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The new government in Peru: Perspectives of its economic and foreign policy

 

                                                                                                                                          Carlos Aquino*

On august 26^th the first cabinet of President Pedro Castillo will present itself in Peru Congress to get an approval vote for its policies. But there are some doubts about it getting the approval from the Congress because several members of the cabinet are being questioned by the opposition parties and the public opinion. A Minister of Foreign Affairs was asked to resign from the government following criticism by several sectors of society for what was called his “apology of terrorism”. So, even if the cabinet is confirmed, it will have a low approval rate among the public, and the possibility of Ministers being censured later by the Congress is high, and this will create political instability and uncertainty in the economy.

Peru suffered a lot with the COVID-19 pandemic, having accumulated up to now more than 197 thousand deaths, in a population of 32 million people. Its economy was hard hit last year, declining at an annual rate of 11.1%. And there is a high probability that a third wave of contagion of COVID-19 will hit the country perhaps at the end of next month. Given the fact that the vaccination rate of the population is less than 25% of the total, and there are doubts about the public health system being able to cope with that, the effects in the society and the economy also could be troublesome. 

An analysis of the new government of President Pedro Castillo will be provided in this article. It will focus in the economic and political aspect, and the perspectives of its economic and foreign policy.           

1. Political situation of the country. -

Pedro Castillo was elected in a runoff and won by a margin of just 44 thousand votes of a total of 17.5 million votes (he got 50.125% of the total). In the first round he got only 19% of the total votes. His triumph was due more to people voting for him to avoid electing Keiko Fujimori, whose father, a former President, was sentenced for corruption and human rights violations (and she herself has also been accused of corruption). Castillo, a schoolteacher with no previous experience in public office, was elected in the ticket of the political party “Peru Libre”, a left party whose main leaders are Marxist-Leninist. 

In a one chamber Congress of 130 members, Peru Libre has only 37 representatives, it is the largest party in the Congress, and together with its political ally, “Juntos por el Peru”, a leftist party which has 5 votes, the two have 42 votes. There are two political parties, “Somos Peru” and “Partido Morado”, that are considered close to the government, and this two together has 9 representatives, for a total of 51 votes for the government.

Of the remaining parties, the second biggest party in Congress is “Fuerza Popular” of Keiko Fujimori, which has 24 votes. With the party “Avanza Pais” that has 10 votes and “Renovacion Popular” with 9 votes, the three are considered right leaning parties and of strong opposition to the government, having them a total of 43 votes. There are three additional parties considered in the center of the political spectrum: “Accion Popular”, with 16 votes, “Alianza para el Progreso” with 15 votes, and “Podemos Peru” with 5 votes.

As can be seen there are ten political parties in Congress and the biggest, the governing party, with its ally has just 42 votes in a total of 130, around 32% of the total. The two parties must get votes from other parties to pass a law that usually requires more than half of the total votes, around 66. To get the approval of the new Cabinet it also needs 66 votes.   

The governing party has already suffered defeats in the Congress. It presented a list to win the Congress Board of Directors but got only 50 votes, being defeated by one of the lists presented by the opposition, who got 69 votes. Also, the Congress elects 24 Committees and the most important ones, as Budget, Constitution, and Oversight, are in the hands of the opposition.

In the presidential period July 2016-july 2021 Peru Congress impeached a President (and another resigned to office before being impeached) and given the strong opposition of some parties to the government, there are talks about the possibility of impeaching also President Castillo. For this to happen a total of 87 votes are needed.  

Getting 87 votes are not easy so now some opposition parties are talking about questioning or censuring some cabinet ministers. The new cabinet that will present on August 26 to the plenum of Congress has several Ministers that are being criticized and probably could get censured. Even the President of the Cabinet is being criticized, and he, with at least 5 Ministers: Defense, Culture, Labor, Internal Affairs, and Transport and Communications, are said to be unfit for office because of their lack of experience in the field, or for having legal problems, or for being apologists of terrorism[1]. The first named Minister of Foreign Affairs, Hector Bejar, was forced to resign with less than 3 weeks in office because he was accused of apology of terrorism and for blaming the Peru Navy of having initiated the terrorism in the country. He even said that the Shining Path movement (Sendero Luminoso), that brought terror to Peru in the 1980s and beginning of the 1990s, was in part a creation of the Central Intelligence Agency (CIA). Bejar himself, an 85-year person, spent several years in the 1960s in jail for committing terrorist acts.

So, the political situation in Peru is not stable. With weak political parties, a divided Congress, and strong opposition to the Castillo government, even if the new Cabinet is approved, the possibility of Ministers being questioned and censured by the Congress is almost certain. To question and censure a Minister 79 votes are needed. The opposition certainly could get those votes.

The opposition to the government is not only because some Ministers are accused of being unfit for office but mainly because the governing party Peru Libre wants to change Peru’s Constitution and aims for a model like in Venezuela and Cuba, where government role in the economy is strong and there are limits to the activity of the private sector. Also, the opposition said that the real aim of changing the Constitution through the election of a Constituent Assembly, as Peru Libre wants, is to change the rules of political elections and allow the President and the governing party to stay in office forever, like in Cuba and Venezuela.

Some analysts even think that what the government wants is to close the Congress and call a Constituent Assembly. For this, it is aiming for the Congress not to approve two Cabinets, and then the President can dissolve the Congress and call for new elections.   

That’s why the governing party has been accused of being communist. At least its main leaders, as the General Secretary of the party, Vladimir Cerron, have shown their admiration for the Cuba and Venezuela regime. Cerron influence in the party is strong, and many analysts think that he is the real power behind the throne, and Castillo will yield to him. Cerron created the party Peru Libre and Castillo was called to be its candidate for the Presidency.  

Precisely the call for changing Peru economic system advocated by Cerron, and other party leaders, is bringing a lot of instability and affecting the economy. A look at this situation is given below.             

2. Economic situation. -

As was said before, Peru experienced one of the worst economic performances in the world in 2020, with the economy declining 11.1%. The poverty rate increased in the country from 22% in 2019 to around 30% at the end of 2020.

Peru is a middle-income country, with around 6,500 dollars income per capita. But its economic structure is weak, with a low industrialization rate, and dependent on the export of natural resources, that has in abundance, and on inflows of foreign investment. But from the year 2000 to 2019 the economy grew without interruption and was considered a star in the Latin American region (See graph 1 below). Its macro-economic figures were impressive. A low inflation rate, low or nearly zero budget deficit, high international foreign exchange reserves, and low level of external debt. Its exports of goods increased from a value of 7 billion dollars in 2000 to around 46 billion dollars in 2019.

Source: Peru Central Bank: Annual Report 2019; https://www.bcrp.gob.pe/eng-docs/Publications/Annual-Reports/2019/annual-report-2019-1.pdf

That was possible because from 1990 onwards Peru implemented economic reforms to open more its economy to foreign competition, lowering import tariff rates, welcoming foreign investment, making more flexible the labor market, and diminishing the role of the state in the economy. State owned companies were privatized, and many of them were bought by foreign investors, and Peru embarked in a string of free trade agreements (FTA) with its main trade partners. Also, the country put more emphasis in the Asia region, joining the APEC forum in 1998, and establishing FTAs with China, South Korea, Japan, and recently ratified the CPTPP agreement.

As a result, now Asia is the most important market for Peru exports. In 2010 only 26% of Peru exports went to Asia, but in 2020 around 46% went to that region. China has become the main market, with 29% of total in 2020, and in a second and distant place with only 13% of the total is the United States. And Asia importance is bound to increase as it is the most important market for Peru exports that in a 70% are mainly mineral, natural gas and petroleum, and fishmeal. Already in the first 6 months of this year China accounted for 35% of Peru exports and US only 12%[2].    

But, despite the impressive economic growth and good export performance, Peru economy suffered a lot in 2020 because of a combination of factors. First, the country was in lockdown for many months because of the pandemic, paralyzing the economic activity; second, as the economy has a high level of informality, with employment calculated to be around 70% informal, many people lost their incomes; and third, because of high income inequality, many people could not live and consume with the economy paralyzed. To this it could be added the incompetence of the government in managing the pandemic (for extending the lockdown of the economy without taking the necessary measures to control the pandemic and avoid its propagation), and the poor state of public health system that could not cope with the pandemic, resulting as said before in more than 197 thousand deaths. Peru has the highest COVID-19 deaths per capita in the world[3].

The economy was supposed to recover and achieve pre pandemic levels this year or the next, due, among other things, to a recovery of the world economy, as Peru depends on a lot of this for its exports, but the situation began to change when in the first round of elections in April Pedro Castillo came first in the ballot. His party plans to change the rules of the game in the economy, by increasing the role of the state, putting limits to the foreign investment participation, and especially his plans to change the Constitution and its admiration of Cuba and Venezuela, made private investors wary of him.

So, the Peru currency, the Sol, began losing value against the dollar, the Lima stock exchange also decreased in value, and many people began taking its money from the bank and changing it to dollars, or taking it outside the country. It is estimated that around 8 billion dollars has left the country in the last months. Peru foreign exchange reserves at the beginning of the year were about 73 billion dollars. Peru GDP is about 200 billion dollars. As Castillo won the Presidency in the runoff elections in June this trend began to increase.

Besides the called “socialist agenda” of its economic policy, what make investors also wary of Castillo’s regime is the sense that his government is not filling public offices with capable people. As said before, many Ministers are being questioned for that, and the proposal to lower salaries of high public officers (already its Ministers have said they will receive only half of their salaries) and the fact that several posts have been filled by people with no previous experience and of low qualifications, is creating more economic uncertainty. Already several of them have resigned following criticism that they were not suitable for office (several Vice ministers and high-level officers for example had to resign).

Peru has a problem specially because of a lack of a meritocratic system in government, and with each change of administration, governments posts are filled with people belonging to the winning party (regardless of their merits). This is particularly troublesome now, because the Peru Libre party has never been in office before, and its General Secretary Vladimir Cerron was the Governor of a region in central Peru, but his record of government is dismal (he was dismissed from office accused of corruption).

Corruption is an endemic problem in Peru, and present at every level. According to Contraloria General de la Republica (Comptroller General of the Republic), the state lost 22 billion soles to corruption in 2020. This amount was equivalent to 12% of the general budget that year[4]. All 6 formers Presidents of Peru has also been accused of corruption, and several were or are in jail.    

To calm the markets and investors Castillo named an economist, Pedro Francke, who is seen as center left and worked before in government. But the pressure to spend more to implement a populist agenda is already in force. The government announced that it will give subsides to poor families, for a total of 5.145 billion soles. This amount is equivalent to 0.6% of Peru GDP[5], and around 2.8% of the public budget of 183 billion soles in 2021. Also, the government has announced that it will give subsidies to lower the price of the natural gas used by families[6].

Annual inflation rate in Peru has been very low in the last years, of around 2%, but has increased in the last month, to around 4%, fueled by uncertainty in the markets for the economic policies that will implement Castillo government. The sol has depreciated in the last months, from a level of 3.63 soles per dollars at the beginning of this year to 4.09 soles on august 24^th[7]. Peru is a net importer of petroleum and natural gas, and of wheat, corn, meat, and all this is impacting in the higher cost of food and living expenses.         

But a brighter side of Peru economy is that several commodities that the country exports are achieving high prices. Copper, which alone account for 30% of Peru exports are in a historic high price, even higher that the level achieved during the super cycle boom for commodities prices that began in 2003 and finished in 2011-2012. Already taxes paid by mining companies during the first 6 months of this years are higher than the amount they paid in the whole of 2020 or 2019. In the first 6 months of 2021 Peru exported for a value of 24.3 billion dollars and it is estimated it will register a historic record of 50 billion dollars for the whole year. Strong exports are the result of not only higher prices for commodities but also of higher exports of agroindustry products, of which Peru is becoming very competitive.

At the beginning of this year the economy was forecasted to grow around 10% in 2021, but political uncertainty is refraining investors and the projection is for the economy to growth 9% or less this year and less than 3% the following two years. But all this could be more complicated and the environment for foreign companies in the mining sector will became bleak if Castillo proposal to tax them more as he said during the election campaign is carried on. The mining sector is the main engine for Peru exports (60% of Peru exports are of the mining sector: copper, gold, silver, iron ore, and others) but investment for more production is being halted in several projects because of protests by local communities. And Castillo also promised these communities that mining projects will not get approval if he is elected.

So far Castillo government has refrained of taking measures against mining companies and said that mining projects will be feasible if they are “socially acceptable”. What that does mean is still not clear.

In addition to the above mentioned, if Castillo government insist on changing the Constitution through the election of a Constituent Assembly, this will create more uncertainty to the whole economy and the prospects for economic growth will become more somber.

3. Foreign policy. -

Regarding the foreign policy of the new government, President Pedro Castillo did not mention anything about it in his inaugural address in Congress on July 28th. Some analysts estimates that a change in Peru foreign policy could happen under Castillo regime. For example, his first Ministry of Foreign Affairs, Hector Bejar, showed strong support for the Cuba and the Venezuela regime. He met on July 30th with Venezuela Minister of Foreign Affairs with whom he talked about “reestablishing relations to the highest level”.

As is known, Peru was one of the creators of the “Group of Lima”, a group of Latin American countries that opposed the present Venezuela regime. The Group was created in 2017 by 12 countries but have not achieved tangible results. Peru, and several of those governments, cut diplomatic relations with the Venezuela regime of President Maduro. But as several leftist parties assumed power in Latin America, some of the countries left the Group of Lima, like Argentina. Under Minister Bejar also that could have happened in Peru.

Bejar had to resign his post and the new Foreign Minister is Oscar Maurtua de Romaña, a career diplomat and former Minister of Foreign Affairs. Perhaps under Minister Maurtua de Romaña Peru foreign policy will not change, but within the Peru Libre party there have been criticism of Maurtua de Romaña designation. Vladimir Cerron, the leader of the party, said that Maurtua de Romaña cannot represent a party of the left. Cerron wants a foreign policy independent of US and rejects foreign interference on the affairs of Latin America[8] .

When Castillo was campaigning for the Presidency, he and leaders of his party also criticized the FTAs signed by Peru. They talked about achieving an integration of the Latin American region instead of searching FTA with countries in other regions. They even talked about the possibility of renegotiating some FTAs because they said it has not benefited Peru.

It has been told, and when Bejar was Minister even said it, that under a Castillo government Peru will put more emphasis in working with countries of the UNASUR, a group of countries that in 2007 created this organization looking to achieve an integration of the region. The Constitutive Treaty of UNASUR entered into force in 2011. Most of its members where countries that at the time had leftist governments, but in 2018 several countries decided to suspend their membership (among them Peru) and even some withdrew from the organization.

Also, under Castillo government Peru participation in the Alianza del Pacifico, a group of 4 countries in the Latin America region with liberal economic policies and open to foreign trade and investment, could change according to some analysts. Countries in this group, Peru, Mexico, Chile, and Colombia have the most open economies in the region and have signed many FTAs with countries outside Latin America. But besides Peru that have now a leftist government, it is probably that in next year elections also Chile and Bolivia could elect leftist governments. The South America region could by next year have more leftist governments, in addition to the ones in Peru, Venezuela, Bolivia and Argentine. See next Map.         

More leftist governments in South America in 2022?

Source: Macroconsult: Alianza del Pacifico: Viraje a la izquierda

There is a possibility that regarding policies about FTAs for example, Castillo government could adopt a pragmatic approach, as the one adopted by President Lopez Obrador in Mexico. The Mexican President is also a person of leftist ideas but given the fact that Mexico economy is highly integrated to the North American market, he has kept its country economy integration under the USMCA. Peru´s economy is also becoming more integrated in the international economy. The external trade represents around 40% of GDP, and accumulated foreign direct investment is around 60% of GDP. So, the stakes are high. The problem with Castillo is that his party is Marxist-Leninist, and several leaders of its organization have criticized FTAs.

It seems President Castillo is aware of the growing importance of Peru main trade and business partners as China. He visited the Chinese Embassy on July 15^th, even before he was officially declared the winner in the election. And after the elections several Ministries in his government have meet the Chinese Ambassador and executives of Chinee companies, giving them assurance that Peru will continue business with them as usual. China is not only the main trade partner of Peru but is also one of the main investors in the country. Chinese investment represents around a quarter of all accumulated foreign investment in Peru. And Chinese companies produce around 25% of copper, 100% of iron ore, and 30% of petroleum of the country. If Castillo government put more taxes to foreign companies in the mining sector, Chinese companies will be among the affected.            

But as it is said foreign policy reflects domestic policies, so special attention must be given to how Castillo government implement domestic policies. In this regard, next presentation of the Cabinet on August 26th in the National Congress has a special meaning.

 

 

 

 

 

                                                                                                                              August 24^th, 2021

 

 

 

*Carlos Aquino is Director of the Center for Asian Studies, San Marcos National University

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[1] The last one being accused is the Minister of Labor. See RPP: https://rpp.pe/politica/gobierno/iber-maravi-niega-responsabilidad-en-actos-terroristas-y-afirma-que-buscan-condenarlo-con-atestados-policiales-noticia-1354062

[2] See Promperu statistics: https://exportemos.pe/promperustat/frmRanking_x_Pais.aspx

[3] See RCP Coronavirus Tracker: https://www.realclearpolitics.com/coronavirus/?fbclid=IwAR0ZgG-ghP_Xp9rXMPN07jiPIisIr_dggoLyDaUSYg1k27aqqMS3YTt8n0w

[4] RPP: https://rpp.pe/economia/economia/corrupcion-genero-perdidas-de-s-22000-millones-al-estado-en-el-2020-segun-la-contraloria-noticia-1346152

[5] Semana Económica: https://semanaeconomica.com/economia-finanzas/politica-fiscal/bono-de-s700-empujaria-el-deficit-fiscal-al-limite-fijado-para-el-2021

[6] Gestion: https://gestion.pe/economia/precio-del-balon-de-gas-bajaria-hasta-s-39-en-promedio-con-fondo-de-estabilizacion-glp-minem-ivan-merino-mef-noticia/

[7] Investing.com: https://es.investing.com/currencies/usd-pen

[8] Gestion: https://gestion.pe/peru/politica/vladimir-cerron-nuevo-canciller-oscar-maurtua-no-representa-el-sentir-de-peru-libre-nndc-noticia/

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