Defining Castillo’s Policies Is Key for Peru Investment, Growth

Fitch Ratings release

Fitch Ratings-New York/London-20 July 2021: Pedro Castillo’s victory in Peru’s presidential election increases economic policy uncertainty as the president-elect has yet to define key policy priorities from his broad, left-leaning campaign platform, Fitch Ratings says. Policy uncertainty is compounded by governability challenges, while the impact of the pandemic will push debt higher in the near-term.

President-elect Castillo of the Free Peru party was certified winner with 50.1% of votes to 49.9% for Keiko Fujimori six weeks after the June 6 run-off vote. Polarization among voters, reflected in the narrow margin of victory, and pandemic-related social rifts compound governability risks stemming from a highly fragmented Congress. The new government may need alliances with smaller parties and strong internal party discipline to pass legislation.

Economic and fiscal policy predictability suffered under the outgoing 2020-2021 congress, which enacted various populist measures. As such, the Castillo administration’s approach to managing strategic sectors including mining, gas and communications, its attitude to private contracts, and its fiscal policy settings, will be important in assessing sovereign creditworthiness.

The Free Peru platform advocates redrafting the constitution (including the key economic chapter that enshrines free market principles and protects the macroeconomic policy framework), expanding the state’s role in business, changing or annulling concessions and contracts to private firms, significantly increasing taxation of, or nationalizing, strategic sectors (including mining and natural gas), restructuring the national pension system and abolishing flexible labor contracting.

Since the election, Castillo has repeated his pledge to request a national assembly to redraft the constitution, focused debate around the mining sector on taxation, and advocated agricultural support. He has not presented a centrist policy document, unlike former President Humala, who won on a left-wing platform in 2011. But he has sent preliminary signals of policy continuity at the Central Reserve Bank of Peru, ruling out price or currency controls.

More indications of economic and fiscal policy settings should emerge in the inaugural presidential address on 28 July and in the 2022 budget due to be presented by 30 Aug. The appointment of key ministers, regulators, and the governor and board at the central bank and the new administration’s concrete proposals will also help clarify Castillo’s policy priorities.

The full release is available here.