Castillo’s likely shift toward a more moderate policy agenda is a positive signal for investors and would suggest that the government is not seeking to radically alter Peru’s regulatory and operating environment. However, firms should continue to anticipate high political uncertainty, as even if the Castillo administration permanently adopts a more moderate tone, tensions between Congress and president will persist, impacting FX and weighing on Peru’s investment prospects.
Overview
Peru’s President Pedro Castillo replaced seven members of his Cabinet, including controversial, far-left Prime Minister Guido Bellido (Peru Libre), with more moderate picks. Bellido, a self-proclaimed Marxist accused of terrorism apologia, had raised investor alarms in recent weeks by threatening to expropriate the Camisea gas field. He also threatened to pursue measures to dissolve Congress if it pursued a censure against Labor Minister Iber Maraví. On October 6, the government announced that Bellido was stepping down. He was replaced as prime minister by Mirtha Vasquez, a seasoned, center-left politician from the Frente Amplio party. Castillo also replaced Labor Minister Maraví as well as his education, interior, production, mining, and culture ministers, reconfiguring his Cabinet to look more moderate. The new Vasquez Cabinet will present its policy roadmap over the following week and is widely expected to secure a vote of confidence from Congress over the next month.
Our View
Castillo’s Cabinet reshuffling signaled the government’s commitment to shifting to the center, leading to moderate sol appreciation and raising demand for sol-denominated bonds. However, although moderation is a positive signal overall, this shift complicates Castillo’s position in Congress. The decision to replace Bellido raised anger across Castillo’s Peru Libre party, with many key members likely to turn their backs on Castillo. Peru Libre is still the largest party in Congress, and losing his base could complicate Castillo’s policy agenda. Further, the right within Congress remains skeptical of the Castillo administration, leaving the government with limited support from the center-left if it cannot rally Peru Libre support. This could lead to an even more obstructionist Congress, raising risks of another political crisis, which could interrupt Peru’s rapid economic recovery.
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