Flash Report /

Peru president Castillo impeached and arrested, more dysfunction ahead

  • Castillo attempts to suspend congress, rule by decree and reform judiciary

  • Instead, he was impeached, arrested and succeeded by vice president Boluarte

  • Peru’s congress remains highly fragmented, inhibiting market-friendly reform as well a leftist lurch in economic policy

Peru president Castillo impeached and arrested, more dysfunction ahead
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
8 December 2022
Published byTellimer Research

After appointing 80 cabinet ministers and five prime ministers, and enduring two failed impeachment attempts in a presidential tenure that lasted less than 18 months, Pedro Castillo now finds himself impeached and under arrest. 

His attempted suspension of congress on 7 December was within his constitutional prerogative but his intention to reform the judiciary during emergency rule was not.

The original case was to answer in the impeachment was criminal profiteering from government contracts. While there were previously sufficient opposition votes to mount an impeachment attempt, there were not enough to push it through. Castillo’s actions appear to have united leftist and rightist parts of congress in a defence of legislative democracy.

His successor, former vice president Dina Boluarte, is another leftist and will likely face the same challenge to manage any meaningful legislation through such a fragmented congress, where rightist parties are in the majority. She has no party of her own, having been ejected from Peru Libre earlier this year, similar to Castillo. 

The inability of any president to manage a fragmented congress means that neither is there much prospect of market-friendly reform nor of a major and lasting leftist shift on policies such as mining royalties or taxation. The next election is due in 2026.

Peru Congress is fragmented. Right and centre leaning parties dominate but have a poor history of coordination.

Equity implications

Peru equities are up 15% ytd, similar to copper exporting peer Chile. Trailing PB and PE are on 20% and 30% discounts to their respective five-year medians.

Arguably, political dysfunction is reflected in these valuations more than the potential for copper prices to pick up in the short term, driven by China’s re-opening, and, long term, driven by the global transition to renewable energy.

Fixed income implications

We expect a negative reaction for Peru’s dollar bonds (and currency) in the near term on this surprise news, after the bonds had hitherto displayed some resilience to the domestic political uncertainty. The bonds have been supported by the country's strong policy framework, track record and policy buffers, and have performed roughly in line with the index this year with a total return ytd of -18% versus -16% in the Bloomberg EM Sovereign USD index (to 2 December). However, political fragmentation could also limit downside, although concerns may intensify if the political crisis shows signs of impacting macro policy making.

The yield on Peru's 10-year dollar bond is c4.9%, with a z-spread of 170bps (+17bps ytd), as of cob 7 December on Bloomberg; the bonds have been broadly stable over the last week since the impeachment motion was passed on 1 December.

Peru spread (bps)