record in this area, having smoothed the way for the Quellaveco copper mine. Vizcarra also appears keen to make greater use of public private partnerships, even though some projects have been clouded by recent bribery allegations and cost over-runs.
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If Vizcarra is to make progress in reconciling corporate and local concerns in the extractive sector, he will need to build an effective process for ensuring that community consultation provides extractive companies with a ‘social licence’ to operate. Meanwhile, protests continue at the important copper mining complex at Las Bambas now owned by China’s Minerals and Metals Group. 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. This will become a more salient issue as copper prices recover and investors push to begin work. An early challenge for Vizcarra will be to push through legislation needed to mine new discoveries of lithium in Puno, close to the Bolivian border, because accessing the lithium requires the simultaneous mining of uranium. 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. 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 teachers strike is possible.
Inflation was just above 1.3% in July, down from nearly 3% a year earlier and at the bottom end of the central bank’s target range. Currency devaluation has accelerated slightly in recent months, which may soon be reflected in a small uptick in inflation. Interest rates remain stable at 2.75%, following a 0.25% cut made earlier in the year in an effort to stimulate growth.
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Demand for Peru’s main mineral exports, including copper, gold and zinc, remain linked to the state of the Chinese economy. However, copper exports at the end of June were 16% higher than a year earlier amid production disruption in other producing countries, and an increase in mining revenues should help reduce the growing fiscal deficit. Foreign reserves are now above 60 billion dollars and should remain strong.
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