Macchu Picchu Peru

Peru Politics July 2021

Peru: Pedro Castillo becomes president of Peru

On 28 July, Pedro Castillo was sworn in as president of Peru, a mere eight days after being announced as the winner of the run-off presidential elections held on 6 June. The verdict came after weeks of legal challenges from defeated candidate Keiko Fujimori—suffering her third presidential run-off defeat in 10 years—whose claims of fraud were eventually rejected by the country’s National Jury of Elections. As such, Castillo becomes the fourth president in less than a year, following November 2020’s eruption of political turmoil that saw the country cycle through three leaders in a week, and closes the chapter on a bitter-fought election campaign between two divisive candidates representing markedly different points on the political spectrum. However, likely clashes between the new cabinet and the opposition-led Congress could make it difficult for Castillo to implement his more controversial policies. Political uncertainty is thus set to remain elevated in the short term, potentially weighing on investor confidence going forward.

Castillo, a former school teacher and union leader from the northern region of Cajamarca, was a surprise victor in both the April general elections and June’s presidential run-off, having never held national office and being considered a radical-left outsider hailing far from the Lima-centric political status quo. He campaigned on a socialist platform with the intention to rewrite the country’s constitution, increase the role of the state in the economy, and use nationalization as a tool to gain more control over the country’s strategic industries such as mining and oil extraction. While he moderated his stance somewhat in the run-up to the June presidential election, his victory has been met with souring investor confidence, manifested in tumbling stock markets and a freefalling currency.

His presidency has seemingly begun on rocky ground. Even before his inauguration, an opposition-led alliance won a vote on 26 July to lead Congress, with centrist María del Carmen Alva claiming the presidency for the 2021–2022 legislative period. With only 37 of the 130 seats held by Castillo’s affiliated party, Perú Libre, there is significant potential for an opposition-led Congress to act as a moderator or even a block to Castillo’s policy agenda, particularly constitutional reform.

The first stumbling block may come from Castillo’s proposed cabinet, the majority of which he named shortly after taking power on 28 July. In a somewhat chaotic situation—2 of the 18 ministerial positions were not announced at the delayed swearing-in event—the appointment of the controversial hardline leftist Guido Bellido as prime minister was met by a strong political reaction, and could test the level of popular support that his nascent government enjoys. The subsequent announcement of moderate and former World Bank economist Pedro Francke as finance minister may go some way to softening the cabinet’s appearance, but with Congress holding the right to both reject confidence in the cabinet and censure specific members, the coming months look set to be dominated by battles between the executive and legislature.

Looking ahead, the ongoing political turmoil will doubtless continue to weigh on the economy. Following the announcement of the proposed cabinet, the sol hit a fresh all-time low of 4.09 PEN to USD on 4 August, having depreciated more than 11% since the beginning of the year. As such, the potential for rising price pressures is a key concern, with inflation clocking an over four-year high in July. Moreover, business sentiment slumped into pessimism following the April general elections, which could drive more cautious capital spending in the tail end of the year.

Regarding the outlook for the economy, Daniel Velandia and Miguel Leiva, economists at Credicorp Capital, stated:

“All-in, considering that President Castillo has affirmed that his government will respect the current legal framework, activities in the country are likely to continue developing normally in the short term with the economy maintaining its recovery path, although proposals aimed at raising taxes in some sectors such as mining or at increasing competition in others such as pharma, gas or the financial sector cannot be ruled out, in our opinion. In the longer term, however, uncertainty will remain relatively high amid the proposal to change the constitution, which could keep private investment sluggish until there is more clarity.”

Meanwhile, Diego W. Pereira, economist at JPMorgan, sees heightened uncertainty weighing on economic prospects ahead, commenting:

“The macroeconomic path ahead is still blurry in the Castillo administration’s political agenda, particularly regarding the push for a constitutional reform via a constituent assembly. […] That uncertainty, in addition to a number of suggested regulation and institutional changes, is likely to impact further private sector capex at least through year-end. This is despite Economic Minister Francke’s commitment to maintain the fiscal deficit objective of the prior administration and a narrower fiscal deficit next year. […] We thus expect private fixed income to contract in H2 2021, impacting the speed of the economic recovery even if public sector capex enjoys a renewed push. Our more conservative stance is thus consistent with 2021 annual GDP being revised to 9.5%, shaving 1.3%-pts from our prior call.”

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