Peru’s Finance Minister May Calm Markets But Challenges Remain
Peru President Pedro Castillo’s decision to install a former World Bank economist as finance minister may ease the pain in one of the world’s worst-performing markets but challenges still lie ahead, according to two of the nation’s former finance heads.
Pedro Francke was sworn in late Friday following a delay that unnerved investors. By then, the sol had already dipped to a record low and the yield on the country’s benchmark bonds due in 2031 spiked to a seven-week high.
“The appointment of Pedro Francke is positive,” David Tuesta, who served as finance minister in 2018, said in an interview Sunday. “Investors need to confirm that the economic stance of the government is pro-market by observing their economic decisions. Until the markets see that, it’s expected that the financial pressure continues and we see more pain in short-term financial indicators.”
In thin trading on Monday, Peru’s 2031 dollar bonds fell to 100.54 cents on the dollar as of 6:43 a.m. in New York, marking the 10th straight daily decline.
Francke advised Castillo on economic policy during the campaign and vowed to largely maintain the country’s macro-economic policies while putting more focus on social issues. He’ll be tasked with trying to maintain investor confidence amid doubts over policy direction under Castillo and his Marxist Peru Libre party while trying to revive an economy battered by recession and the world’s worst Covid-19 death rate.
Peru’s stock market is the world’s worst performer so far this year, and the sol’s slump was more than any other currency last month, according to data compiled by Bloomberg. Investors are looking at Francke’s appointment to reverse that trend.
”This will calm markets temporarily, but it won’t last for long,” Alfredo Thorne, Peru’s finance minister from 2016-17 who runs the investment advisory firm Thorne & Associates in Lima, said in an interview Sunday. “Except for Francke, the rest of the government is very inexperienced. They are due to submit the budget by the end of August and the outlook doesn’t look good.”
Thorne, also a former World Bank economist, said the sol will probably hover around 4.0 against the dollar following interventions by the central bank.
Castillo, a former schoolteacher and union leader affiliated with a Marxist party, emerged out of relative obscurity this year to win the presidency after consolidating support from Peru’s left-wing. While investors have had concerns over his proposed polices since his surprise first round win in April, Francke’s efforts to communicate with investors, the business community and the media had assuaged some concerns over how disruptive economic policy will be.
Still, the key obstacle is holding differing views on the economy and markets with the president and even the bulk of the cabinet, said Tuesta.
“In normal times, you usually expect the president, the chief of cabinet and the minister of finance to be aligned,” he said. “This is something that the markets will need to clearly check.”
Friday’s meltdown of Peruvian assets came after Francke left a ceremony Thursday to swear in cabinet members, stoking speculation he was upset at the radical stances of some of the ministers and wouldn’t be taking the post. Among the appointments was Guido Bellido, a lawmaker who considers the communist government of Cuba to be a democracy, as prime minister.
“The thing is that it’s very, very, very difficult for a minister of finance to do something different than what the prime minister thinks,” said Tuesta, calling Bellido a “confirmed anti-market person.” “Convincing him, the president and the leaders of Peru Libre to do the right thing is his main challenge.”
On Saturday, Francke, 60, took to Twitter to call for a “clear separation” between party politics and the government, addressing a key investor concern on his first day in the post. Hours before Francke was sworn in, Bellido also offered his “full support” for the new finance minister’s economic policy.
Peru still stands out as a good investment among peers in the developing world due to its low debt levels, strong institutions and a “robust” economy -- even if there’s a shift in policy, Dan Shaykevich, the co-head of emerging-market and sovereign bonds at Vanguard Group Inc., said earlier last week.
Peru’s investment-grade credit ratings are among the region’s best, and its assets aren’t pricing in a calamity. Its benchmark bonds trade above par and credit-default swaps show a slim chance of default over the next five years.
Francke is popular with investors, having called for inflation-targeting, fiscal prudence and respect for private property. He offers a counterbalance to concerns such as Castillo’s inaugural address last week, in which he called for Peru to retake control of its natural resources, renegotiate its-free trade deals and dramatically boost social spending.
“Will markets rebound? Yes,” said Carlos Rojas, the CEO of Lima-based money manager CAPIA SAFI. “The panic on Friday -- we’ll recover half of that, but we won’t run fast. People want to see him show better signs of confidence before doing more moves.”
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