Background

Five weeks after an official review was initiated, the National Elections Jury confirmed Pedro Castillo, a rural professor and left-wing union leader, as the winner of the second round of presidential elections. Despite the almost 300 claims that the conservative candidate Keiko Fujimori presented to annul the votes for her adversary, the official results indicated that the Peru Libre candidate obtained 50.12% of the votes compared to Fujimori’s 49.87%, a difference of little more than 44,000 votes.

Fujimori, who must now proceed to trial for alleged money laundering in the Odebrecht case, presented a series of challenges and appeals to delay Castillo’s confirmation. After the electoral authorities dismissed her allegations of fraud, the daughter of former President Alberto Fujimori admitted her defeat, however, she urged her followers to keep up the fight “against communism” and the imminent creation of a Constitutional Assembly, one of Castillo’s electoral promises, which would open the door to drafting a new Constitution.

Meanwhile, while waiting for the official announcement of the election results, former presidential candidates met with Castillo to show their recognition of his victory amidst the controversy. Former presidential candidate Verónika Mendoza from the leftist party, Nuevo Peru, was one of the key politicians who remained a close ally to Castillo during the weeks of uncertainty.

Peruvians have voiced mounting anxiety over the formation of Castillo’s new ministerial cabinet, which he was expected to announce once he was proclaimed president-elect. There was special concern regarding who would be the new Minister of Economy and Finance. The economist Pedro Francke, Castillo’s economic advisor who helped temper the candidate’s platform in the second electoral round to reassure the markets and the country’s main businessmen, was the main candidate for this position. His public statements announcing that there would be no nationalization, expropriations, price controls, or any other extreme provided some reassurance to Peru’s economic elite.

First crisis of the Bicentennial

On his first day as President, Pedro Castillo surprised the nation with the appointment of Guido Bellido to the post of Prime Minister. Bellido, a 41-year-old electronics engineer, is a member of the radical wing of the now ruling party, Peru Libre, and has no previous experience in politics.

The primary criticism against Bellido, however, surrounds his close relationship to the founder of the party, Vladimir Cerrón, a neurosurgeon who declares himself a Marxist and an admirer of the governments of Cuba and Venezuela. He was unable to run for the presidency or assume a cabinet position because he faces corruption charges. Naturally, his appointment generated an intense debate over the direction the new government will take.

The appointment of Bellido was unexpected and controversial, not only because of his political profile but also because he is facing an investigation for the alleged crime of ‘apology for terrorism’. The Prosecutor’s Office is currently investigating him after the video of an interview was released in which he refused to define the members of the Shining Path as “terrorists”. The video quickly went viral and filled social networks with anger.

Castillo introduced Bellido as head of the ministerial cabinet after participating in a symbolic act in the Pampa de La Quinua, a region near the city of Ayacucho, where in 1824 the battle that ended Spanish colonial rule in South America was fought. The other ministers were appointed that same night (including only two women), although the Economy and Finance Minister and Justice and Human Rights Minister had not yet been appointed.

The next day, in an unexpected twist, it was announced that Pedro Francke would assume the Minister of Economy and Finance role and Aníbal Torres would become the Minister of Justice. Francke’s appointment seems to be aimed at calming investors’ nerves, however, investors are increasingly skeptical about the direction Peru will take under the Castillo government after his political campaign and promises to distribute wealth in a more equitable way have impacted the markets. For his part, Aníbal Torres is an experienced jurist and will play a fundamental role in carrying out one of the main promises of the new President: amending the country’s Constitution.

Impact on the economy

Since Castillo assumed the Presidency on July 28, the Lima Stock Exchange (BVL) saw a drop of 4.95%. A few days later it lost more than 6%.

The Peruvian sol has absorbed the impact of investor concerns and has depreciated 3.63% since July 27, from 3.93 soles to 4.07 per dollar. The currency hit a historical trading low of 3.9170 on July 30, just before the appointment of Francke.

One of the most affected sectors of election uncertainty has been the mining industry. Part of investor concern stems from expectations of higher taxes for the mining sector which would negatively impact the world’s second largest copper producer.

It is estimated that the ongoing investment in the Tía María mining project in Arequipa (the southern region of Peru) will cost the Mexican Southern Copper Corporation 1.4 billion dollars. Despite the company already having received the relevant permits from the previous administration, Peru Libre has called for the project to be cancelled.

What Happens Next?

The newly selected cabinet chosen by President Pedro Castillo must win a vote of confidence from Congress in the coming weeks of August in the midst of a tense political environment. Allies of Vladimir Cerrón within Peru Libre continue to push Parliament to censor the cabinet, and have even floated the possibility of the closure of the Legislative branch.

According to Peruvian economist Luis Alberto Arias, Peru is now in an advantageous position. Metal prices have risen from the recovery in the largest economies and profits from a project the size of Tía María would be very high.

Francke has insisted that under Castillo there will be no expropriations or price controls which, according to him, would not even be feasible since the president would need congressional approval to do so and his party does not have the majority.

Meanwhile, inflation in Peru continues to rise and has exceeded the target range for the second consecutive month. Basic foods such as oil and chicken cost are linked to raw materials that must be imported and, with the currency depreciating, they are more expensive. If Castillo decides to cancel the Tía María project, or if Congress refuses to ratify his cabinet appointments in the coming weeks, that would impact the investment grade of the sovereign debt and increase the interest that the Government pays to loan holders. “A pernicious cycle would materialize with more negative consequences than we are seeing. We are heading for a collision, but there is still time to avoid it”, warned Arias.

Sources: BBC, El País and local media