Uncertainty persists

As foreign direct investment in Peru plunges, can the government dissipate investor fears?

Foreign Direct Investment (“FDI”) in Latin America dropped by 45% after the outbreak of the COVID-19 pandemic, according to the United Nations Conference for Trade and Development (“UNCTAD”). In particular, FDI in South America halved to USD 52 billion, with flows to Brazil and Peru reaching their lowest levels in two decades. 

Peru ranked 76 in the World Bank’s Doing Business 2020 report but the pandemic hit its mining and agricultural sectors. Impacted by one of the worst economic crises in the region and a period of political instability, FDI in Peru dropped to USD 3.1 billion in 2020, 67% less than in 2019. Most investments come from US, Spain, UK, Netherlands and Chile. 

The Central Reserve Bank of Peru (“BCRP”) has predicted that private investment will not increase this year, a former director of Proinversión commented, “This is catastrophic and it is all due to political uncertainty. What I see in the private markets is all short-term and this won’t change until the uncertainty dissipates.”

“This is catastrophic and it is all due to political uncertainty. What I see in the private markets is all short-term and this won’t change until the uncertainty dissipates.”

Former director, Proinversión, Peru

Peru continues to be considered one of the most important countries in Latin America and the fiscal measures equivalent to 20% of the country’s GDP are expected to favour a rapid recovery of economic growth which could be in the region of 10% of its GDP. 

According to an economist and political analyst the country’s economic programme needs reform, “Health and education have been neglected, we cannot have another investment as big as that of the Pan-American games and put aside the health sector and then run out of ICU beds.”

Since assuming office last July, President Pedro Castillo has tried to dissipate the fears caused by the belligerent rhetoric against foreign interests in Peru used during his electoral campaign, and now calls on foreign companies to invest in the country. On a recent trip to the US, Castillo said after a meeting with investors at the American Chamber of Commerce that a group of potential investors will soon visit the country to study potential new projects to reactivate the Peruvian economy. In this context, the appointment of former World Bank economist Pedro Francke as Minister of the Economy was welcomed as a pro-market decision by investors. 

The former director of Proinversión in Peru commented, “To paraphrase Claudia Cooper [the former Finance Minister] ‘investors can adapt to risk but not to uncertainty’, Castillo has said reassuring words but what investors need are clear policies and certainty, fiscal discipline, political and legal security etc.”

“To paraphrase Claudia Cooper [the former finance minister] ‘investors can adapt to risk but not to uncertainty’.”

Former director of Proinversión, Peru

The political analyst strongly agreed, “We have had a capital flight of 15 billion USD and this is because of political instability. Julio Velarde, Governor of BCRP, already said that private investment is zero for next year and the only way to generate income and permanent employment is through growth. For that to happen, we need private investment and political credibility, and that is what we do not have. We are not creating an environment of stability.”

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