Macchu Picchu Peru

Peru Politics June 2021

Peru: Presidential run-off election results in disputed outcome

The run-off presidential election held on 6 June has so far resulted in a too-close-to-call outcome. With virtually all votes counted, Pedro Castillo of Perú Libre has 50.1% of the share, with a margin of fewer than 70,000 votes separating him from Keiko Fujimori of Fuerza Popular. However, election authorities have refrained from announcing a winner, with the two parties requesting the annulment of significant numbers of votes that could swing the tight election in favor of either candidate. As such, a decision as to who has won the presidency will have to wait until all challenges have been resolved and the country’s National Jury of Elections approves the final result, which could take some weeks. However, a winner must be decided before the end of July, with the next president required by the constitution to take office on 28 July.

The general elections in April and the subsequent bitterly contested run-off have produced significant uncertainty for the economy: Business confidence plunged into pessimism in April–May, while the sol has endured considerable volatility since the end of March as investor sentiment towards the Peruvian currency has soured. As a consequence, the sol fell to a fresh all-time low versus the dollar of 3.94 PEN per USD on 7 June. Meanwhile, Moody’s recently downgraded the outlook of the country’s A3 credit rating to negative from stable, citing the increasing polarization and fracturing of the political environment. As such, the next president will be handed the sizable task of assuaging the fears of domestic and international stakeholders.

Regardless of who wins, they will hold a very small mandate and will be faced with a fragmented Congress that could act as both an impediment to efficient governing, but also a moderator on the more radical policies proffered by either of the presidential candidates. Castillo’s Perú Libre party took the largest share of votes at just over 13%, with Fujimori’s Fuerza Popular party in second place with 11% of the count. A variety of other parties of mainly centrist disposition will make up the rest of the legislature’s 130 seats, making coalition-building a key challenge for the next president.

Regarding the potential changes to the prevailing macroeconomic regime, Diego W. Pereira and Lucila Barbeito, economists at JPMorgan, commented:

“On the one side, Pedro Castillo […] advocates for a regime change based on a leap higher in structural public sector expenditure, to be financed in principle by an abrupt increase in the tax burden of natural resources exporters, particularly the mining sector. On the other side, Keiko Fujimori is the candidate standing for the continuity of the main macroeconomic policies applied in the last 20 years, albeit her agenda seems shy when it comes to supply side reforms so to push higher trend GDP growth.”

Regarding the path ahead for either candidate, Jorge Morgenstern, senior economist at HSBC, sees challenges for any attempt to pass structural reforms:

“We think that the level of fragmentation in Congress would make any significant reform an uphill battle for either candidate. Moreover, recent history suggests that such fragmentation may make it likely that either members of Congress or the president could face challenges that may cut short their terms. Pushing an agenda without the support of Congress may lead to votes of no confidence and clashes between the Congress and the Executive. We think this potential gridlock is something that a new president would most likely take into account and try to avoid, thus limiting the potential for reforms.”

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