Peru: Risk Assessment
Country Risk Rating
Business Climate Rating
- Membership of the Pacific Alliance and Andean Community
- Mineral, energy, agricultural, and fishery resources
- Low level of public debt
- Independence of the central bank
- Dependent on commodities and demand from China
- Underdevelopment of credit (42% of GDP)
- Inadequate infrastructure, healthcare, and educational systems
- Huge informal sector (70% of jobs)
- Regional disparities (poverty in the Andean and Amazonian regions)
After the massive COVID-19 shock, a rebound is expected in 2021
Peru registered its first COVID-19 case on 6 March 2020. While the then President Vizcarra did not hesitate much before implementing strict mobility restriction measures, the virus’ evolution was dramatic. Therefore, GDP registered a strong slide in H1 2020 (among the worst in the region). Moreover, unlike in Chile, mining was not classified as an essential activity and was put to a standstill. In H2 2020, the economy started to show some recovery at the margin, underpinned by the last phase of the economic reopening initiated on 1 October 2020. Simultaneously, a large fiscal stimulus combined with an expansionary monetary policy also contributed to this rebound. It includes the Reactiva Perú plan (estimated at roughly 8% GDP) that provides additional low-interest loans for small companies to help them resume operations. In contrast with 2020, the economy should outperform the region´s average in 2021 (albeit GDP by the end of 2021 should still be 7% below the 2019 level). This brighter outcome will be supported by the sustained fiscal stimulus measures. Moreover, household consumption will also benefit from the gradual rebound on the job market. Furthermore, exports should return to growth, as the global economy rises from recession and thanks to higher copper prices (also favoring private investments). Downside risks to the economic scenario are related to the uncertainty regarding the COVID-19 pandemic’s evolution, the deteriorated political environment and the April 2021 general election that may lead to some investment postponement.
The fiscal deficit will moderately narrow in 2021
The current account deficit remained weak in 2020. The drop in net income payments (resulting mainly from lower profits in foreign-owned mining firms) offset the weaker surplus in the trade balance and the higher deficit in services (due to a decrease in travel revenues). On the financing side, while FDI deteriorated, they still fully covered the small deficit in the current account. As of Q2 2020, international reserves stood at USD 71.5 billion (covering 26 months of imports). Moreover, total external debt stood at 34.9% of GDP (20% of GDP for public debt and 14.9% for the private sector). 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 24% in Q2 2020). Concerning public accounts, the fiscal deficit will narrow in 2021, but will remain high as activity will not fully return to the pre-crisis level (limiting the rebound in tax revenues) and the stimulus will not have been fully dismantled. It is important to note that, in April 2020, a bill allowed Peruvians to withdraw up to 25% of their savings from their private pension accounts (limited to USD 3600). This resulted in an outflow of roughly USD 5.6 billion from the private pension system. As of September 2020, the system’s total assets stood at 20% of GDP, down from 23 %. Moreover, in August 2020, legislators approved a text allowing the transfer of a one-off refund of up to USD 1200 towards affiliates of the public pension scheme (in Peru, formal workers must choose between joining the public or the private pension system). The then government said that the new measure could affect the fiscal equilibrium, with its fiscal cost estimated at between 1.9% and 2.9% of GDP. Finally, in November 2020, legislators have also voted for another reform of the private pension scheme: allowing their members to withdraw savings with a limit of roughly USD 4,800.
The political environment will remain fragile at least until the April general elections
A new legislative took office in March 2020 for the remainder of the 2016–2021 congressional period, but it failed to improve the political environment. In July 2020, the refusal of legislators to eliminate their immunity generated a direct conflict with the executive and prompted Congress to remove presidential immunity (the bill was approved in the first vote, but a second round is required). Beyond that, in September 2020, Vizcarra faced an impeachment proceeding over alleged links to irregular government contracts with a little-known singer. The president survived the vote, as the large majority of Congress stepped back in the final stage (probably due to the population’s large disagreement with it), but the calm did not last. Less than a month later, Vizcarra was involved in a new allegation of corruption and on 9 November 2020, the Congress impeached him. As a result, the head of Congress, Manuel Merino, an agronomist and businessman from the minority Popular Action, sworn in the presidency and will remain in office until the end of July 2021, when Vizcarra’s term was due to expire. Overall, the troubled political environment increases the chances of outsider candidates in the electoral race just around the corner (the current members of Congress will be ineligible to run in the 11 April 2021 general elections).