The bribery scandal surrounding Brazilian construction firm Odebrecht elevates the risk that major infrastructure projects will be delayed or subject to contract alterations in 2017 Whilst in the long-run corruption investigations will contribute to increased transparency in the awarding of contracts, in 2017 they will weigh on Peru’s economic outlook.
Environmental protests against mining and hydrocarbon projects in Peru are likely in 2017. Protest risks have been exacerbated by legislation, introduced in July 2014, which reduced the mandated period for projects’ environmental impact assessments. Protests often blockade access to sites, causing significant business disruption. For example, in February 2017 local residents blocked the road leading to the Chinese-owned USD 4.7 billion Las Bambas copper mine in Apurimac during protests over the negative health effects of the mine. The road was only reopened after five days. Protests have the potential to turn violent, posing an elevated risk of personal injury and property damage.
In September 2016, protests at the Las Bambas mine left four people dead. To minimise the risks posed by civil unrest, businesses should work with local communities to develop a social licence to operate.
Delays to major infrastructure projects due to corruption investigations will weigh on Peru’s construction sector this year. Peru’s construction sector growth is now forecasted at 0.2% in 2017, having previously been estimated at 3.7%.
The impact of project delays on the broader economic outlook will be moderate. Real GDP growth for 2017 has been revised down to 4.0% from 4.2%. However, in March 2017, the current President of Peru, Pedro Kuczynski, announced a USD 1.7 billion stimulus package to offset the impact of infrastructure delays. It is hoped that the package will contribute to 15% growth in public investment. As a result, Peru will remain a regional outperformer, registering the fastest growth rate of the region’s major economies. Economic activity will be driven by a robust extractives sector, with annual average production growth forecasted at 9.5% in the period to 2020.
Moreover, falling unemployment, a reduction in Value Added Tax in July 2017 and a strengthening Peruvian sol should support strong consumer demand in 2017.
Peru’s sovereign creditworthiness is underpinned by its low and manageable debt-to-GDP ratio, forecasted at 23.3% in 2017. Elevated government investment in infrastructure will contribute to persistent fiscal deficits of 2.5% in 2017 and 2.4% the following year. However, this will not raise sovereign credit risks as tax restructuring will also support revenue growth.
A series of corruption investigations, along with the fallout from the bribery scandal surrounding Brazilian construction firm Odebrecht, will elevate the risk of contract alterations and cancellations in 2017. In December 2016, the US Department of Justice indicated that Odebrecht paid bribes totalling USD 29 million to Peruvian civil servants in 2004-2014 to secure a number of major contracts. This formed part of a total USD 788 million that the firm paid in bribes in 12 countries. Subsequently, the Peruvian government cancelled the concession contract for the USD 7.3 billion Southern Peruvian Gas Pipeline in January 2017, which will now be re-tendered.
The consortium responsible for the project, which is 30% completed, was led by Odebrecht. The project failed to secure USD 4.1 billion in funding following the bribery revelations, after Odebrecht failed to sell its 55% stake in the project. Other major projects will also be subject to review, delaying the start of construction. This includes the Chinchero International Airport, which has been suspended for three months pending review of irregularities in the project’s original contract. A heightened threat of contractual agreement repudiation will weigh on Peru’s attractiveness as a destination for infrastructure investment, having previously been known for contract stability.
In the long term, corruption investigations should lead to greater transparency in the awarding of state contracts, although regulatory burdens may rise as a result. In February 2017, Kuczynski announced a series of measures to reduce corruption. This includes strict anti-corruption clauses in state contracts, which will bar companies found guilty of corruption from participating in further state contracts.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Turkey, Somalia, Argentina and Jordan, all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
Download April Risk Outlook
For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org