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Peru’s new president must appease markets to save economy

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Lima (AFP)

Peru’s newly elected president, leftist trade unionist Pedro Castillo, faces an uphill battle to build the market confidence he needs to deal with a deep economic crisis in a country hit by the coronavirus epidemic, according to analysts.

Voting last month for their fifth president in three years, Peruvians chose between two economic extremes: a rural school teacher Castillo pledging to improve the lot of the poor, and his right-wing rival Keiko Fujimori, supported by city dwellers and investors.

After more than six weeks of suspense as a jury examined allegations of electoral fraud filed by Fujimori, political outsider Castillo was proclaimed president-elect on Monday evening – a turnaround after a quarter of a century of neoliberal government.

On Tuesday morning, the ground fell to 3.964 against the US dollar. The Lima stock exchange has yet to recover from the 7.7% drop recorded the day after the June 6 vote.

Castillo’s goal now, said economist Hugo Nopo of the GRADE research center in Lima, must be “to build bridges with 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 strong experts will be on board.”

Because Peru cannot afford capital flight.

The country has been in recession since the second quarter of last year after the coronavirus lockdown closed businesses and crippled the all-important tourism sector.

Peru is now the country in the world with the highest Covid-19 death rate, and the pandemic has exacerbated deep societal inequalities.

The economy contracted by more than 11% in 2020, two million people lost their jobs and poverty now affects nearly a third of Peruvians.

– ‘Tranquility’ –

In a first sign that he would not immediately start to shake things up, Castillo announced on June 26 that he would keep Julio Velarde as president of the central bank of Peru “to give peace” and for ” open the doors to big investments “.

Velarde has led the bank for 15 years and is considered a prudent and stable manager of monetary policy.

As chief economic adviser, Castillo appointed former World Bank economist Pedro Francke, seen as a moderating influence on his boss.

During the campaign trial, Castillo said Peru’s mineral and hydrocarbon wealth – a pillar of the economy – “must be nationalized”, while promising to boost public spending and limit imports that threaten the industry. national.

Such ploys have led free market defender Fujimori to portray Castillo as a communist who would turn Peru into a new Venezuela or a new North Korea.

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But Castillo appears to have moderated his plans, and Francke told AFP last month that their economic program was “nothing” like Venezuela’s.

“We will not expropriate, we will not nationalize, we will not impose generalized price controls, we will not do any exchange controls that prevent you from buying and selling dollars or taking dollars out of the country”, Francke said.

“The autonomy of the Central Reserve Bank will be maintained, it is important in Peru that we have had low inflation,” he added, although there was a need for “higher taxes on large companies and mines “.

– ‘Left lane’ –

Risk advisory firm Eurasia, in a recent client advisory, noted that a Castillo presidency would mark “a major shift from the economic policy framework that has been in place for decades.

“Moreover, without prior experience in the civil service, without a five-year government plan, or without a strong team by his side, Castillo’s economic policies are likely to be quite erratic and could become more radical as his tenure progresses.”

Others point out that Castillo will not have free rein and will face challenges to his program in a fragmented congress where his Peru Free (Free Peru) party holds 37 of the 130 seats.

But if he fails to deliver, that too could have consequences.

“He will have to see how many promises he can keep because .. with the people’s (high) expectations during the campaign, he could have a big problem,” Nopo said.

There is also the risk that “the clashes between Castillo and Congress weaken political stability,” according to a recent assessment by Fitch Solutions.

Eurasia added: “The threats to social and governmental stability will be significant, with the consequent risks of protests and impeachment efforts against Castillo.”