Peru’s presidential election is tightening, and the City of London should be paying attention. The frontrunner, Keiko Fujimori, and her left-wing rival Pedro Castillo are neck and neck, with security concerns dominating the agenda. For UK investors, the stakes are high: a Castillo victory could unravel trade deals and spook capital markets.
Peru’s economy has been a rare bright spot in Latin America, with steady growth and fiscal discipline. But the pandemic and political instability have taken their toll. The latest polls show Fujimori with a narrow lead, but her authoritarian past and corruption allegations make her a polarising figure. Castillo, a union leader and schoolteacher, has promised to rewrite the constitution and nationalise key industries. That is the kind of rhetoric that sends gilt yields higher and triggers capital flight.
UK exports to Peru are worth around £500 million annually, with machinery, pharmaceuticals, and financial services leading the way. A Castillo government could impose capital controls, renegotiate contracts, and raise taxes on foreign firms. That would be a headache for British companies like BP and HSBC, which have significant operations there. The UK-Peru trade agreement, signed in 2019, might be reopened, creating uncertainty for exporters.
But insecurity is the wild card. Peru’s violent crime rate has soared, and the pandemic has left deep economic scars. Fujimori is campaigning on a tough-on-crime platform, but her family’s legacy of corruption undermines her credibility. Castillo, meanwhile, is seen as a radical outsider who could bring chaos. Markets hate uncertainty, and Peru’s bond yields have already spiked. The central bank has intervened to support the sol, but capital flight is accelerating.
From a fiscal perspective, both candidates are problematic. Fujimori has promised tax cuts and increased spending, which would blow out the deficit. Castillo’s plan to nationalise the mining sector would scare off investors and hurt government revenues. Peru’s debt-to-GDP ratio is around 35 per cent, manageable for now, but a misstep could tip it into crisis.
The Bank of England should be watching closely. A Peruvian default or capital controls could spill over into emerging markets, hitting UK pension funds and institutional investors. The FTSE 100 has already felt the tremors from Latin American volatility.
In the end, the market is pricing in a Fujimori win, but the margin is thin. If Castillo pulls ahead, expect a sell-off in Peruvian assets and a flight to safety. UK trade deals are at risk, but the bigger worry is the signal it sends: if a relatively stable economy like Peru can lurch left, nowhere is safe. The City must prepare for a bumpy ride.
