Special Report: Peru Presidential Resignation Unlikely to Assuage Instability and Corruption Concerns

Special Report: Peru Presidential Resignation Unlikely to Assuage Instability and Corruption Concerns

Executive Summary 

Peru Presidential ResignationThe resignation of Peruvian president Pedro Pablo Kuczynski is likely to lead to further political uncertainty by prolonging the country's ongoing crisis in governance and frustrating the ability of investigators to root out corruption. The resignation is the latest fallout from the hemisphere-wide corruption scandal related to Brazilian construction firm Odebrecht but does not represent the beginning of a long-overdue crackdown on corruption in the country. Instead, it is an example of an emerging and troubling trend in which a scandal is used by Latin American political opposition parties to destabilize governments without following through with the meaningful reform necessary to root out corruption. Kuczynski's approval ratings were low, but the opposition-controlled Congress remains extremely unpopular, and calls for the complete dissolution of the legislature have grown louder in Lima. Incoming president Martín Vizcarra, meanwhile, is likely to be extremely weak - his party holds only 15 of the 130 seats in Congress - and his ability to continue Kuczynski's program of pro-business reforms may be hamstrung by congressional opposition on both the left and right.

Key Judgments

  • Kuczynski's departure is unlikely to result in any genuine major efforts to reduce corruption that affects businesses.
  • Disapproval of the Congress is extremely high and likely to climb even further, leading to increases in both the tempo and intensity of protests. 
  • Both the presidency and the Congress will remain in the hands of business-friendly politicians. However, fighting between them is likely to delay or prevent pro-business reforms. 
  • Businesses, especially those in the extractives sector, can be expected to face protests and an increase in public perception that they are involved in corruption, whether or not any evidence of such collusion exists. 

Background

Peruvian President Pedro Pablo Kuczynski abruptly submitted his resignation March 21, just one day before Congress was set to begin debate on a resolution that would have declared him "morally incapacitated" and removed him from office. The resolution was being considered due to the revelation that a company managed by Kuczynski had received payments from Odebrecht, the scandal-wracked Brazilian engineering firm that confessed in a US court to having paid USD 788 million in bribes to officials throughout the Americas. Kuczynski initially denied receiving any payments from Odebrecht but later acknowledged them after proof emerged that his company had indeed been paid by Odebrecht. However, he insisted that the payments were legitimate and unrelated to corruption.
Kuczynski narrowly survived a vote on a nearly identical resolution in December 2017. That resolution was promoted by an opposition party composed of Fujimoristas, the supporters of right-wing former president Alberto Fujimori. At the time of the vote, Fujimori was imprisoned on charges of public corruption, embezzlement, kidnapping, and murder, raising serious questions as to the degree to which his supporters were truly interested in adopting a tough line on government malfeasance, rather than merely using the Odebrecht scandal to undermine Kuczynski's government.
 
Shortly before voting on the 2017 resolution, several Fujimorista legislators, including the former president's son, Kenji Fujimori, received a phone call from Alberto Fujimori and suddenly decided to either abstain from the voting or to vote against the resolution, sending it to a surprise defeat. Three days later, Kuczynski issued a blanket pardon of Alberto Fujimori and ordered his release. The move outraged leftist members of Congress, many of whom had voted to support Kuczynski merely out of their ideological opposition to the Fujimoristas. Further, the timing of the pardon was widely viewed by Peruvians as confirmation that Kuczynski had issued it in exchange for the Fujimoristas agreeing to deliberately throw the vote on their resolution.
 
Weakened by the defection of several of his former supporters who wished to punish him for the pardon, and having already spent his main bargaining chip with the Fujimoristas, Kuczynski appeared increasingly likely to lose any second vote on stripping him of power. Immediately before such a vote was scheduled, several secretly recorded conversations between Kuczynski's surrogates and members of Congress were released to the press. The recordings were extremely embarrassing, as Kuczynski's surrogates were caught saying that any congressional representative who supported the president could expect to be rewarded with increased government spending in his or her district. In one particularly damaging tape, a supporter of Kuczynski clearly suggests that the government would be willing to overlook petty corruption by congressional representatives as long as they voted to keep Kuczynski in power. This recording doomed Kuczynski's presidency, and his resignation came just hours after its release. 
 

The Worst of Both Worlds: Destabilization without Reform

The Fujimorista-dominated Congress quickly seized upon Kuczynski's resignation and cast it as a major victory in the fight against corruption. Months of political crisis in which the entire government had become unstable, they argued, was worth its cost, as it had resulted in the departure of a corrupt president and paved the way for future anti-graft reforms that would ultimately advance the economic development of the country and make government agencies more transparent and professional.
 
The Fujimoristas, however, almost immediately undercut their argument by attempting to pass a resolution accepting Kuczynski's resignation. The draft resolution accused Kuczynski of having committed "treason against the fatherland" - a charge previously reserved for the leaders of the Shining Path terrorist organization - and suggested that he had been a traitor "throughout his life." While the Congress ultimately passed a resolution that had much of the bombast stripped from it, the language in the draft was eerily similar to that employed during the corrupt and authoritarian administration of Alberto Fujimori.
Furthermore, Fujimorista legislators have also recently made statements that smacked of bitterness over Kuczynski narrowly beating Keiko Fujimori - the former president's daughter - in the 2016 presidential election. Keiko, who remains the head of the main Fujimoristaparty, has widely been reported to have been the main force behind the efforts to strip Kuczynski of the presidency. Her opposition to Kuczynski has often appeared to be personal: she waited five days after the election to concede defeat, for example, and used the opportunity suggest his victory was not completely legitimate. Shortly before the election, polls indicated that Keiko Fujimori would win by a wide margin, but a major scandal in the closing weeks of the campaign, in which it was revealed that Keiko's campaign manager was under investigation for drug trafficking and had been recorded bragging to an informant that he had laundered money for her, scuttled her presidential bid.
 
Rather than a harbinger of serious anti-corruption reform, Kuczynski's resignation is best seen as the result of maneuvering by rival political factions that are themselves implicated in serious acts of corruption. The Odebrecht scandal has so far managed to leave Peru in a "worst-of-both-worlds" situation, in which the government suffers all the instability and polarization attendant to such a major public scandal, but is unable to benefit from the implementation of anti-corruption reforms or the cleansing of corrupt individuals from the political system.

Public Backlash: "Que Se Vayan Todos"

In the aftermath of the resignation, protests were held throughout Peru, especially in Lima. These protests were often not so much in support of Kuczynski as they were against Congress, with many demonstrators calling for the legislature to be dissolved immediately. The attitude of the protesters toward their elected officials is represented by the slogan under which the protests were organized, "Que Se Vayan Todos." Roughly meaning "They All Must Go," Que Se Vayan Todos is the same slogan that was used by protesters in Argentina who, in the early 2000s, forced a series of political resignations that saw five presidents step down in less than two-and-a-half years.
 
While Peruvian admirers of those Argentinian protesters are unlikely to have similar success, they do have the support of a broad swath of the population. A recent poll showed that 82 percent of Peruvians disapprove of Congress, half want the president and vice presidents to resign to force new elections to replace the current congress, and only a quarter believe that President Vizcarra should serve out the remainder of Kuczynski's term. Nor are Peruvians optimistic about the future: 64 percent said that they believe that Congress will deliberately destabilize the country to force Vizcarra's resignation and consolidate their own power.
 
Public confidence in government institutions is extremely eroded, and increased demonstrations and strife are likely throughout Vizcarra's presidency. While protests during the first week of the new administration have not been particularly disruptive, the tempo and intensity of protests is likely to increase as Peruvians, many of whom seek an immediate fix to corruption and the complete replacement of the political class, grow disappointed with the pace of reforms.

Business Outlook

Peru has long enjoyed a reputation as one of Latin America's more business-friendly countries, and Vizcarra is likely to attempt to continue the market-oriented policies of Kuczynski, who sought to increase foreign investment by reducing government interference in the economy and improving the country's infrastructure and educational system. Notably, the opposition Fujimoristas in Congress share a commitment to promoting a market-based economy that is friendly to transnational corporations, such as those in Peru's large mining sector. Further, the political left generally performs poorly in Peru, and candidates who have successfully run on leftist platforms have almost always moderated their positions once in power.
 
Despite this, the implementation of business-friendly measures, such as those designed to reduce licensing and regulatory burdens and to improve the enforcement of contracts, will likely be delayed. Even though the major parties share an ideological commitment to promoting investment, the Congress appears most concerned with consolidating its own power and will be hesitant to hand Vizcarra any political victories by implementing his agenda.
 
Furthermore, given that many of the Fujimoristas are themselves under investigation for corruption, it is unlikely that the Congress will push forward meaningful legislation designed to reduce graft and punish corrupt officials. Businesses, therefore, will likely have to continue to work in an environment in which bribes are demanded and the playing field tilted by corrupt authorities.
 
Consequently, continued anti-corruption protests are likely. While many of these will be aimed at public officials, some are likely to directly target businesses. This is particularly true of firms in the extractive sector, which are routinely the subject of major demonstrations and are sometimes accused of complicity in corruption, whether or not any evidence of collusion exists. Demonstrations related to mining and oil exploration have often ended in significant violence, and this trend will likely continue.
 
Peru can, therefore, be expected to maintain an official policy of welcoming foreign investment, and its business climate will likely continue to be significantly better than that in South America's left-leaning countries. However, serious concerns regarding high-level political instability, the paralysis of the legislative process, and public animosity toward both the government and some corporations remain just below the surface.
 

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