Bonds, Commodities, Currencies, Emerging Markets, Stocks

What Will Drive Peru’s Economy After Its Election?

  • Peru’s business regulations are not expected to change radically regardless of which presidential candidate is elected in the upcoming 2016 election.
  • Peru’s fragmented political scene will require the next president to form alliances in Congress to pass legislation, slowing the legislative process for major regulatory changes.
  • Protests and a militant threat in southeastern Peru will threaten investors over the next five-year presidential term, but these threats are not expected to significantly worsen.

By Stratfor Global Intelligence

Peru Flag - WikimediaPeruvians will elect a new president April 10, 2016, from a field of candidates overwhelmingly supportive of foreign investment. But even with business-friendly leaders, Peru’s economic climate over the next presidential term will be defined not by personalities but by the country’s slowing economy. For nearly a decade, Peru enjoyed rapid growth due to a massive Chinese construction boom, which was fortified by Peru’s iron and copper sectors. But barring major shifts in global mining commodity markets, as growth in Chinese demand continues to decline, so too will Peru’s economic growth. Meanwhile, domestic social risks, such as anti-mining protests and isolated militant activity in Peru’s southeast, will continue to beset foreign investors. However, these threats are not expected to significantly increase in coming years.

Peru figures prominently as one of the economic success stories of Latin America. The country’s receptiveness to foreign investment and wealth of mineral resources made it one of the key mineral suppliers to the booming Chinese market. Because of mineral exports, total Peruvian exports reached an all-time high of $45.9 billion in 2012 — nearly six times the total 10 years earlier. But Peru’s growing economy was unable to avoid the boom and bust cycles endemic to Latin American countries, which rely on extractive industries to generate capital. Oversupply and slowing Chinese demand growth caused prices for iron ore, gold and copper to plummet, eroding Peru’s export revenue. By 2014, the value of Peru’s total exports had declined 17 percent. During the past 18 months, Peru has fallen into a trade deficit and has lost $5.9 billion in foreign reserves.

Courtesy of Stratfor

Courtesy of Stratfor

With the close of the commodity boom, Peru is unlikely to see the rapid yearly economic growth of the past 10 years resume again soon unless prices for its main mineral exports recover. Peru’s lack of options for growth will complicate its economic management. It is a country with a large pool of unskilled laborers and a remote, undeveloped hinterland unable to easily diversify its economy away from mineral exports. Manufacturing activity is similarly limited except in industrialized areas such as Lima province, which is home to nearly a third of the country’s population.

A Divided Political Front

Peru’s next election will not drastically change the country’s attitude toward international investment and business. The current pool of candidates is quite amenable to foreign interests, and though Peru’s economy is declining, voters will not necessarily encourage political populism. Unlike the 2006 election, in which populist Ollanta Humala unexpectedly finished in second place, there are virtually no surprises among the group of potential candidates. None of the likely contenders are political outsiders, and two of them, Alejandro Toledo Manrique and Alan Garcia, lead political movements that governed during Peru’s decade of high growth.

Regardless of the electoral outcome, Peru’s domestic political scene will prevent the winning party from automatically gaining the political majority needed to quickly change the national regulatory environment. The government is a patchwork of fragmented political parties, often lacking broad national voter support. Consequently, the winning party will inevitably have to form some alliances to pass its desired legislation in Congress, preventing any single party from imposing its will on the remainder of the government.

With eight months left before the first round of voting, Keiko Fujimori, the runner-up in the 2011 presidential election and the daughter of jailed former President Alberto Fujimori, leads the pack with 33 percent support according to a July poll. Pedro Pablo Kuczynski, a former government minister, has by comparison only 17 percent. During the last election, Fujimori’s conservative, pro-business stance was more popular among urban voters in the more developed coastal areas of Peru than among voters in the country’s poorer rural areas. Humala, the current president, cannot legally run for a second consecutive term, and his populist Nationalist Party of Peru has suffered strong public backlash over its perceived inability to handle rising crime and a slowing economy. Fujimori could emerge as a presidential contender as the election nears, but with 20 percent of the electorate undecided, other candidates such as Kuczynski or Garcia (himself a two-term former president) could also become credible contenders.

Intractable Security Concerns

The main risks for the foreseeable future to foreign firms operating in or entering Peru will be social unrest and limited security threats, mostly in the country’s southeast. Strong rural activist organizations have targeted foreign firms, disrupting even major foreign-led investments such as the Tia Maria copper project in Arequipa province, which was targeted earlier this year. Protests aimed at the mining industry often call for more royalties and benefits from mining projects or oppose the projects altogether on environmental grounds. These demonstrations will not subside in rural Peru, but they will oppose specific projects and will not uniformly delay or pose a risk to investments in the mining sector.

A separate but far smaller threat to foreign investments is the remaining faction of the Shining Path guerrilla movement. The only notable active Shining Path faction is located in southeastern Peru’s Apurimac, Ene and Mantaro river valley regions. The group is too small to successfully expand out of this area, but it does extort private firms operating in the area and has previously attacked assets belonging to foreign-owned energy companies. Because of the Shining Path’s limited size and the presence of Peruvian security forces, Stratfor does not expect the group’s capabilities to increase in coming years.

Peru will depend on mineral exports for the foreseeable future. Though revenue from mineral exports is declining, it will not necessarily threaten foreign investors. Longstanding security risks are what will most affect investments in the immediate term, even with elections looming. If the winning presidential candidate of the 2016 election does decide to enact regulatory changes, it will require legislative discussions between parties that will delay or prevent any major shifts in national regulatory frameworks from coming to fruition.

Courtesy of Stratfor Global Intelligence, © 2015 Stratfor
Stratfor is a geopolitical intelligence firm that provides strategic analysis and forecasting to individuals and organizations around the world.  For more information, please visit Stratfor Global Intelligence


No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow Us On Social Media

Google Translate

Like Us On Facebook

The SSE Intl Roadshow

The Saudi Stock Exchange International Roadshow

Our Discussion Groups

Facebook Group
LinkedIn Group

Follow EMerging Equity on

Our Social Media Readers


Get every new post delivered to your Inbox.

Join 223 other followers

%d bloggers like this: