Economic Policy under Humala

Diego Moya-Ocampos | IHS Global Insight

Shortly after winning June’s presidential election President Humala took a series of decisions, which indicated his support for continuity in economic policy. Most notable of these were the reappointment of Julio Velarde as president of the Central Bank and the promotion of Luis Miguel Castilla as Economy and Finance Minister (he had served as vice minister under García). The new government subsequently received a vote of confidence from the World Bank, which provided US$ 3 billion credit for social inclusion policies from 2012 to 2016. Increased confidence among investors was reflected by the upgrade of Peru’s long-term foreign currency rating by credit ratings agencies Standard and Poor’s and Fitch. Current IHS Global Insight forecasts are for growth to remain strong over the next few years, with anticipated GDP increases of 6.7% in 2011, 5.3% in 2012, and 5.6% in 2013.

The hydrocarbons sector

The first real test for Humala in the hydrocarbons sector will be the renegotiation of the Camisea contracts (natural gas produced for both domestic and international consumption). Pledges to renegotiate these contracts followed violent protests under the García administration last year, which forced the former president to accelerate plans for a liquid petroleum gas plant in the region and to build a pipeline to transport gas to the south of the country.

The issue remains highly controversial as local communities have claimed that foreign partners have paid less for gas than domestic consumers. They also allege gas exports have contributed to supply shortages in Peru (though this is denied by the government). Humala had previously talked of alleviating shortages by halting gas exports, but now favours construction of pipelines to supply southern Peru instead. Carlos Herrera, energy and mining minister, is currently renegotiating contracts to ensure the allocation of additional gas reserves to the domestic market. In the oil sector, the government has sought to attract investment and some further large projects are anticipated in coming years. State-owned energy firm PetroPeru is also likely to assume a larger role in upstream operations in the future.

The mining sector

The new government has successfully managed to pass three mining laws, which led to an increase in mining royalties collected and the implementation of a new windfall tax. Such legislation followed negotiations with the Sociedad Nacional de Mineria (National Mining Association) and other stakeholders, in which even those with Fujimori-era tax stability agreements conceded to government demands for additional contributions. As such, the tax increase was implemented without compromising the competiveness of Peru’s mining sector and the government foresees further expansion in this area in coming years.

The revenue raised by these measures will be used to finance the government’s expanded social programmes. Priority will also be given to infrastructure projects in areas of mining activity where the Canon Minero (proportion of revenue gained from mining taxes transferred to regional governments) is deemed insufficient.

Future challenges

It is likely that Peru’s development model - based on commodities-driven economic growth - will lead to the continuation of current social conflicts, in particular over natural resources. Widespread poverty, income inequality, unemployment and underemployment, which all help exacerbate such conflicts, remain substantial challenges. The recently passed Prior Consultation Law and the newly established Ministry of Social Inclusion may prove useful tools for dealing with unrest and channelling local concerns institutionally. However, on their own, they are insufficient to help end social conflict, particularly where water supplies are a key issue.

Conflicts are ongoing in a number of regions. In the south, significant protests have arisen in Puno, Apurímac and Arequipa. In the north, the expansion of mining projects in the department of Cajamarca has also sparked unrest in recent weeks, as in Ancash. Five hydrocarbons contracts in the Marañon and the Ucayali Basin, awarded in the dying days of the García administration, will need to be handled with kid gloves if conflict is to be avoided.

A long-term challenge for the Humala administration will be the dependence of its social inclusion policies on revenues from extractive industries. Peru may thus find itself committed to a model of development based primarily on commodity exports, chiefly minerals and gas. In view of the prevailing conditions in places where these are extracted, this may well lead to renewed, localised social conflict over natural resources (the Prior Consultation Law notwithstanding). If this proves to be the case, Humala may, later on in his presidency, need occasionally to cede to pressure from his support base and renegotiate contracts with some extractive firms. This could lead to eventual international investment arbitration claims against Peru.

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    The Peru Support Group exists to promote social inclusion, sustainable development and the observance of human rights in Peru. To that end the PSG highlights shortcomings in observance of established norms, whether international or local in nature, in its research, advocacy and publications. In so doing, it underscores the relationships that exist within the political system, how institutions work, and the effectiveness of policies that aim to reduce poverty and inequality within the context of sustainable development.

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