Peru's Precarious Balance: Political Uncertainty and the Quest for Monetary Stability in an Era of Shifting Foreign Investment Flows

In the Andean nation of Peru, the interplay between political instability and monetary policy has become a defining challenge for foreign investors. As President Dina Boluarte navigates a landscape marked by impeachment threats, eroding democratic institutions, and a staggering 93% disapproval rating, according to an FTI Consulting report, the Central Reserve Bank of Peru (BCRP) has sought to anchor economic stability through cautious monetary adjustments. Yet, the question remains: Can technical precision in monetary policy offset the headwinds of political chaos? The answer, as evidenced by recent trends in foreign direct investment (FDI), is increasingly nuanced.

Political Instability: A Drag on Investor Confidence

Peru's political turmoil has exacted a tangible toll on FDI. From 2020 to 2025, the country has cycled through five presidents, each transition compounding institutional fragility. The U.S. Department of State reports that FDI inflows plummeted from $10.8 billion in 2022 to $4.2 billion in 2023, a decline attributed to social conflicts, corruption, and governance failures. Transparency International's 2024 Corruption Perceptions Index ranks Peru 127th out of 180 countries, a stark signal to capital markets.

The mining sector, a cornerstone of Peru's economy, has borne the brunt of this instability. Protests against projects like Glencore's Antapaccay mine and the Las Bambas copper operation-critical to global supply chains-have led to operational halts and billions in lost revenue, as detailed in a Forbes piece. Anglo American and other multinationals have even considered indefinite suspensions of operations, signaling a shift in risk tolerance. As one analyst notes, "Peru's political volatility has transformed mining from a growth engine to a liability for foreign investors."

Monetary Policy: A Stabilizing Force Amid Chaos

While political uncertainty looms large, the BCRP has emerged as a relative anchor. Since late 2023, the bank has cut interest rates by 325 basis points, bringing the benchmark rate to 4.5% as of August 2025, according to Trading Economics data. These adjustments reflect a dual mandate: maintaining inflation within the 1.0–3.0% target range and cushioning the economy against external shocks. Annual inflation, at 1.7% in August 2025, remains near the midpoint of this band, testimony to the bank's credibility.

However, the OECD has warned that rising trade costs and inflation expectations could force a reversal of this accommodative stance. For now, the BCRP's data-dependent approach-prioritizing inflation stability over preemptive rate cuts-has provided some reassurance. Yet, as FocusEconomics panelists note, further rate reductions may hinge on whether political instability triggers a sharper decline in investor sentiment.

The Tension Between Policy and Politics

The disconnect between monetary stability and political dysfunction is stark. While the BCRP has earned praise for its prudence, credit rating agencies have downgraded Peru's sovereign outlook to negative, citing governance risks. This duality creates a paradox: Peru's macroeconomic fundamentals are sound, but its political environment undermines confidence. The result? A market that remains open to FDI-bolstered by Peru's resource wealth and trade policies-yet wary of sudden shocks.

For instance, despite a rebound in 2024 (FDI reaching $6.9 billion, according to the U.S. Department of State), the specter of protests and institutional fragility persists. The government's fiscal stimulus in 2023, which pushed the deficit to 2.8% of GDP, was noted in the World Bank overview, highlighting the fragility of growth gains. Investors are left weighing the allure of Peru's copper and gold reserves against the risks of social unrest and regulatory unpredictability.

Looking Ahead: A Delicate Tightrope

As Peru approaches the 2026 general elections, the stakes for both monetary and political stability will intensify. The BCRP's ability to insulate inflation from external pressures will be critical, but so too is the need for political reforms to restore institutional checks and balances. Without such measures, the OECD's warnings about restrictive monetary policy could materialize, further deterring capital inflows.

For now, the market remains in a holding pattern. As one mining executive puts it, "Peru is a high-reward, high-risk bet. The question is whether the government can stabilize itself before the next wave of protests derails everything." Until then, foreign investors will continue to watch Peru's political theater with a mix of fascination and caution.