Peru in Crisis: Vizcarra faces uphill climb to 2021

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Friday, March 23, 2018

Peruvians are hoping that newly sworn-in President Martín Vizcarra will put an end to months of bitter wrangling between branches of government that have stalled the economy.

Investors and political insiders say that will be easier said than done.

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Vizcarra, a 55 year-old civil engineer, rose to power last year as the vice president and transport minister for Pedro Pablo Kuczynski, who resigned March 21 amid mounting corruption and influence-peddling scandals after just 20 months in office.

Vizcarra, who had been serving as ambassador to Canada, returned to Peru early Friday after Kuczynski faced accusations that scandal-plagued construction firm Odebrecht hired his investment funds while he was a government official a decade ago. Kuczynski has denied any wrongdoing, accusing the opposition-controlled congress of not allowing him to govern.

Later in the day, congress accepted Kuczynski's resignation and welcomed Vizcarra with a standing ovation. He was sworn in by the head of congress Luis Galarreta (pictured) to serve out the remainder of the term ending in July 2021.

"To grow, our country must be more competitive," Vizcarra said in his inaugural speech. "We will foment private investment and construction of infrastructure will be a priority for our government, especially as we have a pending reconstruction that is urgent to carry out."

Vizcarra urged lawmakers to work with him to fight corruption, ensure credible democratic institutions and spur economic growth.

"This is the moment to come together as Peruvians, standing firm and optimistic amid the challenges awaiting us," Keiko Fujimori the leader of the largest opposition party, Fuerza Popular, tweeted shortly afterwards. "Personally, and from the FP, we wish President Vizcarra success in the administration he begins today."

Fujimori, who lost the 2016 presidential election to Kuczynski by the thinnest of margins, never congratulated the outgoing head of state on his victory, and was in fact a driving force in the congressional opposition that forced him to resign.

Next Steps

One of Vizcarra's first tasks will be to mend fences with the 130-strong congress and name a new 19-member cabinet before setting out to regain investor confidence.

A close ally of Kuczynski, Vizcarra has had a thorny relationship with congress, which forced him to resign as transport and communications minister last May on accusations that a contract to build an airport in Chinchero, Cusco, was unfavorable to the state. The government later scrapped the contract and assumed the airport construction as a state project.

Overall, billions of dollars in infrastructure projects remain suspended, including a natural gas pipeline, highways and irrigation projects, many of them awarded to Odebrecht.

"Vizcarra is likely to face a number of the challenges that confronted Kuczynski – primarily a highly obstructive congress," Diego Moyas-Ocampos, an analyst at UK consulting firm IHS Markit, wrote in a report. "This could involve the blocking of key legislation and motions to censor ministers, as well as new allegations of corruption."

Vizcarra also faces the urgent reboot of a 26bn-sol (US$8bn) flooding reconstruction program, widely criticized for running behind schedule.

Widespread floods, torrential rains and landslides caused by El Niño phenomenon in 1Q17 left at least 163 dead and 291,000 homeless, and caused billions in damage to roads, railways, power plants, schools and hospitals, mainly along the north coast.

"It's comprehensible that there are doubts about the time it could take for the continuity of public works given the restructuring of the executive," Lima regional government president Nelson Chui told state news agency Andina. "The new president's experience in public administration and his democratic credentials will help to restart work, correct mistakes and make necessary improvements."

Mining

In Vizcarra's favor is his investor-friendly track-record as former president of the Moquegua regional government, when he campaigned to advance Anglo American's Quellaveco copper project in his region.

The new president will also benefit from the headwinds of global growth, which spurred a rally in metals markets over the past 12 months, boosting Peru's exports 21% to a five-year high of US$44.9bn in 2017. Surging copper, zinc and lead prices increased metals export revenue 24.7% to a record US$27.2bn.

Peru, the world's second largest copper and silver producer, is counting on the mining industry to start work on over US$11bn in new projects this year.

"The challenge for our authorities is to recover the leadership and trust of the population and guarantee institutionalism," the Peruvian mining association (SNMPE) said in a statement. "We must overcome the uncertainty that has reigned in recent months."

While ratings agencies Standard & Poor's, Moody's and Fitch Ratings said the resignation wouldn't affect Peru's investment grade rating, the country has seen economic growth slow to 2.5% last year from 3.9% in 2016 as companies postpone investment decisions.

Major infrastructure projects including line No. 2 of the Lima metro and the Lima airport expansion are years behind schedule as companies battle bureaucratic obstacles and lengthy permitting processes.

"The damage is done. The government didn't know what to do," political analyst Fernando Tuesta said. "The uncertainty has kept business executives from making decisions."