Peru's Vizcarra rides the mining boom

When then-vice president Martín Vizcarra was sworn in as Peru's caretaker president a year ago, few thought he could emerge from the shadow of his predecessor Pedro Pablo Kuczynski or revive the country's stagnant economy.

Today, President Vizcarra is presiding over a mining boom that has helped post record exports and stronger economic growth last year, while lining up billions of dollars in new mining and infrastructure investment commitments, even as miners ramp up recently-completed expansion projects.

Vizcarra, a 55-year-old civil engineer who previously served as regional president in the key mining region of Moquegua, transport minister and as ambassador to Canada, has been careful to present a new face of Peruvian politics, championing the fight against corruption and travelling to flood-ravaged regions to personally oversee reconstruction efforts.

Mindful of the slowdown in private investment over the two previous years, the media-savvy Vizcarra also hosted televised presentations of major mining investment announcements by Anglo merican (Quellaveco), Chinalco (Toromocho expansion) and Minsur (Mina Justa). The three projects, totaling US$8bn in investment, will add over 450,000t/y in copper output, boosting Peru's annual copper production to 3Mt/y.

In the meantime, Shougang Hierro Perú (US$1.5bn), Southern Copper (US$1.4bn) and Newmont Mining (US$250-300mn) all completed expansions last year, while both Southern (Tía María) and Newmont (Yanacocha sulfides) are looking to push ahead with new projects in the near term.

"2018 wasn't just the year that construction finished on two major mining projects – major new mining projects were also announced," Scotiabank Perú analyst Erika Manchego wrote in a report. "Mining investment will increase for the third straight year to US$5.5bn in 2019."

Other imminent projects include Bear Creek Mining's Corani silver deposit and Jinzhao Mining's Pampa del Pongo iron ore property, while work is expected to move ahead on another US$3.4bn in smaller projects this year including Pan American Silver's Shahuindo expansion and Minsur's B2 tin tailings facility.

At the same time, Vizcarra benefitted from a record US$34bn five-year mining investment drive which doubled copper output to 2.4Mt by 2017. The start-up of mines and expansions by China Minmetals, Chinalco, Freeport-McMoRan, Glencore, Hudbay Minerals, Hochschild Mining, Antamina, Volcan and Buenaventura helped boost metals export revenue to a record US$28.9bn last year.

Copper exports rose 7.8% to US$14.9bn in 2018, also a record, while gold exports climbed 1% to US$8.239bn, followed by gains in zinc (+7%), iron ore (+11.8%), silver (+4%), molybdenum (+66%) and phosphates (+13.3%).

 "We aim to take advantage of underground wealth to generate well-being and development on the surface, strengthening competitiveness and sustainability to consolidate a favorable social-economic climate for investment," mining minister Francisco Ismodes said at the PDAC mining conference in Toronto. "Our goal is to reach the top 10 Fraser Institute ranking in the next few years."

Peru's economy, meanwhile, expanded 4% in 2018, the fastest rate in five years on the strength of growth in manufacturing, construction, crude oil, electricity, fishing, banking and telecommunications.

Nevertheless, Vizcarra faces fiscal deficit risks as overspending spurs rising inflation and forces the central bank to raise lending rates, thereby cooling the economy, according to consultant firms such as Capital Economics.

"We don't expect this strength to last," analyst Quinn Markwith wrote in a report. "The budget balance has swung from a surplus of over 1% of GDP in 2011 to a deficit of 3% of GDP last year. A fiscal squeeze is long overdue."

Infrastructure

Vizcarra's government has also been drumming up investor interest in roads, railways, ports, airports and water projects, as the country strives to close a US$150bn infrastructure gap.

The US$3.26bn, 323km coastal railway and a group of eight airports – Jaén, Huánuco, Jauja, Ilo, Rioja, Chimbote, Yurimaguas and Tingo María – will be put up for bids, along with the Huancayo-Huancavelica railway and Titicaca watershed sewerage treatment plants.

Peru's Romero Group, meanwhile, began working on Salaverry port, and Peru's Volcan announced a US$3bn JV with China's Cosco  to develop Chancay port.

"To avoid a deterioration in public finances, the government has complemented its investment push with a well-established public-private partnership (PPP) framework, enabling the private sector to supplement public investment in tackling infrastructure bottlenecks," Moody's analyst Jaime Reusche wrote in a report. "The current pipeline of PPP projects available for private participation through 2020 includes US$11.2bn in transport, health, water, energy, irrigation, education and other projects."

In fact, Vizcarra seeks to accelerate US$25bn in delayed infrastructure projects, including the Pan American Games, line No. 2 of the Lima metro and the Jorge Chávez and Chinchero airports. His government is also accelerating spending on a 26bn-sol (US$8bn) reconstruction program following record flooding and landslides sparked by the El Niño phenomenon in 2017.

Vizcarra transferred 10bn soles to regional and local governments last year to finance infrastructure projects. About a quarter of the 168bn-sol budget set for 2019 will be allocated to public infrastructure, according to the government.

As a result, construction activity expanded 5.4% last year as central, regional and local governments all increased public spending and progress on public works was up 9.59%.

Politics

At the same time, Vizcarra is benefitting from strong popularity ratings and the fact many of his key opponents have been either jailed or face legal proceedings.

The respite from the political attacks that ousted his predecessor has enabled Vizcarra to push through a referendum late last year, gaining massive backing for his proposed political and legal reforms including campaign financing, congressional reelection and how judges are chosen.

Special prosecutors also secured an agreement with scandal-plagued construction firm Odebrecht which will enable Peru to jumpstart many of the company's halted infrastructure projects while guaranteeing testimony against political and company officials involved in bribery scandals.