Peru’s Sol Slumps as Tensions Rise With Street Protests, Curfew
Peru’s Sol Slumps as Tensions Rise With Street Protests, Curfew
(Bloomberg) -- Peru’s sol had its worst performance in six weeks as traders worried about the political and economic impact of escalating anti-inflation protests that have led President Pedro Castillo to impose a curfew in Lima and declare a state of emergency in the nearby port city of Callao.
The currency declined 1.5% to 3.70 per dollar on Tuesday, the second-worst performer in emerging markets, on concern that the political turmoil could rekindle the political crisis that has already emboldened lawmakers to twice seek Castillo’s ouster during his first eight months in office. The sol had reached its strongest level so far this year on Monday, before paring gains as protests intensified and the government deployed the army to curb them.
The curfew runs from 2 a.m. local time on Tuesday to 11:59 p.m. of the same day, and for now it’s a one-time decision, Castillo announced in an address to the nation Monday night. He held a meeting with his cabinet on Tuesday to discuss the situation.
Castillo survived a second impeachment attempt by congress on March 29 only to find another crisis brewing on the streets. Farmers and truckers staged protests against the rising cost of fuel and fertilizers last week, temporarily interrupting the supply of food to the capital. Over the weekend the president lowered fuel taxes and increased the minimum wage by 10% to help Peruvians struggling with the fastest inflation in 24 years. Yet the measures did little to appease bus drivers, most of them working informal jobs without fixed salaries, and who began a strike on Monday.
“We believe Castillo is unlikely to finish his term, which runs until 2026, and he will either be removed from office or resign,” Moody’s Investors Service analysts led by Jaime Reusche wrote in an April 4 note. But, “we also expect that Peru’s orthodox macroeconomic policy framework will continue to underpin the country’s creditworthiness.”
Peru has long been praised by investors for the government’s commitment to low fiscal deficits and support for free trade, as well as sound monetary policy making by the central bank.
Yet uncertainty was been increasing as the protests may jeopardize the country’s exports. On Monday, an agricultural association said food exports, including those of blueberries, avocados and grapes, were suffering disruptions.
Peru’s dollar-denominated bonds due 2050, among the nation’s most traded, fell more than 1 cent to 126.1 cents on the U.S. dollar on Tuesday, the most in two weeks.
Peruvian local assets had a strong start to the year despite political headwinds. The sol remains among the best performers in major currencies this year against the dollar. The nation’s stocks have gained more than 30% in dollar terms, ranking second among 92 benchmark indexes tracked by Bloomberg.
Declining Popularity
Lawmakers and senior officials will be able to work as normal during the curfew, and citizens in essential businesses including pharmacies and supermarkets will be allowed to move about the city, Minister of Justice Felix Chero said in an interview with Radio Exitosa on Monday. Yet Castillo’s decision is likely to further erode his popularity, according to Citigroup Inc strategists.
“We do not rule out a future push by congress to impeach the president,” Citi strategists including Dirk Willer wrote in a research report. “While the president had the votes to avoid being ousted two weeks ago, a new push down the line might have a different outcome if he loses support of congressional allies.”
Among those criticizing Castillo was the head of congress, who said his decision was “extreme” and didn’t take into account the needs of Peruvians who need to work every day to win their subsistence. She said congress would follow its scheduled agenda on Tuesday.
On Monday, even housewives angry with rising food costs joined the protests. Local media showed mini-markets being looted in the southern region of Ica and school classes were suspended until Tuesday amid the chaos.
Consumer prices in Lima rose 6.82% in March from a year earlier, the most since Aug. 1998, and much above the central bank’s target of 2%, plus or minus 1 percentage point. Prices climbed 1.48% from February, above the median forecast for a 0.92% increase in a Bloomberg survey of economists.
Peru’s central bank is expected to raise its benchmark interest rate by half a percentage point on Thursday to 4.5%, its ninth consecutive increase that has so far totaled 375 basis points of monetary tightening since August.
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