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Peruvian President Pedro Pablo Kuczynski may have won the battle in December when he was saved from impeachment, but he is far from winning the war, the author argues. (Photo: Peru President's Office)
Wednesday, January 24, 2018

Peru Political Crisis: The Fallout

Investors who hoped that the crisis is over may be sorely disappointed.


January 21 marked a month since Peruvian President Pedro Pablo Kuczynski was saved from an impeachment process in which the odds were stacked against him. The month has been marked by protests, criticism from all angles of the political spectrum and increased polarisation. As the dust settles and Peruvians and investors alike try to make sense of the happenings of recent weeks; one thing seems to be certain, the uncertainty is far from over.

By means of context, Kuczynski came to power in July 2016 in a peaceful transition of power, with an ambitious reform agenda aimed at improving infrastructure, strengthening the extractive sectors and providing Peruvians with access to adequate public services. However, Kuczynski has been majorly constrained in meeting his reform agenda by an opposition-controlled Congress which has consistently blocked legislation and undermined Kuczynski and his cabinet at every opportunity, and apparently without consideration of broader social and political repercussions. The crisis came to a head when Congress members of the opposition Broad Front party on December 15, 2017 presented an impeachment motion against the president on the grounds that he is “morally incapable” of leading the country over allegations that he received bribes from disgraced construction company Odebrecht. The motion was approved on the same day with 93 votes in favor (out of a possible 130). The move came after the December 13 revelation by Odebrecht that it made a series of payments worth more than $782,000 to the president’s consultancy company Westfield Capital. The payments were made for consultancy services for the North Interoceanic highway between 2004 and 2007.

Kuczynski narrowly avoided impeachment during the vote on December 21 as Congress voted 78 in favor and 19 against, while 21 Congress members abstained from voting. The motion needed 87 votes for Kuczynski’s impeachment to go ahead. During the session, a number of Congress people changed their minds, and ten members of the Popular Force party (FP), who were widely believed to vote for the impeachment, abstained. The FP is headed by the daughter and son of disgraced former president Alberto Fujimori (1990-2000) and is the largest force in Congress, with 71 of 130 seats.

Initially, the result appeared to be a small victory for democratic process, and the lack of due process (i.e. a thorough and detailed investigation into the allegations against Kuczynski) was believed to have swayed Congress members who had previously supported the motion to vote against it at the last minute. However, when it appeared that the political crisis had calmed, Kuczynski pardoned Alberto Fujimori on December 24 on health grounds. Fujimori was sentenced in 2009 to 25 years in prison for crimes against humanity and corruption committed during his tenure.

The topic of the pardon will increase already high levels of political tension, adding to a significant list of contentious issues within Congress and rumors that the pardon was granted in exchange for Kuczynski’s salvation from impeachment (as part of a deal with the FP). Regardless of whether the pardon was granted as part of a “quid pro quo” deal, the crisis has undoubtedly generated a lack of confidence in the political establishment, not least among investors, and many questions remain unanswered.

The first question on most lips is whether Kuczynski will see out the end of his term (until 2021). He survived the December 2017 impeachment vote and although investigations into his dealings with Odebrecht will continue, his presidency is likely safe in the short term. However, his position is precarious. With a Congress determined to go to any lengths to undermine him, any evidence of wrongdoing will be closely scrutinized, and future impeachment motions should not be ruled out entirely. However, even if an impeachment motion is repeated and Kuczynski leaves office (or if he resigns) this will not automatically translate into a negative environment for investors – the likelihood of a successor who rejects foreign investment is minimal at this point in time.

More relevant for everyone in the immediate term is the issue of governability. Kuczynski is suffering from very low approval ratings. His moves in December angered both his allies and those who voted for him in 2016 when he vowed not to pardon Alberto Fujimori, and led to three members of Congress resigning from his Peruvians for Change party (further reducing its presence to just 15 seats from 18). His reconciliation cabinet that was unveiled on January 9 is likely to do little to build bridges, and with 19 cabinet changes in just over 18 months in office, it remains to be seen how long it will last.

Broadly, all of this highlights that the governability challenges which plagued Kuczynski’s first months in office will continue to a greater degree than ever, as he will continue to focus on putting out political fires while his constantly changing Cabinet members adjust to their new positions. In addition, Kuczynski will not be able to touch any controversial legislation given his lack of support, both from the public and within the political sphere.

With legislative deadlock and political polarization set to continue, what will the economic implications of the crisis be? On the one hand, no major, abrupt policy changes or overhauls to the regulatory framework can be expected, whether Kuczynski remains in power or not. The government needs the economy to retain strength in order for it to win back much needed trust and popularity – and there are a plethora of projects to be auctioned off this year, most notably in the mining, infrastructure and oil and gas sectors. For example, the Chamber of Commerce estimated in January that public investment would increase by 10 percent and private investment by 4 percent in 2018.

On the other hand, these estimations are likely to be ambitious and investor confidence remains cautious. While projects will undoubtedly gather momentum throughout the year, a great number of these will remain stalled at least in the first few months of the year. For example, the tendering process for the Michiquillay copper mine (Cajamarca department) was delayed for two months in December 2017 as given the political circumstances, bidders requested some time in order to re-evaluate. Furthermore, the problems which have always plagued investors, including social unrest and excess bureaucracy, will remain issues as government focus is on survival and other, urgent issues fall down the priority scale.

What does all of this mean for ongoing corruption investigations? Odebrecht in 2016 signed the largest ever settlement for corrupt behaviour, after admitting to bribing officials in a number of countries, including in Peru. Specifically, the company admitted to having paid bribes worth approximately $29 million to Peruvian government officials over the administrations of Alejandro Toledo (2001-06), Alan García (2006-11) and Ollanta Humala (2011-16) – Humala is currently in preventive custody for alleged money laundering.

Corruption investigations will continue, not least into Kuczynski, and given the rate at which the case escalated throughout 2017, other high-level politicians will likely be implicated in 2018. Companies will also come under fire and the first cases of pre-trial detention against personnel of the board of the biggest infrastructure company in Peru, Graña y Montero, occurred in December 2017. Companies operating in Peru can expect full investigations into any evidence of corruption in bidding processes, or subsequently, which could lead to delays to project continuation, or in the worst cases, project cancellation.

Finally, as the public pushes for improved anti-corruption mechanisms, bidding and contracting processes will require more transparency and will gradually improve investor confidence in Peru as the government shows itself to be committed to the cause. In highlighting just that, in January a law passed which will prevent local politicians convicted of corruption from competing in regional or municipal elections. While local level corruption will remain an issue as this policy is implemented, companies can expect some limited, longer term benefits in dealing with local officials.

Kuczynski may have won the battle in December when he was saved from impeachment, but he is far from winning the war. Investors who hoped that the crisis is over may be sorely disappointed as governability and operational problems persist, yet those who ride out the storm could be rewarded with a more transparent environment in the long term, where an abundance of projects are waiting to be undertaken.

Laura Sharkey is the principal Chile, Ecuador, Peru and Caribbean analyst at Control Risks. She wrote this analysis for Latinvex.

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