Why Foreign Investors Should Start Monitoring Peruvian Politics

Peruvians will be going to the polls to elect their next President on April 11. The latest polling reveals that there is no clear winner in the race among the candidates that represent myriad ideologies along the political spectrum. While left-leaning candidate Veronika Mendoza is running on a platform of tax hikes for the rich and increased government regulations, far-right conservative businessman Rafael Lopez Aliaga promises to aggressively attract foreign investments. 

In the event that Peru’s electorate places Aliaga in power, he will have an uphill battle in convincing foreign multinationals to invest in -or trade with- this Andean nation. Three primary components of the investment climate in Peru comprise the primary obstacles to injecting foreign dollars into the local economy: endemic corruption, a deeply divided and skeptical electorate, and the government’s sub-par response to COVID-19. 

Political instability and corruption

The political chaos Peru is experiencing right now is the result of the crisis that started with the fall from power of disgraced former President Pedro Pablo Kuczynski in March 2018. Kuczynski’s premature demise was precipitated by allegations that he was involved in a bribery scandal. Martin Vizcarra, his successor, was subsequently accused of taking money from companies in the construction sector who were bidding for public infrastructure projects while he was governor. Vizcarra was impeached in late 2020 and later replaced by Rafael Merino, who lasted only 5 days in power. Shortly thereafter, Peru’s Congress appointed Rafael Sagasti (a former World Bank official) as president. Today’s election highlights the chasm among different constituencies in Peru. With 18 presidential candidates, the country is more divided than ever. For this reason, Peruvian voters are skeptical about the political system and the credibility of all 18 candidates. 

The pandemic and corruption

As of April 11, 2021, Peru has the dubious distinction of being among the countries that have the highest deaths per capita. At the time of writing, the government reported that 54, 699 Peruvians have died from Covid-19 (though excess death figures suggest that, because of undertesting, the actual total is closer to 85 0OO.) While there are many factors that contribute to the problem, the primary culprit is a woefully unprepared public healthcare system. 

Legal framework and investment climate

While the last few years have exposed many vulnerabilities of Peru’s healthcare and political systems, a historic review of investment climate conditions reveals a favorable legal framework for inbound investments and exports. According to the Heritage Foundation’s objective study of host country investment climates, Peru’s trade regulations rank 7th in the world and 33rd for inbound investments. Both of these rankings reveal that Peru has an open legal and regulatory climates that are very attractive to businesses who want to invest in and/or export and import to and from Peru. 

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With an open legal framework, all hope is not lost. There are three key steps that Aliaga or other presidential candidates need to take to deliver on their promise to attract inbound FDI. First, they must embolden institutions and enforce anti-corruption measures that promise steep consequences for government officials and businesspeople that bribe them. Second, once the fight against corruption produces significant gains, it will mitigate skepticism about the political process and help some candidates consolidate power and support among the electorate. Third, whichever candidate wins must remain in power for his five-year term and serve as a signal of stability to foreign investors who want to take advantage of a legal framework that promotes FDI and trade.

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