In response to Castillo's move—which was described as a coup d’etat by the country’s constitutional tribunal—the Peruvian Congress accelerated the vote and ousted him by an overwhelming majority. The army vehemently rejected Castillo's appeal for support, and the latest headlines point to the president being placed under arrest.
Vice President Dina Boluarte, who also condemned Castillo's action, promptly assumed the presidency, becoming the country's sixth head of state since 2018. Political uncertainty looks likely to remain high for the foreseeable future. The minister of finance and other cabinet leaders, for example, resigned as soon as Castillo attempted to dissolve Congress, and it is unclear whether they will return or new ministers will be appointed. In addition, Boluarte and Congress will likely decide whether to call early general elections or continue with the status quo. Finally, a Boluarte administration looks likely to continue to clash with Congress in several areas.
Peru’s macroeconomic picture remains strong
During times of heightened political uncertainty, it is helpful to reassess the strength of a country’s economic picture. In our view, the numbers for Peru remain relatively strong, which should offer resilience to Peruvian assets through the current crisis. Peru has a low government debt burden and a track record of strong economic institutions that have delivered prudent fiscal and monetary policies. The country also has a high level of international reserves relative to the size of its economy, and a moderate current account deficit that is almost completely financed by large net foreign direct investment inflows. We think Peru can withstand a prolonged period of tight global liquidity relatively comfortably, in contrast to other Andean countries such as Colombia and Chile which appear more vulnerable in our view.
Investment implications
Peruvian assets reacted negatively to the developments at first, but they staged a recovery after Castillo was ousted. The Peruvian sol traded close to flat relative to the US dollar, and spreads on USD-denominated Peruvian government bonds remained largely unchanged. We think Peru’s sovereign credit outlook remains stable and that the ongoing political noise will have a negligible impact on the government's willingness and ability to pay back its debt. Spreads on Peru's USD bonds are in line with those of other BBB rated sovereign issuers in emerging markets, whereas up until not long ago they were trading modestly tighter. As the political uncertainty subsides, we expect to see some marginal spread compression, particularly in the short end of the curve.
Peruvian corporate credits covered by CIO include low-cost mining companies that generate the bulk of their revenues in hard currency, and well-capitalized and systemically important commercial and development banks. We are therefore inclined to take possible price weakness as a result of this unfortunate political event as improved entry levels.
Main contributors: Alejo Czerwonko, Pedro Quintanilla-Dieck, Donald McLauchlan and Chinenyenwa Amaechi
Read the original report, Peru: Sixth president since 2018; still strong macro fundamentals, 7 December 2022.
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