Government strenghtens democratic institutions in Peru to attract investment and promote growth

With an average growth rate of 5.9% over the past decade, Peru’s economy has consistently outperformed most regional neighbours. Politically, the country has recently emerged from a period of instability and security concerns to rank among the top investment destinations in the developing world. That said, corruption continues to be a concern, particularly in the wake of several recent scandals which shook the country’s traditional political establishment. Aggravating this problem, a divided Congress has failed to reach any bipartisan agreement to push through much-needed anti-corruption reforms.

However, the emergence of Martín Vizcarra Cornejo, who assumed the presidency after Pedro Pablo Kuczynski’s resignation in March 2018, offers new hope to investors and Peruvians alike. Although it is still too early to assess his leadership, President Vizcarra has already shown promising signs that his administration will make concerted bipartisan efforts to combat rampant corruption, encourage investment and increase economic growth.

New Precedent

With the April 2016 election of Kuczynski, an Oxford- and Yale-educated economist and former Wall Street banker, Peru appeared to be following the path of several regional neighbours in its move towards more centrist and pro-business policies. However, less than two years into his term in office, President Kuczynski resigned in the face of mounting pressures from political opponents amid accusations of corruption. He was the first Latin American leader to resign over the widening Odebrecht scandal, in which numerous companies admitted to paying bribes to authorities in exchange for contracts, and is unlikely to be the last.

Other leaders have also been implicated, including three former Peruvian presidents, as well as prominent political figures in Venezuela, Brazil, Argentina, Ecuador, Mexico and Colombia. As such, the political instability following Kuczynski’s resignation must be understood in the wider context of broad regional corruption and transparency developments. Over and above the regional corruption investigations, Peru’s current political climate is underpinned by deeper structural problems within the country’s peculiar democratic framework, a hybrid presidential-parliamentary system prone to deadlock.

There are promising signs of change, however. Despite his relative inexperience – having most notably served as the governor of the small region of Moquegua – President Vizcarra has already made progress in breaking the political deadlock in Congress and appears to have crossed political lines and achieved bipartisan support. Furthermore, timely proposals to overhaul the electoral system before the next general elections in 2021 are already in the mix and appear to have broad-based approval.

The Vizcarra administration’s ability to leverage this bipartisan support to push through anti-corruption reforms and strengthen institutions in Peru’s judicial system will be key to ensuring foreign investment inflows continue. With economic losses from the Odebrecht scandal mounting, Vizcarra has already taken concrete steps towards addressing corruption in his short time in office.

This, together with clear signals that his administration intends to continue where President Kuczynski’s pro-business agenda left off, bodes well for Peru’s investment climate over the year ahead.

Political Deadlock 

Between April and June 2016, Peru held general elections to choose the country’s next president and members of parliament. The presidential election was a closely contested affair between two centre-right political blocs. Despite eventually losing the runoff vote to Kuczynski by a margin of 0.2%, or just over 40,000 votes, Keiko Fujimori’s Fuerza Popular (Popular Force) party has since dominated the congressional vote, after initially securing an absolute majority with 73 out of 140 seats in the unicameral Congress. By winning only 18 seats in Congress, Kuczynski’s Peruvians for Change (Peruanos Por el Kambio, PPK) party have encountered an uphill battle from the very beginning to implement its pro-business agenda focused on labour and tax regulation reforms.

Kuczynski found himself in a unique position. Fuerza Popular ’s strong hold over Congress threatened to render Kuczynski’s tenure ungovernable – not since 2000 had one single party held a majority in Peru’s legislature. In the years between, former presidents Alejandro Toledo (2001-06), Alan García (2006-11) and Ollanta Humala (2011-16) all lacked parliamentary majorities and depended on multi-party coalitions to govern. Despite winning the presidential vote, Kuczynski thus became the first president in a quarter of a century to govern without a majority, facing an opposition bloc that could dictate proceedings. Any legislation put forward by his administration required the support of Fuerza Popular, and from the outset, this led to concerns that the opposition party would prevent Kuczynski from governing, despite both sides sharing a similar reform agenda. Indeed, these reservations very quickly proved well-founded.

Unapproved Reforms

In Peru’s hybrid presidential-parliamentary system, Congress has the power to elect and dismiss the president’s cabinet. However, Peru’s constitution entitles the president to dissolve Congress and call for new congressional elections if two of his cabinets are entirely dismissed through a vote of no-confidence.

During Kuczynski’s term in office, this encouraged contentious political dealings between the president’s congressional allies and Fuerza Popular. The opposition party tried to stifle Kuczynski’s ability to govern by targeting his ministers, blocking government reform attempts and slowly eroding the popularity of his administration. In December 2016, just five months into his presidential term, Congress voted to sack Jaime Saavedra, the minister of education, in a major blow to the president’s education sector reform agenda. This followed another setback for Kuczynski a month earlier when his defence minister, Diego Nieto, resigned on charges of nepotism. From then on, the political impasse steadily worsened. In September 2017 Kuczynski’s entire cabinet was forced to resign when a motion for a vote of no confidence aimed at stopping the opposition from dismissing Kuczynski’s fourth cabinet minister in a year failed. By that time, sustained pressure from Fuerza Popular and waning public support for Kuczynski’s administration amid a protracted teachers’ strike had led to a virtual government stalemate.

In just over a year into his term in office, Kuczynski had reassigned 15 cabinet ministers. Stuck in an unfortunate situation, discontent grew within his own party for conceding to several Fuerza Popular cabinet picks, while legislators on the left became increasingly alienated from PPK. This deadlock culminated in an impeachment motion against Kuczynski in December 2017 on charges of corruption related to his former business dealings with Brazilian construction conglomerate Odebrecht, which admitted to paying approximately $800m in bribes to politicians and prominent businesspersons in the region. Although Kuczynski narrowly defeated the motion, it tarnished his political legitimacy.

Corruption Impact

Kuczynski’s alleged links to the Odebrecht scandal are only one part of Peru’s corruption and transparency issues. Keiko Fujimori, who is the daughter of former president Alberto Fujimori, was also under investigation on alleged corruption and money laundering links.

Apart from Brazil, Peru has been the country most affected by the Odebrecht scandal, both politically and economically, and much like Brazil, Peru has also seen its traditional political class on both sides of the divide implicated. In line with the scandals, public discontent with the political establishment has grown. Disapproval rates for Peru’s Congress sat at 82% as of March 2018, with approximately half of all Peruvians supporting the dissolution of Congress and calling for new elections.

Peruvian politics has suffered from corruption and failed attempts at reform long before Odebrecht, however. In 2000, for example, an ad hoc governmental anti-corruption commission made up of well-respected government and judicial figures was crucial in aiding the judiciary’s successful prosecution of Alberto Fujimori and other officials implicated in corruption scandals in the 1990s.

Efforts were also made in the early 2000s to overhaul Peru’s outdated criminal code by separating the powers of judges and public prosecutors, among other measures. However, newer networks of corruption began infiltrating the judicial system, undermining its ability prosecute and convict. Despite overt moves by the Toledo, García and Humala administrations to enhance the Ministry of Justice and Human Rights’ capacity to investigate and prosecute cases, funding remained weak. The limitations of reforms are underlined by the fact that all these leaders are either currently under investigation, fugitives from justice or in jail on corruption charges.

Since the early 2000s, polling has shown that public perceptions of corruption have remained high with pessimistic outlooks. Between 2004 and 2013, the period in which the country’s primary anti-corruption body, the High-Level Anti-Corruption Commission (Comisión de Alto Nivel Anticorrupción, CANA), conducted public perception surveys, confidence in the government’s abilities steadily decreased. This trend continued throughout much of the Humala and Kuczynski administrations.

In September 2017 public opinion polls suggested that 71% of Peruvians believed that corruption would worsen in the next five years. According to Transparency International’s Corruption Perceptions Index, Peru fell 24 places between 2008 and 2017, to rank 96th out of 180 countries surveyed.

Constraining Growth

As such, the Odebrecht scandal marks another chapter in Peru’s uphill struggle against corruption, and has already had an impact on the economy and foreign investment. In January 2018 Claudia Cooper, the former minister of economy and finance, estimated that the country would lose $9.3bn in infrastructure investments, with 150,000 jobs lost in 2017 alone due to the scandal.

The knock-on effect on the economy was noticeable, with GDP growing 2.5% in 2017 against an initial forecast rate of 5%. Despite this, however, economic forecasts remain upbeat: the World Bank and IMF predict stable economic growth of between 3.7% and 4% over the 2018-20 period, in part due to confidence in the Vizcarra administration’s ability to capitalise on increased production and exports in the mining sector, as well as the government stimulus plan focused on public infrastructure investment.

Restoring Confidence

The Vizcarra government’s ability to restore investor confidence and stem the tide of economic losses hinges on effective measures to address corruption and transparency challenges. Vizcarra has called on Peru and the wider region to step up governmental actions in this regard, and with his largely untarnished public record, he is in a strong position to push through such an agenda. This platform is set to become the cornerstone of Vizcarra’s administration and will likely be key to its long-term success, and the president has signalled his government’s intent to address these shortfalls.

The first step will be ensuring that the long list of recommendations put forward by the Presidential Integrity Commission (Comisión Presidencial de Integridad, CPI), an anti-corruption panel established in October 2016, is effectively implemented. Achieving this has not been without its challenges, however. As of April 2018 only 13 of the 100 recommendations made by the CPI had been entirely implemented, 17 partially implemented, and 70 others not implemented at all, according to the Integrity Observatory, an independent Peruvian corruption watchdog.

To accelerate their enactment, in April 2018 President Vizcarra announced plans to integrate CANA into his cabinet, a move that has been widely well received. Another concrete recommendation already being implemented is a proposal currently sitting with Congress that, if adopted, will require all public officials to publicly declare their finances.

Although there have been initial positive signs that his administration is taking solid actions, the success of this campaign ultimately hinges on Fuerza Popular’s support in Congress, which may prove a significant challenge, especially as several politicians, including Keiko Fujimori and even lawmakers in the PPK party, are under investigation and therefore unlikely to risk being exposed. However, if Vizcarra can drum up enough support for the public, he might just succeed in pushing the measure though, as they would potentially risk greater scrutiny by opposing it.

Opposition Rift

The waning popularity of Fuerza Popular caused by internal discord is another factor that bodes well for the ability of the PPK party to push through anti-corruption legislation. The decision of Kenji Fujimori, the son of Alberto Fujimori and brother of Keiko Fujimori, to break from party line and abstain from voting against Kuczynski’s impeachment in December 2017 was a watershed moment for modern Peruvian politics.

This action ultimately led to Kenji Fujimori’s decision to split from Fuerza Popular in late January 2018, taking nine other legislators with him. Adding to this, Kenji Fujimori has threatened to testify in the ongoing Odebrecht corruption investigation in which his sister has been implicated.

The political infighting has already significantly damaged the leadership of the Fujimori family as well as Fuerza Popular’s image. A recent poll taken in April 2018 showed a significant drop in public support for both Keiko and Kenji Fujimori with their approval ratings hovering at 19% and 15%, respectively, down from 23% and 27% a month earlier. Over and above public support, however, the feud has undermined Fuerza Popular’s congressional power.

Reform Agenda 

Key electoral changes intended to strengthen the government’s ability to overcome frequent political deadlocks could come into effect in time for the 2021 elections.

There are several major electoral reforms currently being proposed, including moves to re-establish a bicameral legislature, bar corrupt individuals from running for office, eliminate the preferential voting system, as well as increase the financial transparency of politicians. It remains to be seen whether or not the opposition will support these reforms, which were first proposed by Kuczynski’s administration and are still in their early stages. However, initial signs suggest that Fuerza Popular is willing to debate the proposals in Congress. There also appears to be widespread support across all party lines for some of the changes to be implemented.

While the 2021 elections may be still far away, ongoing corruption investigations could still remove several possible presidential candidates from the running. The political turmoil created in the wake of the Fujimori situation presents an opportunity for Vizcarra’s administration. If he can capitalise on Fuerza Popular’s internal divisions to garner votes for his reform agenda, it’s possible that he will make significant strides towards rebuilding public faith in Congress, overcoming the political impasse and shoring up investor confidence.

In his short time in office, the president has already appeared to have shown himself a capable political broker. Immediately after assuming office, for example, he nominated César Villanueva, a centrist opposition lawmaker, as prime minister. Villanueva, a two-time governor of the Amazonas Region and prime minister under former president Humala, is an experienced bipartisan dealmaker, who may be able to bridge Congress’s current political divide.

However, Vizcarra will need to build further political alliances to govern effectively. So far, he seems to have avoided repeating Kuczynski’s strategy. He has consulted opposition groups on his appointments and included those outside of Lima’s traditional political elite. He has also sought to build alliances between the national and regional governments, which bodes well for his administration ahead of crucial regional and municipal elections scheduled for October 2018. Victories for his allies in these elections will be crucial to the long-term sustainability plans to build a unified government.

Outlook

Political sustainability will depend on effective anti-corruption reforms and measures. At the eighth Summit of the Americas, held in Lima, Vizcarra underlined his government’s commitment to combating corruption. This was well received both domestically and internationally, with Luis Almagro, secretary-general of the Organisation of American States, congratulating Vizcarra for working to restore the political trust of Peruvians and put political and institutional stability back on track.

Looking ahead, a two-pronged agenda prioritising further Latin American regional cooperation on transnational corruption investigations, together with domestic judicial reforms and restructuring, will be key to the success of Vizcarra’s administration.

Combating corruption, encouraging further foreign investment, and re-establishing political stability remain Peru’s most significant challenges over the coming year. Congress’s political impasse poses a major stumbling block for Vizcarra, but early signs suggest he is capable of securing bipartisan support. His government’s ability to successfully push through economic, anti-corruption and political reforms will be key in sustaining economic growth, which is forecast to rise with the global commodity price rebound.