Peru: Peruvian sol hits all-time low in late March before rollercoaster of uncertainty ahead of 11 April elections
April 16, 2021
The Peruvian sol hit an all-time low against the U.S. dollar on 30 March, trading at 3.77 PEN per USD, after trending gradually lower since the beginning of the Covid-19 pandemic in early 2020. However, a sharp rally ahead of general elections on 11 April saw the sol regain considerable ground, amid hopes of a diffusion of political tensions. As such, while the sol appreciated 2.3% month-on-month at the end of trading on 16 April, it was 6.5% lower compared to the same a day a year prior.
The gradual depreciation to a record low came on the back of the sharp economic downturn that began in March–April 2020, at which time the sol traded at around 3.40 PEN per USD. One of the worst per capita mortality rates in the region, combined with some of the most stringent and long-lasting lockdown measures that instigated an 11.1% contraction in GDP in 2020—the largest among major South American nations—have seen the normally stable sol’s luster diminish significantly. Moreover, November 2020’s eruption of political unrest, which saw one president removed from power before his replacement resigned within a week following widespread public protests, also weighed heavily on investor sentiment, helping to sustain the depreciating trend.
More recently, the sol appreciated nearly 3% in a week at the start of April as pre-election optimism that moderate candidates such as Yonhy Lescano and Hernando de Soto would win drove the currency away from its record low. However, following the polarized results of the 11 April election—a run-off vote will be held in June between the left-wing Pedro Castillo and the right-wing Keiko Fujimori, while the new Congress will be deeply fragmented—the sol gave up some of its gains.
Going forward, the currency looks set to experience some short-term volatility as political uncertainty continues to obscure a generally strong macroeconomic picture: Peru has low public and external debt levels, strong international reserves and burgeoning terms of trade amid rising copper prices. As such, the currency should strengthen slightly in the year as political uncertainty subsides and solid fundamentals and a strong export-led recovery drive renewed interest in the sol.
Regarding the outlook for the currency, analysts at EIU commented:
“We expect the sol to depreciate in the first half of this year, reflecting investor jitters about the trajectory of Covid-19 cases, uncertainty regarding the election and pressure from rising US Treasury yields. We expect the currency to see an appreciation in the second half of the year, once electoral uncertainty abates and the pandemic is brought under better control, as the vaccine rollout ramps up. The BCRP will continue to intervene to keep depreciation pressures under control, and large foreign reserves (US$76bn as at February) give the BCRP ample space to intervene more strongly if required.”
Author: Stephen Vogado, Economist