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Peru Politics February 2022

Peru: President Castillo reshuffles cabinet for the fourth time following prime-ministerial resignations

On 9 February, President Pedro Castillo swore in the fourth cabinet of his short tenure at the helm of the Peruvian government. In little over six months in office, Castillo has made 20 ministerial changes, including four prime ministers, three foreign ministers and two finance ministers, in a sign of the seemingly unending political turbulence surrounding his administration. The latest reshuffle came on the back of the sudden resignation on 31 January of Prime Minister Mirtha Vásquez, who herself had been appointed after her predecessor quit only two months into the job. Vásquez’s appointment in October 2021 was accompanied by a more moderate cabinet taking office, which calmed investor nerves considerably: The sol appreciated over 5% versus the U.S. dollar in the week immediately after her confirmation.

Vásquez’s replacement, Héctor Valer, promptly resigned after just four days in office, after allegations emerged of domestic abuse against his wife and daughter. Valer stepped down in the wake of public protests, forcing yet another reshuffle of the cabinet that had only been appointed days earlier. And so, on 9 February, Aníbal Torres was sworn in as the latest prime minister, pledging to pursue free-market policies alongside a strong government presence to prevent monopolies and other concentrations of economic power. Of the previously-named members of the cabinet, 12 of the 18 held their positions, one of whom was Finance Minister Oscar Graham, who had recently replaced the respected Pedro Francke. The appointment of Graham, a technocrat and former official at both the finance ministry and the Central Bank, should somewhat ease any market anxiety over the incoming cabinet.

Looking ahead, the ongoing political turmoil will doubtless continue to weigh on the economy, although the immediate impact has seemed more muted than during previous cabinet reshuffles: While the sol weakened slightly on 31 January, it quickly returned to its recent strengthening trend, having appreciated 4.9% against the U.S. dollar so far this year. Nevertheless, with business sentiment remaining pessimistic in January and inflation ending 2021 at an over decade-high rate, both consumer and capital spending could be reined in at the outset of the year, suppressing economic activity in turn.

Regarding the recent appointments, Diego W. Pereira, economist at JPMorgan, sees heightened uncertainty continuing ahead, commenting:

“The Castillo administration continues to struggle, with the political gambits so far proving unable to provide some sort of medium-term stability. It is against this backdrop that, with only six and a half months in office, Castillo has appointed his fourth Premier. […] Torres now needs to gain the confidence vote of the same Congress he has criticized, which will be a challenging task, in our opinion. The new cabinet must seek the Congress vote of confidence within the next 30 days. […] We expect political tensions to linger, with the gridlock between the government and Congress preventing reforms while keeping regulatory risks elevated.”

Commenting on the outlook for the sol, analysts at the EIU stated:

“We expect the sol to stabilise in 2022. We expect the sol to reach PEN 3.98 per USD by end-2022, from 4.02 at end-2021, but this is still weaker than the end-2020 rate of PEN 3.62 per USD. The sol will be supported by high commodity prices (especially for copper) and by monetary policy tightening, which will attenuate depreciation pressures stemming from interest-rate hikes in the U.S. We assume that strong fundamentals will allow the sol to appreciate from 2023. A political crisis, such as the ousting of Mr. Castillo, will probably cause the sol to depreciate sharply at some point over the forecast period. We expect that the BCRP will intervene if depreciation pressures are stronger than anticipated; large foreign reserves give the central bank ample space to intervene, but overshooting is a clear risk.”

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