"The hope for Peru, Chile and Ecuador is that whoever is elected will realize that mineral resources will be fundamental to economic recovery."

Michael Cullen

MANAGING DIRECTOR - LATIN AMERICA, FTI CONSULTING

May 20, 2021

Which of FTI’s services have been in high demand in the last six months?

Many of the projects that were shut down due to force majeure are transmogrifying into arbitration and dispute issues, so we are providing experts on the ground in Peru to help companies understand the economic and quantitative damage. We are also sending construction experts on the ground to understand the financial impact of delays. Another issue is fraud and corruption. As the saying goes, “while the cat’s away the mice do play”, and Covid has allowed corruption to be exaggerated because of the lack of checks and balances while authorities were distracted. Related to this, we have been doing a lot of cyber security work in Peru, as businesses have transitioned to remote work. We have also done more strategic communications work to try and spread the message of the good work mining has been doing in the communities during the health crisis. Finally, we have been advising private equity from Europe, the US and Asian on opportunities to pick up distressed assets.

What do you think is driving the polemic political dynamics in Latin American in 2021?

Covid-19 has been the fuel onto the fire of a long-standing and deep-rooted social and political problem in Latin America. Latam is home to 8% of the global population, but has accounted for 18% of Covid cases and 20% of Covid deaths. Why has the region performed so poorly in the face of the pandemic? Commentators have been quick to point out populist presidents in Brazil and Mexico who were skeptical of imposing lockdowns, however that was not the case in Peru which also suffered high death rates. There is something more endemic and pernicious at play, and the root cause is inequality.

An example of this came at the start of the pandemic in March 2020, when thousands of Guayaquil’s elite were returning from holidays in Spain and Italy. The infection was passed on to the working class in the city, but unlike the rich, the poor were not able to afford private medical coverage and did not have jobs where they could work remotely. Hence the horrific images we saw of rotting corpses in the streets.

What does this mean for the elections in Peru, Ecuador and Chile in 2021? There are a lot more people living below the poverty line than prior to Covid-19, and these people are looking for a quick fix. The left is offering them the apparent solution to their problems by claiming they can fix inequality with policies of redistribution. We have seen this telenovela before in Venezuela and Argentina, but the fact is that the most effective and proven way to increase average wages is good, old-fashioned, economic growth. However, a relatively uneducated father from a large family in Lima does not want a discussion about the benefits of Keynesian economic strategies in a time of recession – he simply wants food, shelter and work. In such a context, the rhetoric from the left wing can seem attractive, irrespective of the fact certain candidates may have skeletons in their own closets. Peru, Ecuador and Chile have been presented with a perfect storm of historical inequality, growing poverty brought about by Covid-19, and a corrupt establishment, all of which point to a rise in leftist politics.

How have you seen the topic of ESG in the mining industry evolve in recent years?

ESG has always been there in certain forms in Peruvian mining for at least a decade, particularly on the environmental and social side. However, concerns around climate issues on a macro level have increased in recent years. Another change is that financial institutions are finally putting their money where their mouth is. For example, I worked on a mining project in Peru where a European and an American banking institution were about to stop financing due to environmental and human rights issues. If you are a junior mining company hoping to fake it till you make it before being bought out, that is not going to happen, as a deep ESG audit will be performed to ensure that you comply with their very high international standards.

As an interesting footnote, the Chinese companies do not have the same reliance upon European and North American financing, as a lot of their projects are financed by the State. I think this will give the Chinese an unfair competitive advantage when it comes to acquisitions, and we will see a widening gap on this dichotomy between Chinese operators in relation to North American, European and Australian operators.

What type of mining climate do you envisage for Peru by the start of 2022?

For Peru, the election result will be critical. The policy implications of Keiko Fujimori or Pedro Castillo coming to power, for instance, are vastly different. However, I do not think we will get to a point of mass resource nationalization, and we will not see large-scale expropriation. This raises the point of what is rhetoric and what will convert into real policy. When Ollanta Humala came into power in 2011, the economic reality of the situation dictated that he got straight into bed with the corporate element of society, despite having ties to Chávez and rising to power through leftist rhetoric. The hope, for Peru, Chile and Ecuador, is that whoever is elected will realize that mineral resources will be fundamental to economic recovery.

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