The Peruvian presidential election is hanging by a thread, with both main candidates neck-and-neck and no clear winner emerging. UK election observers on the ground have issued a stark warning: the democratic fabric of Latin America’s fourth-largest economy is showing dangerous strains. For those of us who track capital flows and sovereign risk, this is not just a political drama. It is a credit event waiting to happen.
Markets have already priced in a risk premium. The Peruvian sol has weakened 3 per cent this week. Bond yields on 10-year sovereign debt are creeping up, reflecting nervousness about policy continuity. Investors remember all too well what happened when Pedro Castillo, the left-wing trade unionist with no fiscal discipline, briefly won power in 2021 and sent the Lima stock exchange into a tailspin. Now, with the far-left candidate Cesar Acuña running on a platform of nationalisation and debt forgiveness, the fear is that whoever wins will govern with a fragile mandate and a hostile congress.
But it is not only the radical left that worries the markets. The centre-right candidate, Keiko Fujimori, daughter of the imprisoned former president, is hardly a paragon of institutional stability. Her party’s track record on corruption and her previous legal troubles make investors jittery. A Fujimori win might initially boost equities, but the long-term governance premium would remain high.
The real problem is structural. Peru’s economy has been one of Latin America’s success stories, growing at an average of 5 per cent over the past two decades thanks to prudent monetary policy and open trade. But the commodity boom is fading, copper prices are volatile, and the fiscal deficit has widened to 4 per cent of GDP. The next president will inherit a slowing economy and rising debt. Neither candidate has a credible plan to fix it.
UK observers from the Electoral Commission have noted irregularities in voter registration and media bias. The lack of a stable two-party system means that coalitions must be stitched together after the election, a process that can take months. This political vacuum is a recipe for policy paralysis. In the meantime, capital is flighty: we have already seen higher outflows from Peruvian assets as wealthy families move money to Miami or Santiago.
What does this mean for British investors? In a world of low yields, Peru offered a decent carry trade. That window is closing. The risk of a default is low but rising. The real risk is a slow erosion of institutions: a judiciary that cannot enforce contracts, a central bank that comes under political pressure, and a bureaucracy that grinds to a halt. These are the intangible assets that make a country bankable. Peru is in danger of squandering them.
Let us not forget the wider context. Latin America is in a cycle of political volatility. Chile wrote a new constitution, but the economic fallout from its leftist government has been severe. Argentina is in a perpetual crisis. Brazil’s election saw violence and uncertainty. Peru is just the latest in a line of democratic experiments that are failing to deliver prosperity. The lesson for the City is clear: geopolitical risk is not a footnote. It is the main story.
The Bank of England’s Financial Policy Committee should take note. We are seeing a rise in emerging market risk premiums that could spill over into UK-linked funds. The exposure of British banks to Peru is small, but the contagion effect across Latin America could amplify losses. I would not be surprised if the next quarterly stability report mentions Peru by name.
For now, the world watches and waits. But the clock is ticking. Every day without a clear result adds to the uncertainty discount. And that discount will only be removed when a credible government emerges with a credible fiscal plan. Do not hold your breath.
