Peru: Risk Assessment
Country Risk Rating
Business Climate Rating
- Membership of the Pacific Alliance
- Mineral, energy, agricultural, and fishery resources
- Low level of public debt
- Independence of the central bank
- Tourist destination
- Dependent on raw materials and demand from China
- Underdevelopment of credit (42% of GDP)
- Inadequate infrastructure, health care, and education systems
- Huge informal sector (70% of jobs)
- Regional disparities (poverty in the Andean and Amazonian regions)
GDP should gain some strength in 2020
GDP growth slowed down in 2019, amid the rising global trade tensions (affecting mining exports) and the political crisis that escalated in the end of Q3 2019. In 2020, GDP should gain some strength as political tensions abate, improving confidence indicators and, finally, expanding private and public investments. Moreover, a stable inflation and the expansionary monetary stance that the central bank has conducted should be supportive to household consumption. Finally, in end October 2019, the government announced some marginal stimulating measures, such as an increase in minimum wage and pension, tax relief measures for consumers, and USD 4 billion public investment plan that aimed to reactivate several public infrastructure projects. Nonetheless, the scenario is not without risk. A further escalation in the US-China trade war could take a toll on Peru, through undermined mineral prices and lower Chinese demand (main market for exports). Alongside, although political tensions should calm down in 2020, in case this scenario fails, investment would remain undermined by the eroded business confidence.
Twin deficits remain generally well controlled
Current account deficit widened in 2019, due to the lower trade surplus registered in the year. That movement is a side effect of the deteriorated terms of trade, consequence of rising trade tensions between the US and China which affect mineral commodity prices. Although this scenario is not likely to give in significantly in 2020, foreign direct investments (mainly in mining, telecommunication, energy and financial services) should continue to cover comfortably the external account imbalance. Strong net international reserves of roughly USD 68 billion (30% of GDP, implying a coverage ratio of 15 months of imports) give further cushion in case of a sudden change in external investors’ mood. Alongside, external debt stands at roughly 35.8% of GDP and is mostly privately owed (roughly 73%). Regarding the financial sector, the economy has been successful in curbing the dollarization of its local credit market (from the peak of 51% of total credit in 2008 to 27% in Q2 2019). Moreover, the banking system counts with sound capital adequacy ratios and low level of leverage. Peru also has a low level of public debt, thanks to the prudential fiscal policy in force since the start of the commodities super cycle back in the early 2000s. The government of President Vizcarra has continued with the fiscal commitment approach. The fiscal measures unveiled in late October 2019 will have limited fiscal impact, not compromising debt sustainability.
Political climate is likely to improve after the turmoil registered in 2019
Peru may have been the country, other than Brazil, where the “car wash” operation, the far-reaching corruption probe that began in Brazil but has roiled politics across Latin America, had the largest repercussion. The past four Peruvian presidents and key figures of the current right-wing opposition party Popular Force have either been imprisoned on corruption charges or are currently under investigation for fraud. In this context, incumbent President Martín Vizcarra from the center-right Peruvians for Change party has worked to step up the fight against high-level corruption through a judicial and political reform agenda. Nevertheless, the opposition-led Congress (composed in majority by members of Popular Force) has consistently undermined the government´s reform agenda. This political gridlock prompted President Vizcarra to propose early elections for both the presidency and the Congress (from 2021 to 2020). Congress rejected the government’s proposal, leading Mr Vizcarra to call for a vote of confidence over changes on the way the Constitutional Tribunal (CT) judges are appointed, and halt the legislative process to replace six (out of seven) judges whose terms expired. The President argued that the process lacked legitimacy and transparency. The Congress, however, defied the government and elected a new judge on September 30, 2019. That led Mr Vizcarra to dissolve the Congress on the same day and call for snap legislative election. In response, the Congress voted to suspend Vizcarra. The Peruvian Constitution allows dissolution, when confidence is denied twice (the first cabinet was fired under the administration of Pedro Pablo Kuczynski, to whom Vizcarra succeeded after his resignation). However, Mr Vizcarra said he would count the election of new members of the CT as a vote of no-confidence. Although the political tensions had some negative short-term impacts on activity, it has strengthened President Vizcarra’s approval rating. After the Constitutional Court supported the President’s position, a new legislature was voted on January 26, 2020. The political environment (notably the relation between the legislative and executive branches) should evolve positively this year.