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AmericasApril 1 2021

Peru prays for political stability

Huge risks loom over Peru’s economy, as the country pulls out of its worst crisis in decades. 
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Peru prays for political stability

The Covid-19 pandemic hit Peru harder than any other country in the region, with the government opting for one of the longest and most extensive lockdowns that effectively closed the economy for three months. Gross domestic product (GDP) in April 2020 contracted by 39.1%, according to the Economy and Finance Ministry. Unemployment went from 6% to 16% that month. It was the single worst month in the country’s modern history.

Peru ended 2020 with the economy shrinking by 11.1%. Although this was the worst drop since 1989, it was actually better than expected, with a fiscal deficit of 8.9% of GDP and unemployment at 13%. The foreign debt jumped from 26.8% in 2019 to 35% in 2020. It is expected to level off at 37% in 2023. 

Political peace alone would be the biggest boost to the macroeconomy

Elmer Cuba, Macroconsult

“There is no denying that 2020 was one of the worst years in Peru’s history. While we are recovering, there is still a sensation that things are getting worse,” says Elmer Cuba, an economist at Peruvian think tank Macroconsult, and a member of the Central Reserve Bank’s (BCR’s) board of directors. 

While Peru’s numbers are moving in the right direction and there were even a few bright spots at the end of 2020, like the trade surplus and appetite for Peruvian bonds, a series of risks — with political risk chief among them — could derail recovery for years.  

“Political peace alone would be the biggest boost to the macroeconomy,” says Mr Cuba.  

Political dysfunction 

Peru’s political system has been under pressure for decades, with events taking a dramatic turn in 2016 when Pedro Pablo Kuczynski, a banker and former finance minister, won the presidency. His opponent’s party won 73 (56%) of the 130 seats in Congress and vowed to govern from the legislature. 

Mr Kuczynski resigned in 2018 to avoid impeachment in the fallout from a regional scandal involving bribes paid by Brazil’s Odebrecht to obtain contracts. That scandal ensnared three other former presidents and a long list of politicians and business leaders. It continues today. 

Elmer Cuba

Elmer Cuba, Macroconsult

Martín Vizcarra stepped up from the vice-presidency and quickly ran into the same congressional juggernaut. He battled Congress until September 2019, when he used a loophole to close it and call new elections. The Congress elected in January 2020 proved just as belligerent, with the crisis now peaking in November 2020 when Congress impeached Mr Vizcarra and installed Manuel Merino, one of its own, as president. The move was widely seen as undemocratic, with Peruvians taking to the streets in mass protests. Mr Merino lasted just five days in office, becoming a footnote — one of six presidents, and the first in nearly a century, to last less than a week in office since Peru gained independence in 1821.  

Francisco Sagasti was appointed interim president, tasked with controlling the pandemic, fighting corruption, and guaranteeing peaceful elections and a presidential transfer in July. However, his government has been hit by scandals inherited from previous administrations. 

Oscar Maúrtua, a former foreign affairs minister, says Peru is living through “a time of uncertainty and volatility. People are tired of corruption and want an end to impunity.” 

He says political stability would unleash potential that has been bottled up for the past few years, but that this would only happen if the politicians who take office in July are willing to work together on broad objectives. 

Mr Cuba says that while political harmony is not going to happen overnight, he does believe that governing should be easier during the next presidential term. After the April general elections, congress will unlikely be dominated by a single party, as it was after the 2016 vote, and the next government should get a bump from the post-lockdown growth and the benefit of the doubt that normally accompanies new presidents after contentious elections. 

Road to recovery

Positive signs do exist locally and internationally that could hasten recovery and perhaps even stability, if risks are kept in check. 

The International Monetary Fund is forecasting 9% growth for Peru this year. It would be the highest growth in South America, but Peru did have the most substantial decline in the region in 2020. Even with 9% growth, Peru would still be a few notches below its pre-pandemic economy. 

Inflation is under control, at 2.4% annually through February, and the fiscal deficit is forecast to drop considerably this year to 4.8%, according to the BCR. Tax collection, which crashed with the lockdown, is also bouncing back. Tax revenue was up 15.8% in February compared to a year earlier — the best performance in 13 months, according to tax agency, Sunat. 

Peru has also kept its international reputation intact, able to place nearly $5bn in dollar and euro bonds in the first week of March. It was the country’s first foray into the euro market in five years. The bonds should cover most fiscal needs for 2021.  

Authorities are hoping a big leap in export earnings, combined with public and private investment, will get growth into double digits for 2021. 

A trade surplus was the big surprise in 2021, which came in at $7.7bn — the third highest in Peru’s history — even though total export earnings were down during the year. Part of the story is a decline in imports, but the exports began to boom in the final quarter of the year, led by mineral prices. Peru is the world’s second largest producer of copper and zinc, and prices for both began increasing in 2020. 

Not only are prices strong, but copper production is increasing with the expansion of existing mines and greenfield mines becoming operational. China Aluminium Corporation’s $1.4bn expansion of its Toromocho copper mine will increase output by 45% to 300,000 tonnes a year, with Mina Justa, a $1.6bn joint project between Peru’s Breca Group and Chile’s Copec, will add 100,000 tonnes per year of the red metal. Anglo-America and Mitsubishi are moving toward completion of the $5.3bn Quellaveco copper mine, which aims to produce 300,000 tonnes of the metal per year. The government forecasts copper output at 2.5 million tonnes in 2021, after it dipped to 2.1 million tonnes in 2020, and 3 million tonnes per year by 2025. 

People are tired of corruption and want an end to impunity

Oscar Maúrtua, former foreign affairs minister

Energy and mines minister Jaime Gálvez announced in March that mining investment would be $5.2bn in 2021. However, the ministry has a portfolio of 46 mining projects that would require investment of $56bn. 

In addition to mining, Peru broke the billion-dollar barrier for two agro-export products in 2020, with grapes bringing in $1.1bn and blueberries right behind with $1.03bn. Avocadoes, which brought in $835m, are pegged to join the club in 2021. Further down the list was coffee at $649m.

“Agro-exports continue to consolidate, expanding for the eighth consecutive year in 2020, despite the pandemic. While there is uncertainty, with the pandemic and changes to economic policies in many countries, we expect strong growth again this year,” deputy trade minister Diego Llosa, told The Banker.

The government is also confident that negotiations to “optimise” its trade deal with China, as well as the possibility of ratifying the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), will provide an even greater boost. China accounts for 26% of Peru’s trade and the CPTPP, which includes 10 other countries, would open up access to markets such as New Zealand and Vietnam. Peru signed the agreement in 2018, but has not yet ratified it. 

“This agreement is very important and full participation of Peru is going to have a big impact for the country,” says Mr Llosa. 

Peru has also been negotiating a free-trade agreement with India. While it stalled in 2020, there are high expectations for what would be India’s first major trade agreement with a South American country. 

peru

Empty roads: the pandemic has hit Peru harder than other countries in the region

Golden bullet

Economy and finance minister Waldo Mendoza says public investment would be a “golden bullet” to help the economy rebound in 2021. Public investment in February set a record at $914m, according to Mr Mendoza’s office. It was nearly 40% higher than the same month a year ago. 

Several mega-projects are underway and the state has a long list of others. Under construction is Line 2 of the Lima Metro for $5.3bn. It is a public-private partnership being built by an Italian–Spanish consortium. Following it in investment size is the $3bn construction of a new port in Chancy, north of Lima, which is being built by China’s Cosco Shipping and Peru’s Volcan mining company.  

The investment agency, ProInversión, is promoting 19 public–private projects for 2021–2022 that would translate into $5.9bn in investment. 

Public investment represents around 5% of GDP, while private investment is closer to 20%. Private investment increased 9.4% in the final quarter of 2020, after three consecutive quarterly declines. 

Mr Cuba says several sectors have investment studies ready, but have been waiting for the pandemic to subside and for instability to dissipate. He says the administration’s expansive fiscal policy would be much more effective if it combined with private investment. 

It comes down to politics. “The best policy for private investment is political stability,” he says. 

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Read more about:  Americas , Americas , Peru