It is a scene that would make any prudent fund manager nervous. In the City of London, we watch the gilt yields for signs of fiscal discipline. In Peru, the equivalent is the presidential race, currently hanging on a knife-edge as the electorate abandons the establishment in droves, driven by a vertiginous rise in insecurity. The bottom line: this is not a mere political squall. It is a structural repricing of risk in one of Latin America’s more stable economies. And the implications for investors are far from trivial.
The latest polls show a fragmented field, with no candidate breaking 20 per cent. The frontrunners, a motley crew of populists and anti-establishment figures, are benefiting from a collapse in support for traditional parties. The incumbent, President Dina Boluarte, has seen her approval rating plunge into single digits as crime rates have spiralled out of control. Homicides are up 25 per cent year on year. Carjackings, extortion and kidnappings have become a daily reality in Lima’s once-quiet suburbs. The state, it seems, has lost its monopoly on violence.
For a bond market already jittery about global inflation and tight monetary conditions, this is a worrying development. Peru’s fiscal position has been deteriorating. The budget deficit widened to 2.8 per cent of GDP in 2024. Public debt, while manageable at 35 per cent of GDP, is on an upward trajectory. A populist victory could unleash a wave of spending that will test the central bank’s inflation target. The sol has already weakened 8 per cent against the dollar this year. Capital flight is a real risk if the election outcome looks like it will threaten property rights or fiscal stability.
The parallels with the 2021 election, when Pedro Castillo won the presidency on a far-left platform, are eerily similar. Castillo’s brief tenure was a disaster for markets. The Lima Stock Exchange fell 20 per cent in the days after his victory. His impeachment and removal did not restore confidence. The economy has yet to recover. Now, with the electorate in a sullen, anti-establishment mood, the risk of another Castillo-style shock is high.
Who could replace the discredited old guard? The names in the ring are a motley lot. One candidate, Rafael López Aliaga, is a conservative economist who has called for a return to fiscal orthodoxy. But his polling has stagnated. Another, Verónika Mendoza, is a left-wing firebrand who wants to rewrite the constitution. She is drawing support from the poor and disenfranchised. Then there is the wildcard: Antauro Humala, a former army officer who led a bloody uprising in 2005. He is currently in prison but still on the ballot. His support has surprised many. It should not. Insecurity creates a hunger for strong leadership, and Humala promises a iron fist against crime.
The risk for the global investor is that Peru gets a president who combines economic illiteracy with a penchant for authoritarianism. That would be a double blow. It would spook foreign capital, already wary of the region’s political volatility. And it would undermine the credibility of the central bank, one of the few institutions that retains any respect.
What should a rational investor do? The markets are already signalling distress. The benchmark five-year credit default swap has widened 50 basis points this month. That is a clear warning. If the election does not produce a credible, market-friendly candidate, we could see a full-blown crisis unfolding. In the short term, there is still time to hedge. Long-dated sol forwards are pricing in further depreciation. Gold, always a safe haven in uncertain times, has been rising. But the best hedge may simply be to reduce exposure to Peruvian assets until the outcome is clear.
The bottom line: Peru’s presidential race is not just a domestic affair. It is a barometer of the health of Latin America’s economies in a world of rising interest rates and geopolitical uncertainty. The establishment is crumbling. The forces of disorder are gaining ground. For those of us who watch the numbers, the message is clear: brace for volatility.
