ECONOMY

Did Gabriel Boric and Pedro Castillo Drive Away Foreign Investment in Chile and Peru?

The recent leftist governments in Chile with Gabriel Boric and in Peru with Pedro Castillo can give an idea of how foreign investment has behaved .

Gabriel Boric and Pedro Castillo

Photos: TW-GabrielBoric, TW-PedroCastilloTe

LatinAmerican Post | Santiago Gómez Hernández

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Leer en español: ¿Gabriel Boric y Pedro Castillo ahuyentaron la inversión extranjera en Chile y Perú?

Recently, openly left-wing governments took over the heads of state in 2 of the most attractive countries for foreign investment. With a recent tradition of a friendly environment for foreign capital, Peru and Chile have been characterized as one of the favorite destinations for international investment in Latin America.

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However, the fear of many economists is that with the arrival of presidents from the left (one more progressive and the other more traditional) in Chile and Peru, the inflow of foreign currency will be driven away and the result will be an economic blow.

Although as soon as both presidents were elected the price of their currencies fell, due to the fear of investors, it is possible that today the reality is different. Currently, the difficult global scenario means that regardless of the presidents, investors seek stable government plans.

Chile: a Mining Investment Difficult to Reduce

As soon as Boric's election took place, there were falls or instabilities in the Chilean economy. The Chilean peso fell 3%, the most notable drop in months. However, later, with the appointment of a moderate cabinet, the markets were pleased . Although Boric's presidency is still in its infancy and has not lasted more than 3 months, it seems that the largest investment flows do not depend on his position.

Chile is a country with the mineral wealth that today the world wants. With one of the largest copper and lithium reserves in the world, mining in the Andean country is a must. Regardless of the current government and the growing demand for an electrified world, it is unlikely that foreign investment will flee in terror.

Even recent declines in Chilean copper production are associated with "absenteeism due to COVID-19, weather conditions, lower prices on average, shipping schedules, decrease in mineral quality or water restrictions"

Additionally, Boric has maintained an open discourse on the arrival of foreign capital during his government. The "reform is not the same as uncertainty" discourse demonstrates that the Chilean administration seeks to bring about change without taking capital away.

Peru Political Crisis but with Increased Investment

Initially, as soon as the electoral victory of Pedro Castillo in Peru was known, the value of the Peruvian sol fell to historic lows (similar to the case of Chile). Investors also abandoned both the currency and Peruvian stocks and bonds as soon as it became known that the leftist leader was coming to power. However, after this, the markets have found less uncertainty and a necessary "coexistence" between the Government and capital.

Peru is a rather striking case. Despite the political crisis that already seems like a landscape and a government that has not been able to "govern", the Peruvian economy shows good symptoms, at least in terms of indicators.

An example of this is that, according to official figures, foreign investment in Peru has increased since the end of 2021, even above 2019. According to official information, last year there was a 12% increase in investment compared to previous indicators of the pandemic. And if 2020 is taken as a reference, the figures reach a 34% difference. This was driven by the mining sector (especially copper).

However, the biggest threat emerging in the mining world today is due to growing protests and dissatisfaction in mining communities. Recently, residents near the Las Bambas and Cuajone mines demonstrated against the increase in the price of gasoline and fertilizers (associated with the war in Ukraine). This prompted both foreign-owned mines to shut down for fear of instability and violence. This is explained by Erick Rodrigues, vice president of Moody's for Reuters .

Despite his Marxist discourse and several promises that made foreign capital fearful, the reality is that Pedro Castillo has tried to promote Peru as a destination for international money. So much so that Castillo highlighted the application of the Comprehensive and Progressive Treaty of Trans-Pacific Association in September of last year. This Trade Agreement has the active participation of Australia, Brunei, Canada, Chile, Japan, Malaysia, New Zealand, Singapore, Vietnam, and Peru. Likewise, it hopes to have China's participation, making this one of the largest free trade agreements in the world, compared only to NAFTA and the European Common Market.

Even for many specialists, the greatest fears are the instability and poor governance that Peru can provide. The constant political changes, corruption scandals and social unrest have ended in sudden changes of government and instability that alienate investors due to the uncertainty that this generates for their investments.

Likewise, Castillo has ratified Peru's intention to join the OECD, a group of countries that requires certain indicators and policies to enter and that would generate greater confidence in foreign investment.

Esteban Tamayo, Citi's economist for Peru, Colombia, Central America, and the Caribbean, explained to " El Peruano " that the outlook for the price of copper in the international market is very good, so mining investment must continue to rise, even in the face of a reform that seeks to change mining taxes. "The investment continues to pay off in the long run."

Precisely, recently, both the Peruvian Sol (0.4%) and the Chilean Peso (0.7%) increased their price due to the increase in copper prices due to the demand of the Chinese economy that has been emerging from quarantine. Both countries occupy the first (Chile) and second (Peru) place in copper exploitation and are also important suppliers of other materials such as gold or lithium.

Even in terms of inflation, Chile and Peru maintain figures similar to other Latin American economies such as Colombia, Brazil or Mexico. A separate case is hard-hit Argentina, with inflation close to 60%.

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