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Annual Summary

21/12/2021
  • The second year of the pandemic saw a large amount of COVID-19 cases. However, restrictions to operations and people’s mobility were more localized than in 2020. This, in addition to the important progress made with vaccination, enabled people’s mobility to recover significantly. Despite this, schools remained closed almost entirely for the second year running.
  • In June, Pedro Castillo was elected President of the Republic by a very small margin. The winners in the first round of the presidential election were Pedro Castillo (Perú Libre) and Keiko Fujimori (Fuerza Popular) with one of the lowest total votes seen in recent years. After an extremely polarized run-off election campaign, Castillo won the election with a difference of a mere 44,263 votes more than his contender.
  • The economic policy plans of the party Perú Libre marked a radical change to Peru’s economic model. Faced with this risk, investors withdrew their money from the country on a large scale and exchanged their soles for dollars in the months following the election. This made the exchange rate increase sharply and quickly, and made the sovereign bond interest rates in soles increase and investor confidence plummet once again.
  • After several political crises between 2016 and 2020, the confrontation between the Executive and the Legislative remained very intense and the risk of a crisis of governability stayed latent at the close of 2021. Meanwhile, the alliances within Congress—highly fragmented—remained weak, making the actions of the Legislative less predictable. Therefore, the Executive had serious difficulties in reaching consensus with other political forces.
  • Throughout this period there were two big waves of regulatory measures, caused by the second wave of COVID-19 and the start of the new Government and Congress, respectively. The labor and education sectors saw the largest number of bills. Despite the tension between both branches of state, there was certain consensus on these fronts.
  • Prices of several financial assets, commodities and goods increased globally in line with the quick reovery of the economy and some limitations of supply, among other factors. In response to consumer prices, several Central Banks around the world have reacted by accelerating the withdrawal of monetary stimuli to reaffirm their commitment to price stability.
  • In the meantime, several Latin American governments chose to extend the measures of support to household in the second year of the pandemic. In Peru, relief payments and the withdrawal of private savings (worker’s length of service compensation and private pension funds) were continued, totaling almost the equivalent of 6% of GDP. This enabled the total income of households to exceed its pre-crisis levels, despite the slow recovery of informal labor income (70% of the total workforce).
  • As a result of a more localized application of sanitary restrictions during the second wave and the extension of the relief payments for households, GDP grew by close to 13% in 2021. This way, Peru exceeded its pre-crisis production level. However, recovery continued to be vary greatly between economic sectors. The sectors that were not affected much by the 2020 crisis, such as modern agriculture, contained to have high growth rates, whereas the prevalence of sanitary risks continued to limit the recovery of the service sector.
  • The formal sector concentrates the biggest part of economic recovery and it is believed to have increased its participation in the total economy in the last two years. This improvement was explained largely by an increase in employee productivity, which enabled labor income in this segment of the economy to increase.
  • Lastly, 2021 showed a significant increase in group protests. This is thought to have three reasons: high expectations from the population that were not fulfilled, a context of more empowerment of some political actors and the apathy of the Government in the face of protests in areas of mining influence.

OUR PERSPECTIVE

Improvement trends consolidate and new risks emerge on the horizon

Last month, we identified four pieces of good news for the business environment: (i) lower prices of certain imported goods, (ii) lower political risk, (iii) improved business confidence, and (iv) some stabilization in local financial variables. 

The honeymoon period ends, but the government remains relatively stable

Six months into the administration, signs of an impending deterioration in the relationship between the Executive and Congress are starting to surface.

Four positive developments in the business environment

After a challenging start of the year, characterized by social conflicts and heavy rains, the Peruvian economy has begun to show signs of recovery, albeit at a slow pace.

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