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 (40% of GDP)
- Inadequate infrastructure, health care, and education systems
- Huge informal sector (70% of jobs)
- Regional disparities (poverty in the Andean and Amazonian regions)
Activity Recovered Ground in 2018, Though Some Downside Risks Might Materialize in 2019
GDP reported a bright improvement in 2018, after a 2017 marked by strong floods triggered by El Niño and by the suspension of public investment due to corruption scandals. Activity growth was also spurred by robust domestic demand. Investments rebounded, both private and public, backed by a stronger political environment. In addition, household consumption also gained strength on the back of a controlled inflation and accommodative monetary policy.
Activity should observe a similar rate of growth in 2019. Terms of trade should stay close to the levels of 2018, supporting exports and investments in the sector. In parallel, household consumption is expected to remain strong thanks to still favorable inflation and monetary policy. However, there are some downside risks related to the external scenario: namely, an escalation in the trade dispute between the United States and China (the two main destinies of Peru’s exports) and a stronger tightening in US monetary policy. While there are some new domestic political tensions, a possible further escalation, should not cause strong impact in economic activity, as there is a broad consensus on pro-business polices in the country.
Strong External and Fiscal Positions
While most Latin American currencies depreciated in 2018 due to a shift in investors’ mood towards emerging markets, the novo sol has remained broadly stable thanks to the country’s sound external position vis-à-vis its peer economies. In the past two years, Peru has registered low deficits in its current account, driven by stronger trade surpluses due to improvements in terms of trade. In addition, the low external imbalance has been comfortably covered by FDI. Moreover, the country’s international foreign exchange reserves are among the highest in the region relative to GDP, at 29.5% as of the end of 2017. The dollarisation of the banking system has fallen over the last decade to 29% of credit and 32% of deposits at July 2018 from 51% and 46%, respectively, at December 2008.
Peru also has low levels 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 started fiscal consolidation, reducing the non-financial public sector budget deficit targets for 2018 and 2019.
The New President Advances in the Fight Against Corruption, Although Investigations Into New Cases Continue
President Pedro Pablo Kuczynski (PPK) of the center-right Peruvians for Change party delivered his resignation in March 2018. Facing his second impeachment vote in three months, PPK’s resignation was triggered by newly-discovered evidence of corruption with the Brazilian construction group Odebrecht.
As per the local Constitution, First Vice-President Martín Vizcarra (from the same party) took office. Responding to the widespread anger due to the corruption scandals, he has assumed a harder line with the opposition-run Congress (where the conservative party Popular Force has a majority). He has threatened to invoke a constitutional procedure to dissolve the house if it fails to grant him a vote of confidence to advance with four constitutional reforms to combat graft. In early October 2018 the Congress approved the legislation, representing a victory to the government. A referendum on the reforms was held on December 9.
However, a new escalation of political tensions is possible: in September 2018, the Attorney General reopened a corruption investigation into the failed contract of an airport, which had led Mr Vizcarra to resign as Transport Minister in May 2017. Moreover, in October 2018, Keiko Fujimori, leader of Fuerza Popular (opposition party with a large majority in Congress), was detained over allegations of illicit campaign contributions. In addition, while Ms Fujimori’s popularity has declined in recent months due to the scandals, her party is likely to continue using its power in Congress to oppose President Vizcarra.