Castillo does not swear to the Minister of Economy, Peruvian uncertainty stirs bond prices | America

Peru’s dollar-denominated bonds fell on Friday after President Pedro Castillo Guido Peledo, a lawmaker from his Marxist party, was appointed prime minister and did not swear the economy and finance minister, creating uncertainty over the direction of politics and the economy.

The move, which lowered the administration’s cautious expectations, sent the 2060 bond maturing down 1.4 cents on the dollar to trade at 88.8 cents, near its lowest level in a month. The paper to 2032 yielded a cent, according to Refinitiv data.

Investors are increasingly skeptical about Peru’s prospects for Castillo, who won elections last month with a self-described Marxist-Leninist party.

Peledo’s appointment, Thursday, highlighted the influence of the Peruvian Liber Party on the Castillo administration, which began on Wednesday and is expected to run through 2026.

“The highly atypical political situation reinforces our call for a persistent scenario characterized by political, institutional and economic uncertainty,” wrote Diego W. Pereira of JPMorgan.

“It may be too early to draw conclusions, but the initial tactic is not positive,” said Seles Ladd of AXA Investment Managers. He added that the asset manager would keep his exposure small to Peruvian sovereign and corporate debt.

“We think there will be volatility, but I don’t think panic has entered or that we are at the stage where (investors) need to leave the country. At the same time, we are not at the stage where opportunities are seen.”

Peruvian hard currency bond spreads against similar US Treasuries in the JPMorgan EMBI Global Diversified Index rose sharply last week, adding nearly 20 basis points to expand to 191, the highest level since June 2020.

JPMorgan said in a note that Castillo’s lack of access to cheap, high-quality equipment exacerbated those concerns.

“The highly atypical political situation reinforces our call for a persistent scenario characterized by political, institutional and economic uncertainty,” wrote Diego W. Pereira of JPMorgan.

Castillo swore in most of his ministers Thursday night, but the front-runner for the finance job, moderate left-wing economist Pedro Frank, left shortly before the ceremony began, raising questions about whether he turned down the job or lost it at the last minute.

Castillo, who must balance maintaining investors’ faith with improving the lives of the rural base that voted for him, said he wants to raise taxes on mining to fund health and education reforms.

Peru is the second largest copper producer in the world. Sebastian Vargas at Barclays wrote in a note that fiscal deficit targets for 2022 are likely to be revised upward, and an external bond issue of about $4 billion is expected in the second half of 2021.