The Vizcarra Era: Political Instability and Business Uncertainty in Peru 1 ARTICLE THE VIZCARRA ERA: POLITICAL INSTABILITY AND BUSINESS UNCERTAINTY IN PERU Madrid, 28 August 2019 llorenteycuenca.com The Vizcarra Era: Political Instability and Business Uncertainty in Peru 2 In his July 28 Independence Day address to the Fujimorism-dominated Congress continuing the National Congress, Peruvian President Martin liberal reforms of the 90’s would create space Vizcarra proposed a constitutional amendment for sweeping reforms and allow Peru OECD to move general elections from 2021 to 2020. membership. These good economic prospects He did this with the specific goal of ending and high business confidence triggered an Peru’s government functionality crisis, brought investment boom, with investors encouraged on by constant disagreement between the by macroeconomic health and an excellent executive and legislative powers. “All of us must international market for Peru’s raw exports, such go,” asserted the president before a shocked as copper. House of Representatives. This announcement has left Peru’s government in an increasingly As we now know, few of these expectations were volatile state replete with uncertainty, paralyzing met. Peru’s political landscape turned volatile legislation and adversely affecting business and complex, deflating business expectations expectations. and discouraging private investment. Optimistic ideas that the “Ppkausas” and Fujimorists Although not as bombastic as other incidents, the would work together failed to stand up to the truth is that this is Peru’s most serious crisis of pressures of both history and the country’s the last 19 years. Close analysis of Peru’s political political-institutional design. In the last century, dynamics can explain how we reached this no Peruvian government has survived an point, but it is difficult to predict how this crucial absolute opposing congressional majority. moment in history will resolve. This environment is what led to Pedro Pablo Kuczynski’s resignation in March 2018 amid Vizcarra’s five-year term (2016-2021) began intense pressure from Congress. Martin Vizcarra, with high expectations. In fact, by mid-2016, his vice president, succeeded him. business confidence had reached its highest levels since 2013, with the economy growing at During both Kuczynski’s and Vizcarra’s a rate of nearly 6 percent. Consensus among administrations, Fuerza Popular (led by Keiko the private sector was that a highly-skilled Fujimori, daughter of former president Alberto executive branch (led by a seasoned technocrat Fujimori) has maintained parliamentary control, like Pedro Pablo Kuczynski) working alongside a initially holding 73 of 130 congressional seats. llorenteycuenca.com The Vizcarra Era: Political Instability and Business Uncertainty in Peru This has led to numerous clashes between bringing overall governmental effectiveness Peru’s executive and legislative branches, and the country’s economy down with it. manifesting not only via institutional means, such Nonetheless, Vizcarra’s voter approval ratings as subpoenas, interrogations and censorship, remained quite high, largely due to the but also in a negative attitude toward executive following: reform proposals, leading to frequent appeals to popular sentiment. • Public perception that Vizcarra was fighting corruption. • Vizcarra’s image as facing the congressional majority head-on. “The relationship However, his approval ratings ultimately fell due between the executive to: and congressional • A decline in public administration, stunting bodies continued economic progress. 3 • Feelings that the government had no to erode, bringing comprehensive development plan for the overall governmental country. effectiveness and the After a full year, it is no surprise that 75 percent of the population supports an early general country’s economy election. Support for Vizcarra’s “All of us must go” message reflects the public’s exasperation down with it” about Peru’s institutional power and the traditional political class. After Vizcarra’s proposal was announced, the This uncertain landscape was increasingly political environment grew increasingly complex worsened by continued investigations into and uncertain. Circumstances change daily, high-profile corruption cases (the construction even though President Vizcarra has yet to obtain sector’s “Car Wash” scandal and the “corruption the necessary support in Congress to pass his tapes” regarding the upper echelons of the proposal. Furthermore, half of his already small legal system). These investigations involved group of legislators have resigned, leaving a many traditional and well-known political meager five. Among those who have resigned leaders, significantly increasing intra- is Mercedes Araoz, Kuczynski’s second vice governmental tension and uncertainty. This president and first in line to succeed Vizcarra. focus on investigation also lent prosecutors It is widely predicted that Congress will declare and judges greater prominence in the political Vizcarra’s presidential seat vacant rather than arena, leading to a phenomenon known as the acquiesce to his demand for an early election. “judicialization” of politics. Catalyzed by the fight against corruption, serious disagreements However, it is not only lack of congressional between the executive and legislative powers support that is eating away at the president’s continued, with the former accusing the latter power. He is also losing support from regional of inequitably favorable treatment of judges governments—especially in the south, where handling more serious accusations. social conflicts over mining continue to mount, culminating in strikes and demonstrations Throughout Vizcarra’s first year in power, against two flagship projects: Tia Maria and the relationship between the executive and Quellaveco. In the former, Vizcarra attempted to congressional bodies continued to erode, come to an agreement with local authorities in llorenteycuenca.com The Vizcarra Era: Political Instability and Business Uncertainty in Peru person, but the meeting was recorded and the Thus, according to APOYO Consultoría, in 2019 audio leaked to the press, leaving the president Peru should experience a growth rate of 2.2 in yet another awkward situation. percent down from the projected 3.7 percent. Growth will be driven by a small handful of This political turbulence has brought economic factors, mainly mining and agriculture, with only growth to a standstill. However, this kind of marginal progress in key infrastructure projects. situation is nothing new. It is certainly true The current political situation hinders the that the 1990s’ new economic model improved country’s overall growth potential significantly. quality of life for the populace by focusing on macroeconomic responsibility, opening trade, promoting private investment and POLITICAL IMPACT ON THE establishing a subsidiary role for the state. BUSINESS LANDSCAPE However, this economic progress did not lead to the development or advancement of public The political situation in Peru perfectly fits the administration. definition of VUCA (volatile, uncertain, complex and ambiguous), which has a severe impact on To the contrary, during this same period of the country’s business environment. To most 4 economic development, Peru saw the collapse of appropriately respond, it is vital to clearly map the party system and frequent corruption cases. out those channels through which politics affect This trend had already begun in 2000, with the business decisions, and—most importantly— fall of Alberto Fujimori’s government amid the identify the key channels for each sector. We “vladivideos” scandal. In it, Vladimiro Montesinos, have identified four main channels through which Furjimori’s chief advisor, was recorded bribing the political world directly impacts the economic representatives at nearly every level of Peru’s sphere. government. The environment of corruption was later cemented by revelations in the Car The first is political noise and its effect on private Wash investigation and recordings of major legal investment. This refers to such things as constant figures. confrontations between various government WHAT FACTORS DO YOU BELIEVE MIGHT AFFECT COMPANIES’ INVESTMENT PLANS THIS YEAR?1 % OF EXECUTIVES IN STAFF Political instability/political noise 66 Excessive bureaucracy/sluggishness in granting permits 58 Increased social conflict 44 Infrastructure bottlenecks 40 Political uncertainty post-2021 26 Weak/insufficient demand 18 Unfavorable international relations 9 Lack of talent 6 Unsuitable financing conditions 3 Lack of suitable suppliers 1 Source: APOYO Consultoría’s Business Advisory Service client poll 1 Multiple choice, maximum three options. llorenteycuenca.com The Vizcarra Era: Political Instability and Business Uncertainty in Peru figures or frequent, high-profile instances of For example, from 2016 to 2018, 3,632 bills corruption. Thankfully, the nation’s business were submitted to Congress, 514 (14 percent) community is highly resilient to this type of noise, of which were regulations and 87 of which remaining able to make decisions independent of became laws. APOYO Consultoría confirmed political issues, with conclusions shaped instead this information in a study using data analysis by other relevant factors (such as metal prices). tools in conjunction with law systematization However, business confidence does suffer when processes. the political sphere is characterized by so much