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Instability and Unrest in Peru: Business as Usual?

Erin Drake 10 May 2022
10 May 2022    Erin Drake

GLOBAL RISK BULLETIN | VOL 4 2022

In this edition of the Global Risk Bulletin, we look at how Russia’s invasion of Ukraine has prompted European countries to reconsider their military capabilities and potentially driven Finland and Sweden to seek NATO membership, look at why Kazakhstan has been hesitant to support Russia’s invasion of Ukraine despite close ties between the countries, and discuss President Pedro Castillo’s prospects in navigating Peru’s tumultuous political and economic climate during his term.

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Erin Drake considers whether, facing a legacy of presidential ousting and political instability, President Pedro Castillo can avoid impeachment long enough to calm investor nerves and steer Peru away from growing unrest.

 

President Pedro Castillo took office in July 2021, with voters encouraged by the rural schoolteacher’s promises of economic upliftment and social accountability. It was not long before Castillo found himself on a similar trajectory as his predecessors, who, since Former President Pedro Pablo Kuczynski’s falling-out with Congress in 2016/7, have struggled to maintain their grip on power. With two impeachment votes and several cabinet reshuffles already under his belt, Peru’s president navigates a challenging political legacy. While unsuccessful, the impeachment votes against Castillo reflect pervasive political infighting and the resulting political and social instability that has plagued Peru since 2017. Castillo now also faces growing social discontent, with the Covid-19 pandemic and Ukraine crisis driving up living costs. At this stage, it seems unlikely that Castillo can hang on to power long enough to make any noteworthy changes to Peru’s political, security or commercial environment.

 

CASTILLO VS CONGRESS

Amid a fractured relationship between the executive and Congress, Peru’s leadership has changed hands four times in the past five years, with one president ousted in a parliamentary coup after dissolving Congress, and another resigning amid mass protests after only six days. Leftist president Castillo’s support among Peru’s opposition-controlled legislature has also dwindled. This has made it difficult for Castillo to implement or even formulate – any concrete policies or reforms, despite ambitions for increasing mining taxation and ‘regaining sovereignty’ over Peru’s natural resources. For investors, particularly in the mining sector, this is a blessing after initial concerns over Castillo’s agenda. But given Castillo’s lack of congressional support, any left-leaning reforms proposed by the president, especially nationalisation, are unlikely to gain traction in any case.

 

GROWING DISCONTENT 

Peru’s commercial climate and economy remain generally resilient to changes in political leadership. Even so, the political crisis has negatively impacted public perceptions of governmental legitimacy and the administration’s ability to address issues like anti-mining sentiment among rural communities. Protests against mining companies in southern Peru are longstanding, but extractive industry growth in recent years has exacerbated frustrations over the impact of mining on the environment and communities. Driven by anger over the president’s unfulfilled promises of holding companies accountable, protests have escalated since Castillo’s election win, which was incidentally bolstered by support from impoverished mining regions. Communities and mining firms also claim that the government has been ‘erratic’ in its ad hoc efforts to address disputes, likely due to Castillo’s attempt to simultaneously appeal to both constituents and powerful investors.    

Meanwhile, Peru’s middle- and lower-income populations are suffering the economic consequences of the pandemic and, most recently, Russia’s invasion of Ukraine. With inflation, food and fuel prices escalating, those with previously limited interest in the president’s feud with Congress are now blaming this for the government’s perceived indifference in addressing socio-economic concerns. An April 2022 public opinion poll showed a 79 percent disapproval rating for Congress, with 76 percent rejecting Castillo’s government and 63 percent demanding his resignation. Calls for constitutional change are also mounting, particularly over the law that currently forbids government intervention in price-setting by foreign companies.

Demonstrations in April disrupted commercial operations countrywide as protesters blockaded highways, and authorities imposed curfews in Lima. Many demonstrations have turned violent and at least six protesters have been killed. If Chile’s example is anything to go by, this, and Castillo’s decision to deploy the military along highways, will likely fuel existing anger and drive unrest, despite the government’s minimum wage increase and suspension of some fuel taxes. 

 

THE BOTTOM LINE AND THE TIPPING POINT

Instability will continue to characterise Peru’s political and security environment in the coming year. Castillo’s popularity is dropping, and with worsening socio-economic conditions, it will likely not be long before Congress seeks another impeachment. Protests could sporadically impact commercial activities, particularly those reliant on logistics, as demonstrators block highways and cities. Mining companies also face a continued threat of protests that can damage assets and delay operations.

Also worth considering is how changing geopolitical dynamics could exacerbate domestic instability. The fallout from the Ukraine crisis will see continued ramifications in the coming months, particularly in the global energy market and agricultural sector. In 2021 and early 2022, Peru’s agri-exports boomed, but fertiliser shortages and supply-chain disruptions could stunt this contribution to economic growth, which is expected to slow significantly, further impacting the government’s ability to address rising living costs and associated protests. Such a combination of factors could drive unrest and instability towards a tipping point that may make Peru’s investment climate less attractive.

Ultimately, Castillo lacks the technical expertise and political clout to make any major policy changes or steer Peru through its current crisis. Peru will likely not see any significant economic or business reforms as he focuses on staying in power until the end of his term in 2026. Should he be ousted before then, stability will depend on his successor’s agenda and relationship with Congress. Even so, investors have typically adopted a ‘wait-and-see’ approach to whether political machinations and unrest will impact Peru’s commercial environment, which usually tends to course-correct. As such, barring a major deterioration in the political or security landscape, investors will likely continue to favour Peru’s vast resources and generally stable macroeconomic conditions.

S-RM is a global risk consultancy providing intelligence, resilience and response solutions to clients worldwide. To discuss this article or other industry developments, please reach out to one of our experts.

Erin Drake
Erin drake Senior Analyst Email Erin

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