Barely two weeks in power, the Pedro Castillo administration has been shaped by turmoil. Initial polling suggests that 41.0% of Peruvians disapprove of Castillo, a notable decline from 53.0% in July. Castillo’s controversial Cabinet picks left many Peruvians, who expected the former schoolteacher to moderate his platform once in power, reeling. Castillo’s prime minister, in particular, turned heads; Guido Bellido is a Marxist former Cuzco legislator who has praised the Cuban dictatorship and is being investigated for terrorist apologism given past statements on the Shining Path guerrilla group. Stocks fell 6% the day of the Peru Cabinet announcements, and the sol plummeted, overtaking the 4.0 PEN:USD threshold. Castillo has sought to calm markets by nominating Pedro Francke, former World Bank economist, as his finance minister and successfully convincing Julio Velarde, Peru’s longstanding, market-friendly central bank head, to keep his post during the five-year term.
Our View
While Francke’s appointment appears to signal moderation, political risk remains extremely high. Castillo’s Cabinet will need to be approved by an opposition-dominated Congress in the coming weeks. If Congress does not approve the current Cabinet, Castillo can replace his picks, but two “no” votes in a row could open a path for Castillo to dissolve Peru’s unicameral Congress, potentially enabling the president to try to pursue his stated goal of rewriting the Peruvian Constitution. Still, Castillo’s presidency faces its own risks; not only did Castillo win the election with a razor-thin margin, but Congress is dominated by the opposition, and the threshold for impeaching presidents in Peru is among the lowest in the world. In either scenario, we anticipate high levels of political volatility throughout the rest of 2021, likely weighing on the sol and continuing to erode investor appetite.
Business Implications
Firms should closely monitor political developments, particularly in the lead-up to the Cabinet vote. Brace for political conflict, as a “no” vote could push Peru toward another constitutional crisis, weighing on the country’s economic recovery. Additionally, it will be essential to engage in scenario planning, as governability risks for the Castillo administration remain high.
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