Peru's New President Must Appease Markets To Rescue Economy

Peru's newly-elected president, leftist trade unionist Pedro Castillo, faces an uphill battle building the market confidence he needs to address a deep economic crisis in a country battered by the coronavirus epidemic, analysts say.

Voting last month for their fifth president in three years, Peruvians chose between two economic extremes -- rural school teacher Castillo vowing to improve the plight of the poor, and right-wing rival Keiko Fujimori, backed by city-dwellers and investors.

After more than six weeks of suspense as a jury reviewed claims of electoral fraud filed by Fujimori, political outsider Castillo was proclaimed president-elect late Monday -- a U-turn on a quarter century of neo-liberal government.

On Tuesday morning, the sol fell to 3.964 against the US dollar. The Lima stock exchange has yet to recover from the 7.7-percent drop registered the day after the June 6 vote.

Castillo's focus now, said economist Hugo Nopo of the GRADE research center in Lima, must be to "build bridges with the markets, which are wary of what he might do."

He added: "Clear signals must be given that the objective management of the economy will be professional, that solid experts will be brought on board."

Because Peru cannot afford a capital flight.

The country has been in recession since the second quarter of last year after coronavirus lockdown shuttered businesses and crippled the all-important tourism sector.

Peru is now the country in the world with the highest Covid-19 mortality rate, and the pandemic has exacerbated deep societal inequalities.

The economy contracted more than 11 percent in 2020, two million people lost their jobs and poverty now affects almost a third of Peruvians.

In an early sign he will not immediately set out to rock the boat, Castillo announced on June 26 that he would keep Julio Velarde as Peru's central bank president "to give tranquility" and to "open the doors to big investment."

Velarde has headed the bank for 15 years and is considered a prudent and stable manager of monetary policy.

As chief economic advisor, Castillo appointed former World Bank economist Pedro Francke, seen as a moderating influence on his boss.

On the campaign trial, Castillo had said Peru's mining and hydrocarbon riches -- a mainstay of the economy -- "must be nationalized," while promising to boost public spending and to curb imports that threaten domestic industry.

Such schemes caused free-market defender Fujimori to portray Castillo as a communist who would turn Peru into a new Venezuela or North Korea.

But Castillo appears to have moderated his plans, and Francke told AFP last month their economic program was "nothing" like" that of Venezuela.

"We will not expropriate, we will not nationalize, we will not impose generalized price controls, we will not make any exchange control that prevents you from buying and selling dollars or taking dollars out of the country," Francke said.

"The autonomy of the Central Reserve Bank will be maintained, it is important in Peru that we have had low inflation," he added, though there was a need for "higher taxes on big companies and mines."

Risk consultancy Eurasia in a recent notice to clients noted a Castillo presidency would mark "a major shift from the economic policy framework that has been in place for decades.

"Moreover, without prior experience in public office, a five-year government plan, or a strong team by his side, Castillo's economic policy will probably be quite erratic and could become more radical as his term advances."

Others point out Castillo will not have free rein and will face challenges to his program in a fragmented congress where his Peru Libre (Free Peru) party holds 37 of the 130 seats.

But if he fails to deliver, this too, could have consequences.

"He will have to see how many promises he can deliver on because .. with the expectations of the population (raised) during the campaign, he could have a big problem," said Nopo.

There is also the risk that "clashes between Castillo and Congress weaken political stability," said a recent assessment by Fitch Solutions.

Added Eurasia: "Threats to social and government stability will be significant, with the consequent risks of protests and impeachment efforts against Castillo."