Rich Peruvians May Not Be Fleeing Castillo, But Their Cash Sure Is

Peruvian authorities may still not be ready to declare the leftist outsider Pedro Castillo the winner of last month’s presidential election but the rich aren’t waiting for the official announcement.

They’re yanking their money out of local accounts and shipping it overseas at a pace rarely seen in an economy that has for decades been among the most stable in Latin America.

One small mutual-fund firm in Lima, Faro Capital, says its clients pulled half of all their money in the run-up to the vote and the one month since. The “big fear,” as Faro’s chief investment officer, Fernando Garcia, puts it, is that Castillo will slap restrictions on Peruvians’ purchases of dollars and euros, just like Argentina and Venezuela did in recent years.

Whether this concern is justified or not -- Castillo’s top economic adviser insists the angst is overblown -- it’s driving the wealthy to get their money out while they can.

The exodus has helped push the sol down 8.4% since the first of two rounds of voting was held in April, making it the worst-performing currency in emerging markets, even though the central bank has repeatedly stepped into the foreign-exchange market to prop it up.

Rich Peruvians May Not Be Fleeing Castillo, But Their Cash Sure Is

Those interventions, along with a decline in dollar deposits held at local banks, have driven down Peru’s foreign reserves -- the hard currency that forms a country’s financial safety net -- in each of the past three months.

Under the Mattresses

At a press conference last month, Julio Velarde, the country’s long-time central bank chief, sought to clarify that not all of the money lost in foreign reserves -- some $9 billion, or about 11% of the total -- had necessarily gone overseas.

Some of it, he said, is also being squirreled away under people’s mattresses at home. The comment didn’t exactly help sentiment, if that was the intent. The Lima benchmark stock index sank 0.6% that day, capping a brutal two-week rout that has made the Peruvian market the second biggest decliner in the region this year. Peru’s dollar bonds have posted negative returns of 6.5%, only worse than Colombia, Argentina and Lebanon.

“The profile of the Peruvian investor is very conservative and very nervous,” said Paul Rebolledo, the CEO of Tandem Finance, a firm that prepares students for the chartered financial analyst certification exams.

Read More: DoubleLine Dumps Peru Bonds, Boosts Bets on EM Bellwethers

Radical Change

After the pandemic caused a surge in poverty and unemployment, voters are clamoring for radical change across the Andes region in economies that have traditionally been friendly toward big business.

In Colombia, an attempt to raise taxes in April triggered weeks of civil unrest against the pro-U.S. government of President Ivan Duque. An anti-establishment candidate, Gustavo Petro, is now leading in polls ahead of next year’s presidential election. The nation’s stock market is the world’s worst performer since the start of 2020.

In Chile, voters have abandoned the traditional parties, and this year elected a new generation of left-wing and independent candidates to the constituent assembly that will write the new constitution.

Castillo, a rural union activist from a Marxist party, was virtually unknown at the start of the year, but beat 17 other candidates in the first round after successfully tapping voter rage against the nation’s political elite.

Rich Peruvians May Not Be Fleeing Castillo, But Their Cash Sure Is

He ran on a slogan, “No more poor people in a rich country,” meaning that the nation’s vast mineral wealth must benefit ordinary people, and has pledged to dramatically increase spending on health and education. If the electoral court declares him the winner, he’ll take office on July 28.

Fraud Allegations

In the June 6 runoff election, he got 50.1% of the votes, to 49.9% for Keiko Fujimori, the conservative, free-market candidate who investors preferred. The announcement of the final result has been delayed for weeks after Fujimori alleged fraud, though the U.S. and the European Union said the election was clean.

The task of calming down jittery Peruvian investors has fallen largely to Pedro Francke, the former World Bank economist who Castillo tapped as his chief economic adviser last month.

He’s repeated again and again that Castillo is no extreme radical and that comparing him to the late Venezuelan leader Hugo Chavez is a mistake. Part of that messaging was to have Castillo signal that he plans to retain Velarde as the central bank chief. The announcement triggered a brief rebound in Peruvian assets.

“The fears are unjustified,” Francke said in an interview, “but we’ve got to be respectful of the positions people have.”

Vladimir Cerron, the Marxist neurosurgeon who leads Castillo’s Peru Libre party in congress, also toned down his message in recent days, saying in a Tweet that his party respects the right to private property.

Peru has been here before. Back in 2011, the election of a left-wing former army officer, Ollanta Humala, provoked similar concerns among investors. Humala moderated his positions once in office, though, and markets stabilized.

But the angst among Peruvian elites is more palpable this time around.

“I’ve been doing this 20 years,” says Luis Ferreira, the head of investment strategy at EFG Capital International, a money-management firm in Miami that caters to clients in Latin America. “It’s different now. You see a very high level of concern -- people liquidating positions, trying to leave.”

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