This July 28, Pedro Castillo’s government completes one year amid fiscal investigations against the president, political conflict between the Executive and Legislative powers, and a complex scenario that challenges the Peruvian economy due to uncertainty and lower global growth perspectives in the short and medium term.
In almost 12 months, several indicators in the country have moved significantly; some are impacted by local factors and others by international factors. Three economists consulted by Bloomberg Línea make a balance of the factors to be considered and give their opinion on what can improve the economic course of the Andean country in the short term.
DOLLAR EXCHANGE RATE
Within a year and after Pedro Castillo was late in appointing his Minister of Economy when he took office, the price of the dollar in Peru surpassed for the first time the psychological barrier of PEN 4 per US$1 and remained at that level until a change was made at the top of the presidency of the Council of Ministers.
As it is recalled, the first president of the Council of Ministers was congressman Guido Bellido, from the Peru Libre party, who on several occasions generated uncertainty due to his economic stance and had situations that led to clashes with the private sector, such as the announcements of the nationalization of Camisea gas.
When Bellido announced that the Camisea gas contract would be renegotiated with the companies operating in the area and threatened to nationalize the field, the interbank price of the dollar reached a maximum of PEN 4.13 per US$1, according to the Central Reserve Bank (BCR).
After his departure and subsequent replacement by the former president of the Council of Ministers, Mirtha Vásquez, the dollar temporarily fell below PEN 4, remaining below this price since December 27, 2021.
Since 2022, the dollar in Peru has remained volatile, but the Peruvian sol (PEN) has managed to strengthen and recover the lost ground after the strong depreciation and exchange intervention experienced during the second half of 2021.
Throughout the first quarter, the exchange rate maintained a downward trend. Until this July, global factors have led to a strong appreciation of the greenback that has impacted various currencies of emerging countries, such as the Peruvian currency.
“Now the dollar exchange rate is rising because of external problems. We have seen that internal problems are potentially dangerous because of the volatility they generate. We cannot control external factors, but neither should we add more sources of local uncertainty, which is a constant concern,” says Paola del Carpio, Research Coordinator of Red de Estudios Para el Desarrollo (REDES).
BUSINESS CONFIDENCE
The economists consulted by Bloomberg Línea agree that in the last year, business expectations in Peru have remained pessimistic, mainly due to the signals given by the Peruvian government.
Here they have found situations that, although long-standing, have not had a prompt solution, such as the social conflicts around mining operations such as Las Bambas; while other factors are the recent changes in labor legislation such as the prohibition of labor outsourcing and the strengthening of collective bargaining and unions recently approved.
“The clearest thing in which the government has interfered is the level of uncertainty in the feeling of insecurity to make investments and to advance normally in business. It was initially threatened with changing the game’s rules, which translates fundamentally into an investment that in the first quarter is closer to zero growth than to healthy growth,” mentions Eduardo Jiménez, partner of Macroconsult.
From May 2021 to June 2022, three and 12-month business expectations collected by the Central Reserve Bank (BCR) mainly remained below 50 points, i.e., in the pessimistic range. Only 12-month expectations have been out of the pessimistic range on three occasions since the beginning of Castillo’s administration, while three-month expectations – strongly linked to short-term investments – have remained in the pessimistic range.
For Juan Carlos Odar, director of Phase Consultores, the orientation of the government’s actions and comments have had an “anti-business bias that has been noted above all at the mining level,” with which this indicator, despite the high copper price that was maintained until June, has not helped the Peruvian economy as would have been expected.
“We have a mining industry where there has been a lot of social conflicts, a lot of stoppages, and the activity and expectations to invest have been damaged,” Odar points out.
On this point, del Carpio considers that with metal prices reaching very high levels since 2021, “there are no excuses” for the mining GDP and mining investment in the country to fall back since mining production was affected by the various stoppages in the sector’s operations.
In addition to Las Bambas, there were other cases, such as Southern Peru’s Cuajone mine, whose copper production was halted for more than 50 days.
“There are internal factors that play a role. The social conflict faced by the sector is not new; it has always existed, but with a government that shows no signs of wanting to do something about it and that does not take a clear position, it is difficult for any investor to make long-term decisions,” remarks del Carpio.
INFLATION
As in other countries, inflation in Peru has remained high in the last few months, affected by the rise in international prices. In June, annualized inflation reached 8.81%, the highest since 1997.
Economists agree that the global factors have strongly impacted the situation of this indicator more than domestic uncertainty or government decisions. For del Carpio, the BCR’s work to stabilize inflation by raising the reference interest rate to 6% is important.
However, Odar recalls that in months such as April and May, some food prices, such as carrots, which depend on local factors, were impacted by the transport strike, a situation that lasted longer than it should have.
PUBLIC INVESTMENT
The results of public investment have not been the best, even though this indicator recorded an expansion of 13% in June due to the progress of local and regional governments.
In contrast, according to the Peruvian Institute of Economics (IPE), investment by the National Government fell by 2%, which shows that the execution of public resources is slower by the entities in charge of the Executive Power.
Del Carpio emphasizes that what has been perceived in this indicator is greater inoperability of public investment from the National government, which generally pushed this indicator.
“Behind that are the almost 60 changes of ministers in less than a year, questioned appointments, and constant change of officials, as each minister that comes in brings a new team. It paralyzes decisions,” the economist points out.
Peru’s scenario in the last year of Castillo’s administration has seen 59 ministerial changes, with the Ministry of the Interior being one of the most affected: in less than 12 months, the sector has had seven ministers.
Only three ministers remained in the same position they were assigned since the beginning of Castillo’s administration, as shown in the graphs above.
Notwithstanding this scenario that affects the management of the State, for Jiménez, it is important to consider the basis of comparison of public investment, especially in the first months of this year, after the Ministry of Economy (MEF) promoted investment packages and scored record levels of growth in this indicator.
“If we consider last year’s public investment an all-time historical record, it is difficult to beat that execution. Many public projects were bottled up, and Waldo Mendoza as minister (in the first half of 2021), made them be executed quickly.
“With that ceiling, it is difficult to win or ask the government with other things to face, such as inflation and the protests that follow, that this be an indicator of momentum,” specifies the economist of Macroconsult.
GROSS DOMESTIC PRODUCT (GDP) AND EMPLOYMENT
The slowdown in the growth of the Peruvian economy in recent months has been almost in line with the expectation of various economists following the strong economic rebound in the first half of 2021.
However, some indicators have been more affected than expected by the impact of the mining stoppages between February and June. With the data updated to May, this has been noticed in a lower momentum of the primary GDP.
In a recent report, the BCR highlighted that primary activities decreased 3.6% in May 2022, a result that reflects the lower mining activity, mainly due to the stoppage of Las Bambas, and the lower production of fishmeal, oil, canned and frozen fish, due to the lower capture of marine species.
On the other hand, the national employment rate has been recovering quarter by quarter, but economists consulted by Bloomberg Línea emphasize that we cannot lose sight of the fact that adequate employment has not yet returned to pre-pandemic levels.
WHAT TO EXPECT FROM THE MESSAGE TO THE NATION ON JULY 28?
While the world faces more uncertainty on the economic side, Odar, Jimenez, and del Carpio agree that President Castillo has the opportunity to provide greater security for domestic investments, considering the official expectations of the BCR and the Ministry of Economy and Finance (MEF) still point to a null growth of the private investment.
“Political uncertainty is being added to the fall in terms of trade, which could contribute to lowering our private investment expectation of -3.3% for 2022. We had the impact of political uncertainty, but we have to see how the international situation develops,” Jiménez explains.
The economist emphasizes that Castillo has the possibility of “calming the waters” this July 28 in his presidential message, leaving behind the rules of the game, such as the proposals for a new Constitution or a change in the economic chapter of the Peruvian Constitution.
“With the minimum of demands is what can be asked of a president who is not doing things right. Giving tranquility is important in an environment like this. Pushing projects is also necessary, and the Minister of Economy seems to me to be doing an interesting job and could help a little,” says Jiménez.
For del Carpio, the fundamental thing in the short term is to generate clear conditions and rules of the game so that private investment does not panic anymore.
“More than very active actions, it is necessary to have an adequate playing field so that investment can take place and not to try to make employment even more rigid. There we see measures that are a bit worrying, that make formal hiring even more expensive and even more complex than it is at present,” he warns.
Finally, Odar points out that a comment on how to boost private investment in the short term or to relaunch a block of large public infrastructure projects “can generate a favorable context to promote private investment, but for now, the government is going in an opposite direction”.
With information from Bloomberg