Political Instability in Peru: Implications for Foreign Direct Investment and Portfolio Risk in Latin America

Political instability in Peru has emerged as a critical risk factor for foreign direct investment (FDI) and portfolio risk across Latin America. As the country navigates a deepening institutional crisis, marked by public distrust, corruption scandals, and fragmented governance, its economic trajectory has become increasingly volatile. For investors, the implications are stark: Peru's political environment not only deters capital inflows but also amplifies regional uncertainties in a continent already grappling with cyclical policy shifts and weak institutional frameworks.

The Roots of Peru's Political Crisis

Peru's political instability is rooted in a combination of institutional fragility, corruption, and social unrest. President Dina Boluarte, who assumed office in 2022 following the removal of Pedro Castillo, faces a staggering 93% disapproval rating as of March 2025. Her administration has been plagued by over 60 ministerial changes in 24 months, reflecting a lack of policy continuity and executive authority. Compounding this, Congress has passed 34 laws since 2023 that weaken anti-corruption mechanisms, including a controversial "humanitarian" amnesty for military and police officers involved in human rights violations.

The Odebrecht scandal, in which $29 million in bribes were paid to secure government contracts, further eroded public trust, with 52% of Peruvians identifying corruption as the country's primary problem. Transparency International's 2023 Corruption Perceptions Index ranked Peru 121st out of 180 countries, underscoring persistent governance challenges. Meanwhile, the recent approval of a bicameral Congress-a move rejected by 90.5% of voters in a 2018 referendum-has deepened public disillusionment.

Economic and Investment Implications

The political turmoil has had tangible economic consequences. Peru's GDP contracted by 0.6% in 2023, a sharp reversal from 2.7% growth in 2022. Foreign investors, particularly in the mining sector, have borne the brunt of this instability. Mining contributes 10% of GDP and 60% of exports, yet projects like Glencore's Antapaccay and MMG's Las Bambas mine faced temporary disruptions due to protests in 2023. These incidents, coupled with a complex regulatory environment, have elevated portfolio risk.

FDI inflows dropped from $10.8 billion in 2022 to $4.2 billion in 2023, though they rebounded to $6.9 billion in 2024, driven by Peru's low inflation (2.1% as of July 2024) and a robust network of trade agreements. Despite this, political uncertainty-exacerbated by the 2026 election cycle-remains a drag on long-term investment. Credit rating agencies like Fitch and Moody's have maintained negative outlooks, citing risks to policy continuity and institutional integrity.

Regional Context and Cross-Border Risks

Peru's challenges mirror broader Latin American trends. Political fragmentation and volatility have become defining features of the region, with countries like Mexico and Brazil also experiencing abrupt shifts in governance. The Economic Commission for Latin America and the Caribbean (ECLAC) notes that FDI in the region is increasingly shaped by low growth capacity, inequality, and weak institutions. For Peru, its FDI rebound in 2024-making it the fourth most favored destination in South America-highlights its strategic advantages, including trade agreements and macroeconomic stability. However, these gains are offset by the risks of democratic erosion and rising crime, which could deter cross-border capital flows.

The U.S.-Peru Trade Promotion Agreement (PTPA) provides a legal framework for foreign investors, yet political instability complicates its implementation. ProInversion, Peru's investment promotion agency, has launched deregulatory initiatives, but only half of these reforms are operational. For regional investors, the lesson is clear: while Peru's economic fundamentals remain strong, its political environment demands a risk-averse approach.

Conclusion: Navigating the Paradox

Peru presents a paradox for investors: a country with robust macroeconomic foundations and strategic infrastructure projects, yet hamstrung by political instability and corruption. As the 2026 elections approach, the risk of further institutional erosion and social unrest looms large. For Latin America, Peru's experience underscores the broader challenge of balancing FDI opportunities with the realities of political volatility. Investors must weigh Peru's long-term potential against its short-term uncertainties, recognizing that portfolio risk in the region is inextricably linked to the health of democratic institutions.