Peru seeks to maintain growth as demand for commodities falls

Buoyed by high commodity prices and market-friendly policies, Peru has been one of the best-performing and stable economies in Latin America over the past decade. Rapid economic growth has, in turn, spurred an emerging middle class and notable social gains, with the number of Peruvians living in poverty falling by more than half in the period between 2004 and 2014.

Economic Challenges

Today, the challenge facing Peru, as well as other commodity-driven economies in Latin America, is how to diversify its economy, ensure inclusive economic growth and sustain years of poverty reduction amid falling demand for commodities. This involves striking a balance between the expectations of the middle class, business leaders, foreign investors and the demands of influential local communities which live in Peru’s mineral-rich areas.

Since coming to power in mid-2011, President Ollanta Moisés Humala Tasso has tried to maintain this balance, though with varying degrees of success. The years 2014 and 2015 were particularly challenging, as has been reflected in low approval ratings, numerous Cabinet reshuffles and various anti-mining protests. This environment is likely to pose an ongoing challenge for Peru’s new president, following the national elections in April 2016.

Nonetheless, Peru is still regarded as an attractive destination for foreign companies, and investment continues to flow into mineral extraction, with the economy continuing to outpace that of many other Latin American countries. GDP figures from April 2015 show that economic recovery is gradually under way in Peru, following a year-long slowdown on weaker mineral exports in 2014.

Political Past

Peru’s political history, like that of many Latin American countries, has included periods of both military and civilian rule since the country gained independence from Spain in 1824. Peru emerged from a period of martial government in 1980 following the re-election of Fernando Belaúnde Terry, 12 years after he was deposed by a military coup. Belaúnde’s presidency (1980-85) saw the rise of Shining Path, a Maoist-inspired guerilla movement whose aim was to establish a communist government. The ensuing two-decade insurgency has marked Peru’s recent history and is a legacy the country is still coming to terms with. Nearly 70,000 people were killed in the war against Shining Path, according to Peru’s Truth and Reconciliation Commission, set up in 2001 to examine abuses committed in the 1980s and 1990s.

Political violence dominated Peru in the 1980s. A global downturn in commodity prices and a series of natural disasters sparked a period of hyperinflation and rising unemployment that put the country on the verge of bankruptcy. This provided a fertile breeding ground for the emergence of Shining Path – which was supported largely by Peru’s rural poor – and the rise of another guerrilla group, the Túpac Amaru Revolutionary Movement (MRTA). The conflict between the rebels and the government intensified, and by 1990 Shining Path had gained control of a number of large rural areas, particularly in the poor Andean region of Ayacucho in southern Peru.

In 1985 Alan García was elected president of Peru with the centre-left American Popular Revolutionary Alliance party. The transfer of power from Belaúnde to García marked Peru’s first peaceful government transition in 40 years. President García imposed price and exchange controls in an attempt to reign in high inflation and a substantial government deficit. Despite initial successes, Peru defaulted on its debt payment and in 1989, García’s last year in office, inflation reached as high as 3398%.

Fujimori Years

By 1990 Peru was in the midst of a crisis. Facing economic turmoil and a worsening security situation, the stage was set for the rise of an unlikely political outsider, Alberto Fujimori. The son of Japanese immigrants to Peru, Fujimori defeated the Nobel-prize winning writer Mario Vargas Llosa in the 1990 elections and, together with the new Cambio 90 party, vowed to improve the country’s economy and defeat guerrilla groups.

To address hyperinflation and the fiscal deficit, Fujimori opened up Peru’s economy and introduced free-market reforms, known as the “Fuji shock”. This move included privatising state-owned industries on a large scale, lifting price controls and removing obstacles to attract foreign investment. The measures helped get the economy back on track, with Peru’s GDP per capita increasing by an annual average of 3.9% between 1991 and 1997.

Crackdown

Fujimori also spearheaded a counter-insurgency military offensive against the rebels. In 1992, Shining Path’s leader, Abimael Guzmán, was captured by security forces and sentenced to life imprisonment, dealing the group a serious blow from which it never recovered. With Guzmán imprisoned, Shining Path saw its membership dwindle. By 1994 around 6000 guerrillas had surrendered under a government amnesty programme. Two years later, Fujimori faced the biggest attack by the MRTA rebels when they seized hostages at the Japanese ambassador’s residence in 1996. After a four-month siege, Peruvian commandos freed 71 hostages and killed all 14 rebels, including the group’s leader.

Authoritarian Rule

Fujimori’s counter-insurgency operations led to improved security but were marred by widespread human rights violations. His last years in power were also marked by increasing authoritarianism and greater military interference in politics. He suspended Congress, sacked Supreme Court judges and adopted a new constitution in 1993 that would allow him to seek re-election. In 1995 Fujimori was re-elected for a second time, though he fled the country before completing his term. It was a corruption scandal that ultimately led to Fujimori’s downfall. In 2000 videos were released showing the then intelligence chief Vladimiro Montesinos allegedly bribing a congressman, which subsequently forced Fujimori to resign and flee to Japan. Montesinos was later imprisoned on embezzlement and corruption charges.

Legacy Of Fujimori

Today Fujimori remains a polarising and controversial figure among Peruvians. While his supporters credit him for defeating the Shining Path, restoring security and tackling hyperinflation, his critics view him as a dictator, responsible for human rights abuses.

In 2005 Fujimori was arrested in Chile and extradited to Peru two years later to face trial. Now 76 years old, he is serving a 25-year prison sentence for human rights abuses and embezzlement. Whether or not Fujimori should be pardoned for his crimes continues to dominate debate in Peru. In 2013 President Humala rejected a request to pardon Fujimori on health grounds.

Fujimori’s legacy continues to shape Peruvian politics. His daughter, Keiko Fujimori, is a leading conservative congresswoman and heads the opposition Popular Force party. She is a likely presidential contender in the upcoming 2016 elections.

Growing Stability

The 1990s were marked by economic growth fuelled by a commodities boom. A victory by economist Alejandro Toledo of the new centre-left party, Possible Peru, marked a watershed in Peru’s history, as Toledo became the country’s first president of indigenous heritage. One of Toledo’s most notable achievements was the signing of a free trade agreement with the US in 2005.

However, his presidency was tainted when, in 2005, a congressional commission found Toledo guilty of electoral fraud that was committed in 2000, by having forged an estimated 80% of the signatures presented in order to be able to participate as a presidential candidate.

In 2006 Alan García achieved re-election after defeating his rival, Ollanta Humala, in a second round of voting. Two years later, García’s entire Cabinet resigned over a bribery scandal involving oil contracts. García also faced large-scale protests by indigenous groups in the Amazon over land rights in 2009, during which at least 32 people were killed.

2011 Elections

In 2011, Humala, a former army officer, ran for the presidency again as a candidate for the Peru Wins alliance, formed from the Peruvian Nationalist Party, the Peruvian Communist Party, the Peruvian Socialist Party and the Peruvian Socialist Revolutionary Party, among others. This time around Humala distanced himself from his left-wing and nationalist stance inspired by the late Hugo Chavez (Venezuelan president during 1999-2013) in favour of a more moderate centre-left platform modelled on Luis Inácio “Lula” da Silva (Brazilian president during 2003-11). The approach paid off, with Humala winning a runoff vote and defeating Keiko Fujimori. Many poor Peruvians rallied behind Humala on his pledge to close the gap between rich and poor.

Social Inclusion

Social inclusion has been the centrepiece of Humala’s five-year term, a policy that has gained traction in Peru and across Latin America in recent years. Social inclusion not only refers to reducing poverty and inequality but also aims to ensure better access to the formal labour market and increase political participation by raising awareness among people of their rights.

Low inflation and record foreign investment in Peru’s vast mineral resources has led to robust economic growth in the past decade, allowing successive governments to increase spending on social programmes. Between 2005 and 2014, Peru’s economy grew at an average annual rate of 6.1%. Robust economic growth has contributed to a significant decline in the poverty rate, which halved between 2005 and 2014, from 55.6% to 22.7%, according to the World Bank. Under Humala, 1.3m Peruvians were lifted out of poverty in the 2011-15 period. As part of efforts to reduce poverty, he expanded a programme of cash transfers targeting poor families, which reached 753,000 families in 2014. Humala has said he aims to ensure that 95% of Peru’s urban population and 75% of its rural population have access to drinking water by 2016, and that 80% of Peruvians are covered by health insurance. The government has also pledged to build 250,000 homes for low-income families by 2016 and has focused on providing a minimum pension for all Peruvians over age 65. In an address to congress in July 2014, Humala stated that 190,000 families had benefitted from the housing programmes.

Slow Growth

However, a global fall in commodity prices has weakened Peru’s economy. After increasing by 5.8% in 2013, Peru’s growth slowed to 2.4% in 2014. Maintaining a policy of social inclusion is set to be a challenge for Humala’s successor. José Angel Gurría, the secretary-general of the OECD said in October 2015, “Peru has been one of the most rapidly evolving Latin American economies over the past year, driven by significant reform and solid economic momentum, but it still faces big challenges if it is to consolidate its emerging middle class and set off along the path to inclusive and sustainable development.”

While substantial progress has been made in tackling poverty in Peru’s urban and coastal areas, it still remains stubbornly high in the poor indigenous communities of the Amazon, and in rural areas, where the percentage of people living in poverty was 46% in 2014, according to the country’s statistics agency.

The government also faces the challenge of ensuring that mining income taxes transferred to regional governments are efficiently managed and spent at the local level. According to an EY 2014-15 investment report, “Regional and local authorities are still sitting on billions of nuevos soles from mining canon and mining royalties, which could be used to fund new roads, hospitals, schools and water projects.”

Political Instability

Humala has faced a number of political challenges since coming to power in the middle of 2011. He began on the back foot following a very narrow victory over Keiko Fujimori, with 51.5% of the votes. Humala’s Peru Wins coalition party gained 47 out of the 130 seats in Congress, well short of a majority.

Support for Humala among left-wing parties has dwindled following what they view as his shift to the centre and capitulation to mining companies. This has eroded Humala’s political base, and a number of his original left-wing allies have deserted his government. Since Humala took office, there have been at least 14 defections, further reducing the number of seats held by Humala’s coalition to half its original size. Corruption allegations against close allies and a money- laundering scandal involving his wife, Nadine Heredia, have also served to harm Humala’s approval ratings, which dropped to 17% in September 2015, the lowest since he assumed office.

Violent protests over mining projects have also undermined political stability and Humala’s approval ratings, particularly in 2014 and 2015. In response, Humala has undergone several Cabinet reshuffles to restore confidence in his government. A February 2015 reshuffle saw the President name his seventh interior minister. Since coming to office, Humala has appointed three defence ministers and seven different prime ministers. In March 2015 former premier Ana Jara became the first prime minister to be removed by Congress in 52 years.

With an opposition-controlled Congress, Humala suffered congressional defeats on pension and labour reforms in early 2015. His biggest defeat was in July 2015 when lawmakers elected an opposition legislator, Luis Iberico, from the Alliance for Big Change party, as head of Congress. Humala will now face his last year in office without legislative control.

Furthermore, maintaining political stability is made difficult by Peru’s political landscape, which is marked by a high level of fragmentation, with a large number of independent movements and weak political parties receiving low shares of the vote, particularly at the regional level. Peru’s regional parties tend to be short-lived, personality-driven and focused on local rather than national issues.

Mineral Conflict

Peru’s economy is highly dependent on its vast mineral resources, and its extractive sector is the main driver of growth. Peru is the world’s third-biggest producer of copper, its major export metal, and the country also attracts the world’s major mining companies to tap into its deposits of gold, silver, zinc and other minerals.

Rapid and large-scale development of the mining industry has brought increased social conflict and growing concerns over environmental damage and water supplies. Dealing with widespread protests over mining projects has dominated Humala’s term from the outset. In late September 2015, the president declared a state of emergency for a month following protests in which three people died at the Chinese-owned $7.4bn Las Bambas copper mine under construction. Another hotspot for protests is the $4.8bn Conga copper and gold mine, owned by Colorado-based mining company Newmont, which opponents argue will cause pollution and destroy water supplies. Development of the mine has been on hold since 2011 pending government authorisation.

To address the demands of communities who say they are not given sufficient information about extractive and logging projects on the lands on which they live, Humala introduced a prior consultation law in 2011. While the law requires companies to consult with locals before undertaking projects that affect them, it does not allow communities to veto projects.

Indeed, protests have derailed several big mining projects in 2015. In June Southern Copper Corp’s $1.4bn Tia Maria copper mine in Peru’s south was put on hold amid deadly protests over fears about environmental damage as construction was set to start.

Finding the right balance between the rights and growing expectations of local communities, many of them indigenous people living in mining areas, and the need to attract foreign investment to ensure continued economic growth will continue to be a key challenge for Humala’s successor.

Security Issues

While Shining Path is largely defunct, the group continues with the remnants of a political following, and small rebel units remain active in the cocaine trade in jungle areas. Shining Path’s last big attack was in April 2012 when rebels captured, and later freed, 36 natural gas workers in their first large-scale kidnapping since 2003.

Humala has faced sporadic attacks and ambushes by rebels against security forces as the government cracks down on drug trafficking concentrated in the Apurimac, Ene and Mantaro river valleys. With 6.6 murders per 100,000 people recorded in 2013, Peru’s homicide rate is below the Americas’ average of 15.5 murders per 100,000, and is significantly lower when compared with its neighbours Brazil, Colombia and Venezuela and parts of Central America. However, opinion polls in mid-2015 showed crime, such as street robbery, is a growing concern among Peruvians and, as such, is likely to be a key issue on the campaign trail ahead of the elections.

Coca Production

Peru, along with Colombia and Bolivia, dominate the world’s production of coca, the raw ingredient for cocaine. According to the US government, in 2014 Peru remained “the world’s top potential producer of cocaine for the third consecutive year,” surpassing Colombia. Most of the cocaine produced in Peru is exported for consumption. In recent years, a US-backed coca eradication scheme being conducted by Peru’s authorities to clear fields of coca has made progress. According to government figures released in July 2015, coca production in Peru dropped by almost 14% in 2014 compared to 2013.

Foreign Policy

Peru’s fast-growing economy has also seen it take on a more active leadership role on the international stage. In October 2015 Peru hosted an annual meeting of the IMF, the first Latin American nation to do so in nearly 50 years.

Humala, like his predecessors, has continued to champion free trade as part of the government’s commitment to integrate its emerging economy with world markets. Peru is an active member of the Pacific Alliance, a regional integration initiative that includes Mexico, Colombia and Chile. In October 2015 Peru joined the Trans-Pacific Partnership, which brings together Peru, the US and 10 Pacific Rim nations, uniting 40% of the world’s economy.

Election Time

Peru’s citizens will head to the polls in April 2016 to elect a new president, as well as 130 members of Congress. Keiko Fujimori leads her rivals in polls as of April 2015. The right-wing populist is expected to run for the second time, though as of October 2015 she had yet to officially announce her presidential bid. In October 2015 Alan García, former two-time president, announced that he was running. Pedro Pablo Kuczynski, a former World Bank economist and the country’s prime minister between 2005 and 2006, who describes himself as a “progressive”, has also announced his bid for the presidency and is running for the second time, following his unsuccessful bid in 2013. The winner of the presidential election will sit for a five-year term.

Outlook

With an opposition-controlled Congress, low approval ratings and ongoing mining conflicts, President Humala is expected to face a difficult last year in office.

The year 2016 looks set to be dominated by election campaigning, and it is likely that Humala’s weakened coalition will realign and seek to build new alliances ahead of the national elections.