- Guillermo D. Olmo @BBCgolmo
- BBC News World correspondent in Peru
Peru is going through a permanent political crisis. But its economy follows a different course.
The country has had five presidents in less than five years and the last, Pedro Castillo, is already in his fourth government in just six months in power.
With constant changes in key positions and an unresolved dispute between the President and Congress, the climate of institutional precariousness is not in sight and yet, in recent years, Peru has been perceived from the outside as an example of success and a rare model of stability in the convulsive panorama of Latin American economies.
Pedro Francke, former economy minister, told BBC Mundo that “the economy has done incredibly well since Pedro Castillo became president”. Data for GDP growth and private investment in 2021 have been “incredibly good”, when “those weren’t anyone’s projections in June or July of last year”.
Other experts, on the other hand, paint a less triumphant picture and point to less promising indicators.
What is the real situation of Peru’s economy? Let’s look at a few key indicators.
A GDP that is growing, but is it growing enough?
According to projections by the Central Reserve Bank of Peru, the country’s gross domestic product (GDP) will increase in 2021 13.2%.
The increase is largely explained by the sharp drop of 11% recorded the previous year due to the impact of the pandemic, which particularly affected Peru.
But if the previous slowdown is one of the explanations, Peru can boast of having has returned to its pre-pandemic GDP level much earlier than experts had predicted and to have grown well above the Latin American average.
So the predictions of some of Castillo’s rivals and critics in the campaign, who predicted a collapse of the economy in the style of that produced in Chavista Venezuela, seem far from coming true.
However, in recent months, grounds for concern have accumulated.
GDP gains eight consecutive months slow-down. It is growing less and less and the Central Bank’s forecasts for 2022 are quite modest. It estimates growth of 3.4%, while other entities manage even lower projections.
Diego Macera, an expert at the Peruvian Institute of Economics and a member of the board of directors of the Central Bank, told BBC Mundo that “3% growth is good for a developed economy like the United States, but for an emerging country like Peru, it is insufficient. “.
According to Francke, “it is estimated that in the first months of Castillo’s presidency there was a capital flight of 15,000 million dollars”, although the former minister estimates that they came mainly from local investors who took refuge in the dollar.
In a highly polarized campaign and with her rival Keiko Fujimori warning of a supposed danger from the arrival of communism in Peru, “some have become nervous, but international investors are more phlegmatic”, explains Francke.
Foreign direct investment is generally considered to be the indicator that best reflects the development of projects that generate jobs and prosperity.
According to Central Bank projections, in Peru increased by 18.3% in 2021with a significant increase concentrated in the fourth quarter of the year, when Castillo had already donned the presidential sash.
This figure represents a strong increase, but the outlook for 2022 is less encouraging and it is estimated that by the end of the year it will have fallen by 17.1%. If confirmed, it would be a fall very close to the rise recorded during the first year of Professor Cajamarca’s presidency.
The 2022 investment withdrawal may well be influenced by a more uncertain international scenario, in particular by the evolution of inflation, which has reached levels not seen for decades throughout the developed world.
But Macera believes that “by doing additions and subtractions, the international context still very favorable for Peru, above all, because of the high price of metals”.
The expert believes that Castillo’s promises of constitutional reform may have deterred investors, as well as the appointment of some senior officials suspected of corruption or incompetence.
“Although it no longer looks like the promises of constitutional reform will materialize, if you look at the bigger picture, perceives mistrust of investors that responds to internal factors,” explains Macera.
A mining boom or a missed opportunity?
The mining and hydrocarbons sector is a critical sector for Peru and in 2019 represented 12.2% of its GDP.
Much of its economy depends on metal exports
The mining sector has seen an estimated annual growth of 9.6% in 2021, but again this figure largely responds to the huge bump from the previous year and between January and November 2021, mining production was 5% lower than the same period in 2019.
Against a backdrop of rising metal prices, with copper prices in international markets at record highs, many observers fear that the country is missing out on the global trend to seek alternatives to fossil fuels for which the abundant minerals in Peru are obligatory.
“There is a mining boom which should encourage investment to reach the country, but things are not going as planned because the dialogue between the authorities and foreign companies is not going well“, explains Hugo Ñopo, analyst at the Grade research center.
A report by the Peruvian Institute of Economy attributes the poor performance of the sector, still far from its pre-pandemic level, to “the intensification of social conflicts and the depletion of mineral resources in some areas due to the delay new investments.
Despite Castillo promising during the campaign that he would strike new deals with the companies that operate the mines so that they benefit communities, a recent report from the Office of the Ombudsman reported to augment from the social conflicts throughout the country and Rolando Luque, attached to this organization, underlined that “there is an extraordinary growth in the number of conflicts”.
Perhaps the most emblematic is that which affects Las Bambas, in Chumbivilcas, one of the largest copper mines in the world, where local communities maintain a pulse with the Chinese company that exploits it, which has forced to suspend its activity several times. .
A “stable” economy
Its evolution in recent years has made Peru an example of stability in a region populated by countries with unstable currencies and unbalanced public accounts.
Peru ahead of Chile and Colombia. economic stability ranking from Bloomberg, which measures various political, economic and social factors.
For Francke, it is a consequence of “the solidity of its public finances and its economic policies” and not of the political situation of the country. The former minister believes there are “inherited strengths” that keep things going.
The country has healthy public accounts. Its low budget deficit of 3.3% stands out in the Latin American context, despite the fact that the pandemic has forced the mobilization of funds to apply stimulus and support measures to the economy.
Part of this effort has been that of the Central Bank to curb fluctuations in the price of the sol, the national currency, which, despite having suffered significant devaluations over the past two years, closed the week with its best price against the dollar since Castillo assumed the presidency and has positioned itself as the second strongest currency in Latin America only behind the Brazilian real.
However, the state tax room has not been used in far-reaching economic reforms that correct the deficiencies suffered by a large part of the population, especially in rural Peru.
Public finances have the means to get closer to this objective, but for that it requires an agreement with Congress and a political line, which Castillo’s detractors, but also certain former members of his cabinet, have missed. until now.
A salary that is not enough
Far from the macroeconomic figures manipulated by the experts, there is what people perceive more directly in their daily lives.
Critics of the economic model implemented in recent decades in Peru complain that economic growth did not translate into benefits for the population nor in a significant reduction in inequalities.
And, despite the fact that per capita income has been rising sharply since the mid-1990s, Peru seems to have a long way to go in improving its public services and in seeking greater social cohesion, aspects highlighted by many analysts as one of the causes of Castillo’s unexpected electoral victory.
The pandemic has only made things worse.
According to the National Institute of Statistics and Informatics, the average labor income in the Lima metropolitan area was 1,639.5 soles (about $440), which means a decrease of 8.8% since the start of the pandemic.
In a country where informality and low income mark the daily lives of many people, this has aggravated the difficulties of many in a context of inflation such as the one we are currently experiencing.
More than one in five workers included in the report received a salary below the legal minimum of 930 soles (250 USD) and it can be assumed that the situation is even worse in the interior of the country, where informality tends to be higher than in Lima.
This is where Castillo is most expected to keep the promise he repeated in the campaign and which for the moment is not reflected in the figures: “no more poor people in a rich country”.
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