New president must appease markets to rescue economy

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 rightwing rival Keiko Fujimori, backed by city-dwellers and investors.

Castillo’s focus now, said economist Hugo Nopo of the GRADE research centre 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.”

But the Peru Libre insisted on Tuesday that he was keen to form a government picked from a broad spectrum. “We’re forming a working team and I can see that there are people who are pretty interested in supporting this government, from all political persuasions, also people who aren’t political,” said the president-elect.

Peru cannot afford capital flight – the country has been in recession since the second quarter of last year after a coronavirus lockdown shuttered businesses and crippled the all-important tourism sector. It 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 the campaign trail, Castillo had said Peru’s mining and hydrocarbon riches – a mainstay of the economy – “must be nationalised,” while promising to boost public spending and to curb imports that threaten domestic industry. But Castillo appears to have moderated his plans, and Francke told AFP last month their economic programme was “nothing like” that of Venezuela. “We will not expropriate, we will not nationalise, we will not impose generalised 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.

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.

Others point out Castillo will not have free rein and will face challenges to his programme in a fragmented congress where his party holds 37 of the 130 seats.

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