A visitor returning to Peru for the first time in 20 years could be forgiven for thinking they have arrived in an entirely different country.

This South American country, whose Pacific Ocean coastline of beaches and deserts rises eastward into the Andes and then sinks into the dramatic torpor of the Amazon rainforest, boasts many of the same traits as before. The bracing mix of European, indigenous and African cultures, the distinctive genres of music and the delicious cuisine are still there, but the political and security landscape of the country have changed to such a degree as to be unrecognisable, and, with it, Peru’s appeal as a destination for foreign investment.

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Teetering wreck

By the late 1980s, Peru was a teetering wreck. Its then-president, Alan García, presided over a country where inflation ran at about 7600%, made lunges to nationalise Peru’s banking industry and defaulted on the country’s debt repayments to the International Monetary Fund. Two rebel groups, the Shining Path and the Túpac Amaru Revolutionary Movement, strode about the country and into the heart of the capital, Lima, with ever-more brazen attacks.

When Mr García finally fled into exile following the end of his term, he was replaced by Alberto Fujimori, an academic of Japanese ancestry who defeated novelist Mario Vargas Llosa, perhaps the best-known Peruvian in the world, for the presidency. Mr Fujimori closed down Peru’s congress and rapidly blossomed into the kind of military-style leader that South America had long known and feared, nevertheless managing to break the backs of the rebel movements at a terrible human cost before he was overthrown after a decade in office and also forced into exile in 2000. Mr Fujimori has since returned to Peru, where he is in prison having been convicted of human rights abuses and financial misdeeds during his rule.

Then, as the new millennium beckoned, something surprising happened. Mr Fujimori was succeeded as president by Alejandro Toledo, a Stanford University-educated economist of indigenous descent, who in turn was succeeded in 2006 by the formerly disgraced Alan García, now reborn as an evangelist of free trade and investment.

In 2011, Mr García was succeeded by former army officer Ollanta Humala (who had launched an inconclusive uprising against Mr Fujimori just before the latter’s impeachment, and defeated the former president's daughter, Keiko, in the general election). Despite the differences in profiles and temperaments of the three men, and despite the pockets of poverty and inequality that remained, Peru began to take off economically.

FDI floodgates

Although Peru remains one of the world’s largest producers of copper, gold and silver, new opportunities for foreign investment ranging from infrastructure to energy began to arise across the country and foreign firms flooded in. They are still coming.

In the past year, Peru has witnessed the start of such large-scale foreign investment projects as the second line of the Lima Metro, work on an international airport at Chinchero in the colonial city of Cusco, and the early stages of the massive Gasoducto Sur Peruano project, a $4bn private investment structured through project finance that will see an estimated 1200-kilometre gas pipeline snake from deep in the Amazon, across the Andes and finally down to Peru’s southern coast.

Peru’s president, Mr Humala, who had run unsuccessfully as a fire-breathing compadre of Venezuela’s populist left-wing president Hugo Chávez against Alan García in 2006, struck a far more moderate tone in the 2011 vote, seeking to identify himself more with the moderate progressive governments of countries such as Brazil, where the left-wing Worker’s Party has been in power since 2003. It is a stance that has continued during Mr Humala’s presidency and which, in the words of the country’s new minister of finance, Alonso Segura, “has served Peru well”, an assessment that most foreign financial observers would agree with.

Lima the pleasant

Lima, once referred to by the poet Sebastián Salazar Bondy as “Lima the horrible”, is now one of the most pleasant cities in Latin America, with a vibrant cultural and dining scene, and bohemian neighbourhoods such as Barranco abutting posh districts such as Miraflores. The poverty rate in Lima has been reduced to less than 13% from nearly 45% a decade ago.

But the salubriousness of the capital can be deceiving, and the poverty rate in rural Peru still hovers around the 50% mark, where workers are likely to earn at least 20% less than their counterparts in Lima. Many indigenous communities still live in poverty and many of the children in these communities still suffer from high rates of malnutrition.

Civil unrest, much of it linked to development projects and mining endeavours, still features in Peru's landscape and the police response has frequently been lethal. Eighty people have been killed by the police in such protests since 2006, with more than 800 wounded, according to Peru’s National Coordinator for Human Rights.

Storm clouds gather

And during the past year, clouds have begun to cross the country’s sunny economic horizon. Peru’s economy, which grew by 9.8% in 2008 and 6% in 2012, grew only 2.75% during the first eight months of 2014. The government has blamed much of the downturn on such factors as a drop in export prices, adverse weather conditions caused by the El Niño phenomenon, which affected fisheries significantly and some agricultural staples, and also the fact that Peru’s mines have reached veins of lower quality minerals.

Nevertheless, the slowdown spurred a significant government shake-up, with Mr Humala’s long-serving minister of finance – Luis Castilla, widely viewed as one of the government’s most powerful members – replaced by Alonso Segura in September. To stimulate the economy, the Humala government also announced a reduction in import duties and spending packages, and – worryingly for some – a streamlining of environmental permits for businesses operating in Peru.

Given other government measures such as the promotion of capital markets access, cracking down on tax evasion and reforming the civil service, it would seem that the administration is serious about tackling the slowdown before it gets out of hand. Many observers, though, still caution that the performance of Peru’s overall economy is linked to the health of its extractive industries.

“Everything is tied to the mining industry,” says Pedro Tuesta, an economist at 4Cast Inc in Washington, DC.

With elections scheduled for 2016, many observers believe former president Alan García could be pitted against Keiko Fujimori. Whoever wins, however, it is unlikely that Peru will see a dramatic departure from the successful economic model that has thus far seemed so effective.

“Peruvians have understood that you can't play with economics,” Peru’s minister of energy and mines, Eleodoro Mayorga, tells fDi. “The cost of populist measures is too high to pay. A serious orthodox handling of the economy, a state of law, a respect of contracts – that pays.”

And so it has done for Peru.