Over the course of this year, the bussiness environment has undergone three notable changes that are shaping its trajectory. First, despite ongoing economic slowdown, the international environment looks more promising than the end of 2022, due to the end of China’s zero Covid policy, the resilience of the North American economy, and the reduction of gas prices in Europe. This has improved the prospects for global economic growth, increasing the price of copper and the risk appetite of global investors.
Second, there have been modest improvements in public management and reduced regulatory risk from the Executive compared to a few months ago, especially on the labor front. An example of this is the recent publication of the Telework Law, which provides greater flexibility to both employers and employees in key aspects of remote work and makes its implementation easier.
Third, in February, social protests have reduced and have concentrated in Puno, after reaching their peak in mid-January and having generated a marked deterioration in the business environment during that month.
Despite the improvements on the international front and in the State’s management, the economic environment has primarily responded to changes in the political and social landscape at the start of the year. For example, in the financial front, the escalation of violence led to the depreciation of the sol in January, even though its fundamentals, such as the price of copper, suggested appreciation. However, with the decline in violence, our currency has appreciated in recent weeks (see chart below). Similarly, roadblocks in January exacerbated food inflation, particularly in the southern region, where total inflation rose from 9% in December 2022 to 11% in January 2023, affecting consumers from CDE socioeconomic segments. However, the wholesale food price index has declined in the last two weeks, in line with the gradual abatement of the wave of violence.
At the same time, the economic activity has also been marked by changes on the political and social front. In fact, during the peak of violence in January, close to 80% of the clients of Apoyo Consultoría’s Business Advisory Service (SAE) reported having faced medium or high magnitude impacts on their operations due to the wave of demonstrations and violence. The impact was most notorious in the mining, construction, agribusiness and tourism sectors. As social protests have significantly decreased, certain high-frequency economic indicators have shown signs of improvement during February, including increased national electricity demand and vehicular traffic in Lima. Moreover, amidst a “temporary truce,” the protesters have lifted the blockades in the South Mining Corridor, potentially facilitating the restoration of mining production and economic activity in the southern region of the country. In fact, the electricity demand of Las Bambas mine has recovered considerably in the last week (see graph below).
Unfortunately, even if the number of protests remains low in the coming months, the local economic landscape is likely to be characterized by a decline in private investment and a moderation in the growth of formal employment, amidst a climate of elevated political uncertainty. As a result, the Peruvian economy is projected to expand at a sluggish rate of 2.2% this year.
Senior Analyst
During the 2Q2024, economic growth was driven by the rebound of primary sectors, such as traditional agriculture and fishing, and by higher public spending, supported by an estimated increase of 11% in public wages and 16% in public investment, adjusting for inflation.
During the month of August, attention was focused on the dynamics within Congress. In view of the election of the Board of Directors and the recomposition of the ordinary commissions, numerous movements were recorded in the benches.
Although the implicit alliance between the Executive and the Legislative remains in force, in recent months we have seen a progressive weakening of the Executive.
