Peru FDI: In Spite of Political Uncertainty

16 March 2023

Peru has suffered significant political turmoil in the last few years. Since the election of president Pedro Pablo Kuczynski in 2016, not a year has passed without a major upset for the political establishment. This ongoing situation, of course, has deep economic consequences, some of which the country has not yet internalized.  One reason for these delayed outcomes is that exports just kept growing. From 2019 to 2022, mineral exports increased by 16%, while those from agricultural surged almost 40%. Better prices and investments made in the previous years explained the expansion. A more careful analysis, however, suggests caution against any temptation for complacency. Protests slowed or stopped some mining operations for long periods, causing its output to drop every quarter on a yearly basis from Q4-21 to Q3-22. In 2020, Congress implemented harmful changes in the law that provides guidelines for modern agriculture. The question is not so much whether exports grew within a context of political uncertainty, but rather how much they would have grown without it.

In the medium term, exports are always dependent on private investment. This metric fell 0.5% in 2022 when compared to the previous year. For 2023, the Peruvian Institute of Economics (IPE) anticipates another yearly drop of 3%. Worsening business outlooks and sustained civil unrest have stalled some large foreign investments, while anecdotal cases abound. In mining, Newmont (US) postponed until further notice the development of Sulfuros Yanacocha, an investment of over US$2 billion. MMG (China), operator of Las Bambas mine, has been unable to expand its operations to the Chalcobamba pit, an initiative of around US$800 million. Some foreign companies have reduced their stake in the country too. This is the case for Glencore (Switzerland), which started the process of selling a quarter of its equity in Volcan mine, and for Enel (Italy), which is shelving its Peruvian operations, worth about US$3 billion, according to press reporting.

Still, despite these cases, it would be a mistake to portray general foreign investment as leaving the country. It would be more sensible to state that investment conditions have deteriorated enough to, on the margin, trigger corporate decisions that limit the exposure to Peru by some foreign companies.  Overall, macroeconomic indicators suggest the Peruvian economy has been more resilient than anticipated--but strengths are never unlimited.