The sudden removal of a popular president amidst the coronavirus pandemic plunged Peru into chaos last month.
On Nov. 9, Peru’s single-chamber Congress voted to impeach President Martín Vizcarra amid allegations that, while a provincial governor, he had received a payment of 5 million Peruvian Sols (US$1.4 million) from a company awarded the contract to build a public hospital in the southern city of Moquegua. The move was the latest dramatic political development in one of the world’s leading mining jurisdictions.
Peru’s most popular president in a generation, Vizcarra’s sudden removal from office sparked major protests in Lima and other cities accusing the lawmakers who ejected him of launching a coup d’etat against the legitimate government.
When two young protesters were shot dead during clashes with police in Lima, Vizcarra’s successor Manuel Merino resigned as president after just five days in the post. A day later Congress elected economist Francisco Sagasti as its new head and subsequently President of the Republic.
Since then, the situation has calmed significantly. Protests have subsided after the new head of state promised to hold the post until next July when a newly elected president is due to take office.
While Vizcarra’s ousting from office and the subsequent turmoil had little impact on Peru’s world-class mining industry, observers fear that the country’s increasingly chaotic political scene is taking its toll on its ability to attract investment in the long term.
Even before Vizcarra resigned, all five presidents to hold office this century were under investigation. In March 2018, Vizcarra’s predecessor Pedro Pablo Kunzcynski resigned over payments from Odebrecht, the Brazilian construction giant whose name has become a byword for corruption throughout Latin America.
Before them, Alberto Fujimori, Peru’s president from 1990 until 2000, has spent more than a decade behind bars for murder and embezzlement charges, Alejandro Toledo (2001-2006) is fighting extradition from the US to Peru on corruption charges, while Ollanta Humala (2011-2016) and his wife are under investigation for money-laundering. Alan Garcia (2006-2011) killed himself last year when police appeared at his house to interrogate him over links to Odebrecht.
Following his unexpected promotion, Vizcarra made cleaning up Peru’s dirty politics a priority, a move that placed him on a collision course with lawmakers, many of whom face corruption charges themselves. In late 2018, he scored a major victory when voters overwhelmingly approved three of his four flagship reforms in a referendum (improving the way judges are appointed, banning lawmakers from seeking re-election and strengthening regulations of party finances, but not a return to a two-chamber legislature).
So far investors seem reassured.
On November 24, the government issued US$4 billion worth of bonds including its first 100-year bond, backed by a confirmation of its BBB+ sovereign debt rating from ratings agency S&P Global Ratings. The bonds attracted an interest rate of just 3.23%, or just 170 points above U.S. Treasuries.
Nor has the gridlock in Lima have gummed the wheels of bureaucracy. Permitting and community engagement procedures for new mining projects are continuing although slowed by the difficulties imposed by the Covid-19 pandemic, says Luquman Shaheen, CEO and president of Panoro Minerals (TSXV: PML), which is developing the Cotabambas copper project in southern Peru.
That’s good news for miners and the country.
Giant mines such as Glencore’s (LSE: GLEN) Antapaccay, MMG’s Las Bambas, and Chinalco’s Toromocho have almost doubled Peru’s copper output over the last decade, making it the world’s second largest exporter of the metal as well as a major producer of gold, silver, tin, and zinc.
The expansion of the mining industry has driven Peru’s economic growth, with poverty levels falling from over 50% at the start of the century to less than a quarter in recent years.
And the country continues to attract significant investment. New mines under construction include Anglo American’s (LSE: AAL) US$5.3 billion Quellaveco copper project, and the US$900 million Mina Justa, owned by tin miner Minsur and Chilean industrial group Empresas Copec.
The turmoil comes amid a Coronavirus outbreak which has so far claimed the lives of 35,000 Peruvians, the second highest per capita death toll in the world. Despite a nationwide lockdown imposed from mid-March, which even closed the giant copper mines for several weeks, the disease has spread rapaciously as millions of informal workers were forced onto the streets or fled to rural areas, taking the virus with them.
As a result, the country is facing one of the worst economic contractions in the region as well as the near-collapse of its ramshackle healthcare sector.
The economy is expected to bounce back in 2021, in part driven by a 15% jump in copper production to 2.4 million tonnes following this year’s shutdowns.
Despite the hardships suffered by millions of Peruvians over the last ten months, a radical change of course is not expected at next April’s presidential vote.
“We don’t see demands for significant changes to the economic structures,” notes Pablo de la Flor, executive director of the national mining and energy association SNMPE
Memories of economic chaos in the 1980s and the arrival of more than 800,000 Venezuelans fleeing a similar mess at home have largely immunized Peruvian voters from the populist strains which are once again sweeping Latin America, says Nicolas Urrutia, a senior analyst at ControlRisks,
“Even in the context of Covid-19, voters are expected to cast their votes for candidates who promote fairly orthodox economic policies,” he told The Northern Miner.
However, many are concerned by the longer-term impacts of Peru’s political gridlock.
Whoever wins next year’s elections (and there is no clear favorite yet) is likely to face a fragmented congress.
Without a majority, the incoming president will have to seek ad-hoc coalition to pass any legislation or face a return to the deadlock of recent years. The fear is that the sclerosis hardens and delays decisions key to Peru’s future development, including the mining sector.
“This has definitely had an impact on the rate of economic growth,” notes de la Flor.
For example, work on a US$7.3 billion pipeline to bring natural gas to southern Peru has been paralyzed for the last four years amid a corruption scandal. Vizcarra had hoped to award the project to a new consortium before a new government is elected but that now looks unlikely.
Several mining companies are looking forward to plans that that would link southern Peru’s isolated Andahuaylas-Yauri copper belt to the port of San Juan de Marcona via a new 920-kilometer railroad. Construction is due to begin in 2023.
The US$9.2 billion project would immediately benefit MMG’s Las Bambas operation, which has faced protests from local people against heavy trucks laden with concentrates from the mine streaming through their communities. But other copper projects lie in its catchment area including First Quantum Minerals’ (TSX: FM) Haquira and Southern Copper’s (NYSE: SCCO) US$1.8 billion Las Chancas.
Mining executives are worried that with officials at all levels wary of corruption accusations, key decisions like these will be delayed, setting back the country’s development.
“It’s going to be a road or airport that has not been built or a port has not been privatized because leaders were afraid,” says Panoro’s Shaheen. “And delayed work to upgrade infrastructure will have a trickledown effect on our projects.”