Peru is muddling through its worst political and social crisis in decades. The turmoil is weighing on investors’ confidence and economic growth, and entire industries have been crippled by violent protests and vandalism. Oddly, the country’s economic fundamentals are intact.
By John Quigley
In Abancay, a city in Peru’s southern Andes, roads at either end of the city were blocked for weeks by demonstrators calling for the country’s president, Dina Boluarte, to quit.
Salvador Palacios, head of the local chamber of commerce, painted a surreal picture. Banks, service stations and shops opened each day. But there was no cash in the ATMs, no gasoline in the pumps and no products on the shelves. The vital arteries connecting Abancay to the commercial hubs of Cuzco to the east and Lima to the northwest were severed.
“It’s like we’ve been kidnapped in our own city,” Palacios said at the time.
The social convulsion that was unleashed by the ouster of President Pedro Castillo on December 7 blindsided investors and roiled a country still recovering from the collapse of its economy during a long lockdown for the pandemic. The prospect of new elections and growing calls from leftist parties for a rewriting of the constitution are amplifying the uncertainty.
Peru’s Congress impeached Castillo hours after he announced in a televised address that he would dissolve Congress, overhaul the judiciary and pave the way for a new constitution. Castillo was replaced by Boluarte, his vice president, and jailed pending trial for charges including rebellion. Thousands of Peruvians took to the streets to protest, some calling for Castillo to be reinstated, others to demand new elections. Congress rejected Boluarte’s proposal to hold a general election as early as this October.
Forty-nine people were killed during the clashes with security forces during December and January, including a policeman incinerated in his patrol car. Dozens of highways were blocked, and airports, government buildings and mining facilities were vandalized.
Roadblocks disrupted exports from a country that is the world’s second biggest producer of copper and one of the top suppliers of blueberries, table grapes, avocados and organic coffee. The violence, centered in the south of Peru, scared tourists away from cities such as Cuzco, gateway to the 15th century archaeological wonder Machu Picchu.
“The country has always had political problems, but you now have to add the lack of respect for authority,” says Alberto Arispe, CEO of Kallpa SAB, a Lima-based brokerage firm. “People storming airports, blocking roads, killing policemen. We’re in the midst of chaos.”
Political instability has been on the rise since 2016, when a graft case involving Brazilian conglomerate Odebrecht engulfed the country’s political elite and intensified political infighting. The country has since cycled through five presidents in as many years.
Business sentiment sank during the government of Castillo, a rural schoolteacher who often portrayed himself as a victim of the country’s business and political establishment. He churned through more than 70 ministers in his 16 months in office amid a series of corruption scandals.
Mining has been a flashpoint for social tensions in recent years, and the number of conflicts only increased under Castillo.
“Capital goes where it’s welcome. It doesn’t go where they throw stones at it,” says Arispe.
“Capital goes where it’s welcome. It doesn’t go where they throw stones at it.”
– Alberto Arispe
Carlos Gálvez, a former head of the Peruvian mining group Sociedad Nacional de Minería, Petróleo y Energía, says he doesn’t see foreign mining companies undertaking any multi-billion-dollar investments in Peru for the foreseeable future. That money is more likely to go to safer countries, such as Australia, Canada or the United States, he adds.
“We’re going to have to content ourselves with brownfield expansions,” Gálvez says. “We’ll probably see local companies building some $400 million to $500 million projects, rather than the $4 billion to $5 billion projects we could be developing. It’s a pity, but that’s where we are.”
The Peruvian central bank estimated in December that mining investment fell 6% last year and forecast bigger drops in 2023 and 2024.
While many executives express relief that Castillo’s term ended prematurely, some are concerned that the instability will persist because of electoral uncertainty and calls for a new constitution.
“We were a stable country for 25 years. We still have enviable macroeconomic stability but politically, a lot of damage has been done,” says Juan Stoessel, a director at exporters group ComexPerú. “That’s going to cost the country investments in the medium term.”
The violence in cities such as Cuzco forced hotels, tour operators and restaurants to close their doors, and left hundreds of businesses and thousands of jobs hanging in the balance, he says. Furthermore, new investment in tourism-related sectors dried up during Castillo’s government. And given the current malaise, companies and their financiers will be more reluctant to embark on new ventures, despite Peru’s wealth of natural, cultural and archaeological attractions, says Stoessel, who is also CEO of the country’s biggest hotel chain, Casa Andina.
“The country’s image has been badly affected and it’s going to take time for the foreign tourist market to recover,” Stoessel says.
Underlying the discontent are years of unstable and ineffective governments, compounded by inefficient local authorities, where many governors and mayors have proven themselves to be unable to spend efficiently on public works and basic services, says Salvador Palacios from the Apurimac chamber of commerce in the southern Andes.
While the unrest eased during February and roadblocks were lifted in much of the country, the giant Las Bambas copper mine in Apurimac operated by Chinese government-owned MMG Limited remained offline due to blockades.
It’s not all doom and gloom. The economy would be in even worse shape if it were not for high copper and gold prices, big exports out of Peru.
And despite the turmoil on the ground, Peru’s macroeconomic indicators are very solid, and the country’s bonds have been unduly punished, according to Alejo Czerwonko, chief investment officer for emerging markets in the Americas at UBS Global Wealth Management in New York.
“If you compare it with conditions in many developed markets, many of those developed markets would be envious of Peru in terms of debt-to-GDP, the debt distribution dynamics and the level of international reserves,” he said at a February 10 Moody’s Investors Service summit.
The spread between Peru’s international bonds and US Treasuries widened from 1.97 percentage points to 2.08 percentage points between early December and late January, indicating an increase in country risk. Yet that was down from 2.43 percentage points in October and was less than the 4.32 average for Latin America in late January, according to central bank data.
Peru is not the only country in the region that’s disconcerting investors. Political risk in Colombia and Chile has also increased in recent years, says Gabriel Amaro, director general of agricultural producers association AGAP. He expects investors’ interest in sectors such as agriculture and mining to bounce back, given the investments made in recent decades in infrastructure, technology, markets and know-how.
“Peru is holding on.”
– Gabriel Amaro
“Peru is holding on. We’re a democratic country where institutions have functioned in spite of all the problems they have,” Amaro says. “And that gives more confidence to long term investors.”
Finance Minister Alex Contreras is optimistic. He says the economy has received all sorts of blows in recent years but has an almost “unbreakable” strength.
The worst of the unrest has passed, the minister says, and while there are still people protesting, they are doing so peacefully.
The economy is also growing, with GDP forecast to increase 2.6% this year and 3.2% next year, the fastest among Latin America’s biggest economies after Venezuela, according to the International Monetary Fund. Peru’s GDP expanded by an average of 3.2% annually in the four years prior to the pandemic.
The government’s goal now is to provide aid to sectors such as tourism, improve the climate for mining investment by reducing red tape and accelerate social projects to placate local communities. It also plans a package of political reforms to provide stability to future governments, Contreras says.
“There’s been political noise,” he says, “but the economy has shown it’s very resilient.” LF