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 its central bank; strong banking sector
- Tourist destination
- Youthful profile of the population
- Dependence on raw materials and demand in China
- Exposure to climate shocks; seismic events
- Underdevelopment of credit (40% of GDP)
- Inadequate infrastructure, health care, and education systems
- Huge informal sector (70% of jobs) which impedes training and productivity
- Regional disparities (poverty in the Andean and Amazonian regions)
- Scale of coca growing and cocaine production
Resilient in Activity in 2018
Activity in 2017 suffered partly as a result of the floods, landslides, and disruption to the communications infrastructure triggered by the 2016-2017 El Niño costero weather events phenomenon, and partly due to the suspension of public investment in the light of the Odebrecht corruption scandal. A sharp recovery in domestic demand is expected in 2018, in a context of a continuation of the positive economic policy. Construction work, such as the building of the gas pipeline in the south of the country, is expected to resume.. Construction of the second Lima subway line and the infrastructure for the hosting of the Pan-American Games in Lima in 2019 will likely also continue, alongside the modernization of the Talara refinery by Petroperu. With the recovery – albeit slow – in raw material prices, investment in mining is starting to pick up. In addition, a three-year plan for the rebuilding of damaged roads, bridges, housing, and schools was approved in September 2017.
Household consumption is expected to feel the benefits of the new jobs created as investment increases, as well as the slowing in inflation resulting from slower rises in food prices, and the expected slight depreciation of the sol. Reduced inflationary pressures will make it possible for the central bank to hold the key lending rate (3.5% at the end of October 2017) just above inflation. Exports are set to increase, but at a slower rate than in the previous two years. This will apply to copper (29% of sales), gold (19%), oil and gas (6%), zinc (5%) and lead (4%), which benefited in 2017 from a (weak) recovery in prices and increased production. Sales of seafood, fruit (grapes, avocados, pineapples, mangoes, berries, etc.), as well as fish-meal (5%) are expected to do well, excluding any extreme climate events. However, as imports will increase in line with the strength of domestic demand, the contribution of trade to growth could be slightly negative.
Comfortable Budget Margins and Current Account Deficit Financed by FDI
The government is expected to continue its relaxed budget policy in 2018, with a particular focus on infrastructures, education, healthcare, access to drinking water, and sewage systems. However, the government does seem to have – at least temporarily – abandoned tax cuts for companies whose goal was to incite small and mid-sized companies to submit the necessary declarations, with the aim of reducing the scale of the economy’s informal sector and increase fiscal revenues (23% of GDP). The authorities have triggered the hardship clause in the budget regime. This approach is made easier thanks to the small relative size of the debt, which remains below the legal ceiling of 30%. The 1% deficit target for 2021 remains achievable.
The current account deficit will likely continue at a moderate level. The trade surplus – generated notably by metal sales – expatriate worker remittances and tourist income are set to partly offset the repatriation of profits by foreign investors and foreign transport services. This deficit is well-funded thanks to foreign investments, which enables the central bank to increase its already substantial currency reserves (around fifteen months of imports) which give it the ability to intervene to prevent excess volatility in the sol. Although in decline, dollarisation still covers 45% of deposits and 30% of outstanding credit. A sharp depreciation would endanger what is otherwise a solid banking system.
Reforms Being Held Up in Struggle Between the Executive and Legislature
In 2016, Pedro Pablo Kuczynski of the center-right Peruvians for Change party won a narrow victory in Peru’s Presidential elections (50.1% of votes) over his rival Keiko Fujimori – daughter of imprisoned former President Fujimori, of the conservative Fuerza Popular (FP) Party. President Kuczynski’s programme includes both social inclusion and the encouragement of private (foreign) investment, (including within areas that are traditionally public) via the loosening of administrative formalities and deregulation of the labor market, alongside fiscal incentives – all the while, maintaining the essential equilibrium. His party has only 17 out of the 130 seats in congress, meaning the government has to rely on the support of the FP (77 seats).
In September 2017, the government was defeated in a motion of censure relating to changes to the status of teachers. The President formed a new Council of Ministers, headed by Mercedes Aráoz and comprising six of the nineteen previous ministers, which got a vote of confidence in October. In the event of another motion of censure, the president will have the right to call fresh elections – a possibility clouded with uncertainty, both for the FP, whose leader may be implicated in the Odebrecht scandal, and the President, who narrowly survived an impeachment vote over corruption charges related to the same affair in December 2017. Given the weakness of the executive and the FP’s sensibility to interest groups, reforms will be hard-fought. Nevertheless, the task would be facilitated if the head of the Council of Ministers was granted special powers by Congress to speed up the process. It is with this method that some progress has already been achieved relating to administrative matters. There is now an anti-corruption decree that prohibits anyone involved in any corruption from being employed in a national, provincial or local public body.