Peru's problematic politics to persist after election (as expected)

  • For Congress (which has legislative power), exit polls suggest the 7 largest parties bunched between 7% and 11% of votes
  • For President, leftist Pedro Castillo (19% in 1st round) likely to face Rightist Keiko Fujimori (15%) in June 2nd round
  • Peru's fragmented politics will remain a drag on the investment case, so it is down mainly to copper output and prices
Peru's problematic politics to persist after election (as expected)

Peru's general election on 11 April is very unlikely to alter the political pattern of recent years: fragmentation in the Congress and fractious relations between the Congress and the President. This is not a surprise: there are too many similarly sized parties.

The Presidential front-runner in round one, leftist Pedro Castillo, is likely to see his party control only a small minority of seats in Congress. Exit polls suggest that the largest seven parties are bunched between 7% and 11% of votes.

Peru equities remain more of a play on metal exports (about 60% of total exports, with copper alone accounting for almost 30%), attractive valuation, and low currency risk than reform and self-help initiated by its political class.

Peru's highly fragmented politics to persist after election

Peru is set to outpace the real GDP growth of most LatAm equity market peers in 2021, at 8.5% according to the latest IMF forecast. Irrespective of the risks to this forecast from copper revenues or Covid-19 disruption, there is very little positive role that the current political class has played. Instead it has been too fragmented to unite beyond any policy other than a collective self-interested fight against anti-corruption scrutiny and governance safeguards in the fallout from the Odebrecht Scandal.

The result has been an erosion of its institutional strength as the Congress has repeatedly been unwilling to cooperate with the President, and increasing distrust of the political class among the mass population. The Covid-19 shock has nearly doubled unemployment (eg from 6.6% in 2019 to 13.6% in 2020 in the city of Lima). And the Covid-19 shock is ongoing because infections have not been brought under control.

This means that Peru can no longer be run on policy autopilot (fiscal rules, inflation targets). Structural reform is needed (eg improvements in education, healthcare, infrastructure, ease of doing business, and public sector efficiency) and this requires a more coherent governing coalition.

Peru has a 9.9% weight in the MSCI FEM and 22bps in MSCI EM, with three stocks, each with a US listing. Almost half of its index weight is in the two stocks exposed to mining of Copper (Southern Copper) and Gold (Buenaventura), with the remainder in bank Credicorp.

The S&P Peru PEN Index is on 12.4x forward PE, a 13% discount to the 5-year median. Currency risk is relatively with low with IMF forecast 2021 inflation of merely 2%, current account deficit of merely 0.4% in 2021, FX reserves providing 21 months of import cover, and short-term external debt to GDP of merely 4%. Peru also has access to US$11bn via an IMF flexible credit line (which expires in June 2022).

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