What a year for Peru. With an old political class struggling to survive and a tired population which demands accountability, transparency and a better country, the interim government of President Sagasti will continue to lead Peru through its worst political, economic and health crisis to the next general election in 2021. Despite a second COVID-19 wave and further economic constraints expected in the new year, economists believes the medium term outlook for Peru remains attractive as recently acknowledged by the successful issue of a 100-year bond last month.
The main political challenge facing the transitional administration in Peru is to guarantee the governance of the country: foster a conciliatory climate between the Executive and the Legislative powers, guarantee the transparency of the general elections in April 2021 and combat the COVID-19 pandemic.
The 2021 general elections are already generating noise and uncertainty: the official campaigns start in January 2021 with 22 eager candidates for the presidency. There are no clear favourites so far, but pundits estimate that there is a 65% probability that a centrist candidate will win.
It will be equally important to watch the Congressional elections, Constitutional Tribunal elections and the election of the President of the Central Reserve Bank of Peru (BCRP).
“We have a wave of short-term populism in Congress, which is going to cost a lot in the long-run. This will affect investment prospects, which could worsen further with a new COVID-19 outbreak. The scope of action of the transitional government is very limited though and it is unfair to expect them to resolve in a month what has not been done in years.”
Economist and political analyst
In addition to the political uncertainty in Peru, there are a number of potentially huge changes to the law being proposed. These include: calls for a Constituent Assembly to debate a new Constitution (see Chile), a proposal to create a multi-sectoral commission for reforming the entire tax system, a proposal for a ‘solidarity’ wealth tax (see Argentina), and a proposal to create a public body to oversee the Peruvian Pension System (OPP).
Other important challenges are to safeguard economic and financial stability, stimulate the recovery of public and private investment and boost formal employment.
Public sector budget for the year 2021 has been approved with 104 votes in favour, 13 against and 8 abstentions. The budget contemplates that each Peruvian would assume a debt of almost USD 410.
For next year, nearly USD 1 billion has been allocated to continue with economic reactivation plan dubbed Arranca Perú, 60% of this is assigned to regional and local governments with the hope that 500,000 jobs will be created.
Investment in healthcare is also key. The COVID-19 pandemic has highlighted the weakness of Peru’s health infrastructure: 1 ICU bed per 100,000 inhabitants and just 276 respirators in a country of 33 million people. To compound these failings, Peruvians were recently told that there is no formal arrangement for the purchase of any vaccine!
“A second wave threatens, and in other countries there is a third. In Peru we are sitting without access to any vaccine due to terrible government management. Without a vaccine there will be no consistent economic recovery.”
Candidate for Vice President and former minister
Another huge structural problem facing Peru is the size of the informal job market, which extends to more than 75% of the population. Without reform to improve the flexibility of labour laws and provide better job security, nothing will improve.
As with other countries, a key pillar of Peru’s economic reactivation plan is infrastructure investment. Before this can be delivered, investors must have confidence that the government has the capacity to stabilise the economic, health and political crises in the country.
Project Management Offices (PMOs) have been created in the various ministries as Proinversión seeks to award 14 projects under Public Private Partnerships (PPP) before July 2021.
This renewed portfolio involves investments of USD 2.8 billion. It will be a good sign to the market if a good part of these projects are awarded. The award of PPPs such as the Huancayo-Huancavelica Railroad or the Natural Gas Massification were projected for the second half of 2020 but have been delayed until February and March 2021, respectively.
In addition to these projects, there is the Reconstruction and Investment Plan for the north of the country, managed by the United Kingdom, for the construction of hospitals, schools, colleges and roads.
Other major infrastructure projects include Metro Line 3 and 4, the Central Highway, and 74 hospitals and schools, together totalling 7% of GDP.
7 of the 31 active projects have been stopped, totalling USD 1.8 billion, these must be unblocked. The largest are two irrigation projects: Chavimochic III, stopped since 2016 and which could generate an impact of USD 490 million once reactivated; and Majes Siguas II, launched in 2017 and likely to have an impact of USD 462 million.
Investments in copper mining by foreign investors are expected in 2021 and 2022. The 2020 Mine Construction Project Portfolio is made up of 46 projects with a total investment of USD 56 billion.
5 mining projects from the Ministry of Energy and Mines (Minem) portfolio are expected to start construction in the first half of 2021: Yanacocha Sulfuros, San Gabriel, Corani, Tailings in Marcona and Optimisation Inmaculada. This will depend on the agility of the state to resolve processes pending in some cases, and the capacity of the mining companies to obtain the necessary financing for the start of the works, in other cases.
The largest project in the portfolio, Yanacocha Sulfuros (USD 2.1 billion), will not start construction in the first half of 2021. This is despite having the majority of permits necessary to start copper extraction, as it must await the approval of the Environmental Impact Study (EIA).
Global supply of copper is suppressed due to a lack on investment in recent years and demand is being driven by a return to growth in China and the reactivation of the global economy following the first phase of the COVID-19 pandemic more generally.
This has led to copper prices bouncing above pre-crisis levels, up 18% so far in 2020.The price of copper has an impact on the real economy and current prices would boost results of mining and non-mining companies in Peru.
The agriculture industry has continued to operate at near 100% capacity throughout the pandemic and is expected to continue to outperform the wider economy in 2021.
There has been some recent disruption when farmer workers protested for better working conditions and called for a derogation of Agrarian Promotion Law 27360. Congress has approved Bill No. 57596 that proposes repealing Law No. 27360 but there could be more protests when the workers stop receiving their weekly payments at the end of December and future payments are lower as a result of their demands.
Peru has lost prestige worldwide as a destination for agro-industrial investments, and therefore, investments in this sector are expected to be limited until clear rules are laid down.
Lower profitability from the sector could reduce investment further and reduced the demand for labour. Large, consolidated companies will have more capacity to face these changes, e.g. an increase of the income tax (from 15% to 30%) and other labour costs such as handling the payroll, but smaller companies are expected to fall behind.