The Future Path of Peru’s New President

In an attempt to restore political order and stability, on the 16th November 2020 Peruvian lawmakers chose their third president in a week, Francisco Sagasti. This followed the 5 day rule of Manuel Merino, who was forced to resign due to mass protests over the controversial impeachment of the president before him, Martín Vizcarra. The centrist Sagasti is a former World Bank academic and there is now hope that he can restore order to a country that has been challenged by increasingly volatile protests against what is perceived to be a corrupt system and one that has faced one of the worst COVID-19 outbreaks worldwide.

One of the most pertinent issues Sagasti has to contend with is the pervasive corruption in the country. NBC News reports that every single living former president has been accused or charged with corruption and that half of congress faces charges against them ranging from corruption to homicide. President Vizcarra attempted to tackle this issue head on by removing the right to immunity of those in congress. However, he had no party backing him and was ousted on grounds of ‘permanent moral incapacity’ after he was accused of taking bribes when he was governor of a small province over 5 years ago.

Such widespread corruption is a major issue that will need addressing if the country seeks to encourage investment to bolster economic recovery post-pandemic. Peru is one of the largest oil producers in the world, but its oil industry is on the verge of collapse, partly due to corruption. The country is also the second largest copper producer, with 2.4 million tons produced in 2019; this industry may also be central in determining the extent of recovery, which is predicted to be 7.3% in 2021, according to the International Monetary Fund IMF). Corruption is likely to significantly deter investment into these sectors: for example, Palisades Hudson Asset Management, a US asset management firm, has recently suggested that corruption and worsening demographics has meant that the company has chosen to liquidate all its Latin American mutual funds.

COVID-19 has also devastated the economy and raised social tensions. GDP reduced 40% in April and the IMF predicts an overall 13.9% contraction this year. Peru enacted one of the longest lockdowns in the world, from the 16th March until June, yet it still has the fifteenth most total cases in the world, and one of the world’s highest death rates.  The BBC has suggested reasons for such high cases include 70% of the employed population working in the informal sector, consumers buying fresh food from markets due to 40% of the population living without a refrigerator, and a lack of investment into the healthcare system. In order to restore stability, the new president will have to find a new way to limit the spread but also ensure there is a long-term recovery plan in place.

Fortunately for Sagasti, there is hope of economic recovery. Despite Peru having the largest predicted drop in growth for 2020 of any large Latin American economy, it also has the largest predicted increase in growth for 2021 at 7.3%, more than twice that of Brazil and Mexico. Peru entered the pandemic as one of the stronger Latin American economies and had low levels of debt. It also recently announced the release of 100-year bonds, a further signal of economic strength. The previous government under Martín Vizcarra also announced packages worth 13% of GDP to help the economy, such as loans for restructuring and refinancing small or medium-sized companies. Mr Sagasti will have to use his vast economic experience within the World Bank, to help channel Peru’s potential. This may take the form of increasing the number of intensive care beds or providing better support for the poor. The latter may also help reduce protests.

The next few months will likely be as unpredictable as recent events for Peru, especially with vaccines potentially being rolled out. Peru’s new president, however, as a centrist and former World Bank academic, seemingly has the necessary tools and a clear mandate to address issues of systemic corruption and to assist an economy that has shrunk at record levels. In the meantime, there should be a focus on restoring order and making sure that the virus does not spread uncontrollably. If this is achieved, then the past few months may be just an aberration for one of Latin America’s more successful economies.

 

By Gregor MacDonald

Sector Head: Jared Gibson

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