January 24, 2018 – This post was written by Alejandro Valerio, Senior Analyst, and Boyang Xue, Research Intern
Peru’s President Pedro Pablo Kuczynski (PPK) survived an impeachment vote in Congress at the end of 2017 following the revelation that he had received payments from Odebrecht, a Brazilian construction company, during his time as Finance Minister of Peru.
Ultimately, Peru’s Congress failed to reach a super majority to impeach PPK for “permanent moral incapacity.” Three days after the vote, PPK chose to pardon ex-president Alberto Fujimori, who had been sentenced to 25 years in prison for corruption and human rights violations. PPK’s decision gave way to popular belief that he had reached a political deal with lawmakers from the main opposition party, Popular Force, to prevent his ousting, thus driving nation-wide protests and political resignations.
PPK’s 18 months in office have been marked by strong opposition from Congress, which has toppled four of his cabinet members. Meanwhile the country’s economy, the fastest growing in South America, saw its growth decelerate in 2017 largely due to delayed investment decisions caused by the Odebrecht corruption scandal.
Despite this slowdown in 2017, and the latest political crisis with PPK that has halted a recovery in business confidence, multinationals should remain optimistic about Peru’s economic prospects in 2018, here’s why:
- Peru’s politics will stabilize at least in the short term: PPK is under pressure to deliver on the several infrastructure projects that were delayed or cancelled last year. And although PPK’s decision to pardon ex-president Fujimori has alienated the anti-Fujimorismo faction, PPK’s government can strengthen its ability to pass legislation by deepening the divide between the two main blocks (the Kenji-bloc and the Keiko-bloc) within the Popular Force Party. Additionally, PPKs new cabinet was sworn in on Jan 9th, and should provide his government with the political force to begin accelerating pursuit of new legislation and the implementation of existing projects. To be sure, the political crisis is not over yet, but even under a scenario in which PPK is ousted, he would likely be succeeded by one of his two vice presidents (without new elections being triggered). Thus, policy continuity can be expected despite moderate political volatility.
- The government increased the public budget and it’s reconstruction plan will boost infrastructure development: With a 10% increase in the government budget (for 2018 against 2017) and Peru’s US$ 7.9 billion Reconstruction Plan approved (for El Niño-affected regions, 2018 is set to see higher public investment. Furthermore, the President is committed to providing safe drinking water for all Peruvians by 2021, and US$ 1.3 billion have been designated for water sanitation projects in 2018 alone. Construction companies from Asia, Europe and the Americas are already bidding for public contracts.
- Rising copper prices will drive investment in mining: Peru recorded a 6% increase in copper production in the first 11 months of 2017, and mining investment is expected to have grown 9% in 2017. Now global copper prices are at a four year high, with stronger global demand expected to continue driving activity in Peru’s mining sector throughout 2018. Indeed, the Ministry of Mining expects about US$ 10 billion worth of new investment in 2018, including Anglo American’s Quellaveco copper project, Michiquillay copper mine (US$ 2 billion), the Toquepala Expansion (US$ 1.2 billion), and the Toromocho Expansion (US$ 1.3 billion), among others. As the government regained momentum after the new year, it also started to evaluate a US$ 2.4 billion railway project through joint public-private financing to link some of its copper mines to port, which would ultimately further stimulate product
- Private consumption will be more robust than last year: Private consumption in 2017 was dampened by the flooding, protests, and political instability. However, the government’s stimulus package led to a recovery in private investment and improving consumer confidence during the second half of 2017. The augmented public budget for 2018 will lead to higher spending on health, public safety, and education. The positive spillovers from these drivers will certainly result in higher employment and wages. Additionally, internal evens such as the the Dakar Rally, the Pope’s visit, and the World Cup (in which Peru will compete for the first time since 1982), can be expected to stimulate activity.
With economic prospects improving in 2018, MNCs should be preparing to capture upside growth:
- B2G and B2B companies should tap into the growing construction activities and related industries: On January 3, a bus tragically fell from a cliff on the coastal highway close to Lima, underscoring once again the importance of improving Peru’s poor infrastructure. PPK quickly announced his plan to expand and upgrade the country’s coastal highway system in time for the Pan American Games in 2019 in Lima. In fact, at least US$ 1.5 billion have been earmarked to upgrade the city’s infrastructure prior to this event. Along with the reconstruction projects in the northern provinces, increased construction activities in 2018 can be expected throughout the country. MNCs should position themselves to take advantage of the infrastructure growth that will boost demand for equipment and machinery for companies in mining, construction, transportation, and water sanitation.
- B2C companies will benefit from higher private consumption: FSG expects private consumption in Peru to expand by 3.7% in 2018. In addition to higher public and private investment that will boost jobs and wages, easier monetary policy from the Peruvian Central Bank (which lowered the benchmark interest at the beginning of this year), will help stimulate consumer credit growth. MNCs should be considering how to capture this upside growth, while also preparing to capture increased demand driven by events such as the World Cup that will drive more Peruvians to restaurants and bars in 2018.
Though political risk has diminished for the time being, FSG will continue to monitor new events in the market.