Salvador Peru has been experiencing serious riots for days: as a result of the failed coup attempt in the country, demonstrators have set up roadblocks in 13 of 24 provinces. Airports, dams and energy companies were stormed several times. There have already been at least eight deaths.
In response to the protests, the government has declared a state of emergency for 30 days. Political instability now threatens to jeopardize the country’s economic success.
Last week, President Pedro Castillo tried to forestall a motion of no confidence by surprisingly announcing the dissolution of parliament on December 7th. From now on he will rule the country by decree, said Castillo, who was elected president just a year ago with a small majority. But the coup failed.
A short time later, parliament deposed the former village school teacher and elected his vice-president, Dina Boluarte, as his successor. The 60-year-old lawyer is the first woman to lead the South American country and the sixth head of state in just four years.
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It is unclear how long she will remain in office, because the president, who has since been imprisoned, still has supporters in Peru. They demand Castillo’s release, Boluarte’s dismissal and immediate new elections.
Last week, President Pedro Castillo tried to forestall a motion of no confidence by surprisingly announcing the dissolution of parliament on December 7th.
(Photo: Reuters)
Since the riots, not only the supply of the population with food is threatened. Companies also have problems because of the interrupted supply chains. Las Bambas, one of the largest copper mines in the world, can maintain production. But the warehouses of the mine, which is controlled by the Chinese group MMG, are now full.
Lowered growth forecast
The Peruvian Chamber of Commerce in Lima has also lowered its growth forecast for this year by 0.2 percentage points to 2.9 percent. According to the Institute of Economics and Entrepreneurial Development in Lima, each day of the strike costs the country $380 million.
In response to the protests, the government has declared a state of emergency for 30 days.
(Photo: Bloomberg)
The investment bank Morgan Stanley, on the other hand, fears that Peru’s gross domestic product will only increase by 2.5 percent. That’s a lot in a regional comparison in Latin America, but little for Peru’s economy, which is used to growth. Especially since the Peruvian ores and metals fetch high prices on the world market. The copper price has risen by 20 percent since mid-July.
The country could grow five percentage points more, estimates the economist Hugo Perea from the investment bank BBVA. The investors would not use the potential for investments in mining because they were unsure about the political situation.
>> Read here: Peru’s deposed President Castillo has been held in custody for 18 months
JP Morgan also believes the lower investments due to political instability to be the main reason why Peru is growing less. However, since the beginning of the corona pandemic in 2020, Peru has only grown by just under two percent a year.
So far, politics has not weighed on the economy
The fact that the economy is coming under pressure from politics is a new phenomenon in the country. So far, the financial markets and the economy have always remained largely uncoupled from the events in the capital Lima.
The 60-year-old lawyer is the first woman to head the South American country.
(Photo: AP)
On the one hand, this is due to the structure of the economy: because Peru is a raw material economy. Foreign companies in particular mine copper, gold, zinc and lead there. Around 50 percent of exports are metals and ores, another third are agricultural products.
Since the mid-1990s, Peru has cleverly imitated Chile as an economic model. Peru has thus become an important investment destination for mining companies worldwide. The country benefited from this: in the two decades leading up to the pandemic, Peru grew by 4.3 percent per year, almost as fast as Chile, due to investments in the mining sector. Despite the downgraded forecasts, Peru tops all of Latin America for growth this year and next.
>> Read here: Glencore-Boss Nagle warns of massive copper shortage
The central bank plays an important role in this. It is autonomous and has been led by the same president for 16 years. Peru has the highest foreign exchange reserves in relation to gross domestic product (GDP) in Latin America. At around eight percent, inflation is low by regional comparison. As early as 2023, it could be back within the central bank’s target corridor of one to three percent.
Police forces clear a street blockade of demonstrators with heavy equipment.
(Photo: AP)
The budget deficit is harmless at 1.5 to 2 percent of GDP. Peru achieves a primary budget surplus. This reduces the country’s debt, while debt is rising sharply almost everywhere else in Latin America.
Economy faces structural problems
This is also the reason why things have remained calm on Peru’s financial markets recently, despite the drastic political events: the sol retained its value, shares and bonds lost only a little. The investment banks also saw no reason to change their risk assessments or forecasts for the Andean country.
Expropriations from foreign corporations are unlikely, thinks Diego Pereira of JP Morgan. Castillo, for example, had announced the expropriation of foreign mining companies during the election campaign.
Basically, however, Peru is burdened by serious structural problems. Corruption is high. All presidents of the past thirty years have been prosecuted by the judiciary for corruption.
The majority of people have limited access to public goods such as health, transport and education.
(Photo: dpa)
According to estimates, 80 percent of the population lives and works in the informal sector. It turns out that growth alone is not enough. The majority of people have limited access to public goods such as health, transport and education.
For Marcos Casarin, Latin America expert at Oxford Economics, it is foreseeable that Peru will grow much more slowly in the future than before the pandemic. In the next few years, growth will not be more than 2.5 percent per year.
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