Peru Political Risk Lingers Post-Castillo, Strategists Warn

(Bloomberg) -- While the ousting of former Peruvian President Pedro Castillo, who was impeached and arrested Wednesday, should be short-term supportive for the nation’s assets, governability challenges will remain, according to Barclays.

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• Vice President Dina Boluarte took over as head of state, saying she would seek a government of national unity and fight corruption

• “Locals tend to think that ousting Castillo should be bullish for Peruvian assets, and we could see the typical relief rally after the fact. But medium term, governability challenges are likely to remain even if the VP takes over,” said Erick Martinez, a strategist at Barclays in New York. “We stay bearish in the medium term because this doesn’t solve the governability problems. But we do think there can be a short-term relief”

• The resignation of the finance minister and others implies damage is done and rebuilding the cabinet will add a layer of uncertainty, strategists including by Esteban Tamayo, Dirk Willer and Donato Guarino wrote in a note Wednesday

• “Boluarte is not necessarily perceived as market friendly, but the general sentiment is that anyone is better than Castillo,” said Valerie Ho, a portfolio manager at Doubleline Group in Los Angeles. “Her cabinet appointments will be an important signpost”

• “If reasonable members are appointed, there is a good chance that the political horizon will be much more stable than that of the past 16 months,” Scotiabank economist Guillermo Arbe wrote in a note. “Boluarte is likely to continue to behave left of center, but is not likely to have close links to the radical left”

  • “We will also look closely at who will be appointed at the Ministry of Finance and at the Ministry of Mining. If all goes well, a significant part of the political turbulence veil that has done significant damage to business confidence, may be finally lifted”

(Updates with Scotiabank comments in last two bullets.)

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