Peru's Political Instability and Legal Reforms: Implications for Sovereign Risk and Investor Confidence

Peru's political landscape in 2025 is a microcosm of Latin America's broader struggles with institutional erosion and democratic backsliding. At the heart of this turmoil lies the Constitutional Court's controversial decision to shield President Dina Boluarte from investigations into her role during the 2022 protests, a move that underscores systemic governance risks and judicial politicization. For investors, this case is not just a legal footnote but a critical signal of how political elites in fragile democracies weaponize institutions to evade accountability.

Judicial Shielding and Systemic Risks

The Constitutional Court's suspension of probes into Boluarte's presidency until 2026—a term that ends on July 28—has drawn sharp criticism from human rights groups and international observers. The court cited constitutional immunity for sitting presidents, but the timing and implications of this ruling suggest a deeper issue: the judiciary's susceptibility to political pressure. This is not an isolated incident. Peru's history of political instability, marked by six presidential changes since 2016, has normalized the manipulation of legal frameworks to protect incumbents.

The case against Boluarte includes allegations of constitutional violations during the 2022 protests, which left over 60 dead and hundreds injured. The Inter-American Commission on Human Rights has already condemned the government's use of force as “disproportionate and lethal.” By halting these investigations, the court has effectively granted Boluarte a legal reprieve, reinforcing perceptions that Peru's judiciary serves political expediency rather than impartial justice.

This pattern is compounded by legislative actions that further erode democratic norms. The March 2025 “anti-NGO” law, which allows the government to monitor and restrict organizations receiving foreign funding, has been labeled a “threat to freedom of association” by Human Rights Watch. Such measures not only stifle civil society but also signal to investors that regulatory environments can shift unpredictably, undermining long-term project viability.

Sovereign Risk and Investor Sentiment

Despite these governance risks, Peru's macroeconomic fundamentals remain relatively robust. The International Monetary Fund (IMF) forecasts 2.6% GDP growth for 2025, supported by strong mining exports and low inflation (1.8%). Foreign direct investment (FDI) in 2023 totaled $3.3 billion, with the mining sector accounting for 20% of GDP. The opening of the China-backed Chancay port in 2024 is projected to add 1.8 percentage points to GDP in 2025, creating 7,000 jobs and boosting trade capacity.

However, political instability continues to weigh on investor confidence. Credit rating agencies have maintained Peru at investment grade but with cautious outlooks. Fitch and Moody's upgraded their outlooks to “stable” in 2024, citing economic resilience, while S&P Global Ratings affirmed a BBB- rating with a stable outlook. These ratings reflect a delicate balance: Peru's low public debt (34% of GDP) and strong foreign exchange reserves offset concerns about fiscal discipline and political volatility.

The key question for investors is whether these ratings accurately reflect the risks. While Peru's economic fundamentals are sound, governance challenges—including the politicization of the judiciary and legislative overreach—pose a significant drag on long-term viability. The OECD's 2023 Economic Survey highlighted structural weaknesses, including a large informal sector and weak anti-corruption enforcement, as barriers to sustainable growth.

Strategic Implications for Investors

For investors, the Peruvian case illustrates a broader trend in Latin America: the decoupling of economic potential from political stability. Countries like Peru, with abundant natural resources and strategic infrastructure projects (e.g., Chancay port), offer attractive returns but require a nuanced risk assessment.

1. Sector-Specific Opportunities: The mining and infrastructure sectors remain resilient due to global demand for copper and gold. However, projects must be hedged against social conflict. For example, the 166 active social conflicts in 2025—nearly half in mining—highlight the need for robust community engagement and ESG frameworks.
2. Geopolitical Exposure: Peru's deepening ties with China, particularly in mining and infrastructure, introduce geopolitical risks. Investors should monitor U.S.-China tensions and their potential impact on supply chains and regulatory scrutiny.
3. Legal and Institutional Reforms: While Peru's legal framework supports foreign investment (e.g., national treatment laws), the recent anti-NGO law and judicial politicization signal a need for legal due diligence. Engaging local counsel to navigate regulatory shifts is critical.

Conclusion: Navigating the Paradox

Peru's 2025 political and legal landscape presents a paradox: a country with strong economic fundamentals but a governance structure increasingly compromised by institutional erosion. The Constitutional Court's shielding of Boluarte is emblematic of a broader trend where political elites prioritize short-term gains over the rule of law. For investors, this means that while Peru's economy offers growth potential, the risks of political instability and regulatory arbitrariness cannot be ignored.

The 2026 elections will be a pivotal test. If Peru can stabilize its institutions and restore judicial independence, it may regain investor trust. Until then, a cautious, sector-focused approach—prioritizing infrastructure and mining while hedging against social and political risks—is advisable. In Latin America's most unstable economies, the line between opportunity and peril is razor-thin, and only those who navigate it with precision will thrive.