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Peru could face capital flight if Castillo clinches presidency - JPMorgan

Credit: REUTERS/ALESSANDRO CINQUE

Peru's financial markets are likely to see capital flight if left wing candidate Pedro Castillo emerges as the winner of a presidential election run-off that took place at the weekend, and remains too close to call.

By Marc Jones

LONDON, June 7 (Reuters) - Peru's financial markets are likely to see capital flight if left wing candidate Pedro Castillo emerges as the winner of a presidential election run-off that took place at the weekend, and remains too close to call.

The final result may not be known for days.

"If Castillo is confirmed as president elect, we believe the central bank would be tested under regime change, likely facing capital flight following the election outcome," JPMorgan said in a research note.

"If the regime-continuity candidate (Keiko) Fujimori ends up winning.. we expect financial conditions to normalize despite the political challenges ahead amid a very polarized society."

The vote comes after a turbulent year in Peru. The Andean nation has churned through three presidents since late 2020, has the world's highest per capita COVID-19 death toll, and experienced its worst economic crash in three decades.

Fujimori, a 46-year-old who has tilted at the presidency twice before, has pledged to follow the free-market model and maintain economic stability in the world’s second-largest copper producer.

Castillo, the son of peasant farmers, has promised to redraft the constitution to strengthen the role of the state, take a larger portion of profits from mining firms and nationalize key industries.

The country's sol currency PENUSD=R has fallen roughly 6% against the U.S. dollar since April as the uncertainty has escalated.

That is despite the country's central bank using the equivalent of $11 billion, or 5.4% of GDP, to intervene in the currency market either through direct buying or via swaps, JPMorgan estimated.

"Whoever wins, probably Peru is not going to have a great next five years," Federico Kaune, Global EM Senior Portfolio Manager at UBS Asset Management, had said ahead of the election due to the fact politics would remain deeply divided.

"Peru is an investment grade country so if something does go wrong it could give us a pretty nasty surprise," adding that some of Castillo's views on state involvement in the economy were similar in some ways to those of Venezuela or Bolivia.

(Reporting by Marc Jones, editing by Karin Strohecker & Simon Cameron-Moore)

((marc.jones@thomsonreuters.com; +44 (0)20 7513 4042; Reuters Messaging: marc.jones.thomsonreuters.com@reuters.net Twitter @marcjonesrtrs))

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