The Peruvian presidential election remains too close to call, with the outcome resting on the knife-edge of public safety concerns. As the Andean nation grapples with rising crime and political instability, British investors are increasingly nervous about their exposure to a market that was once a beacon of fiscal rectitude.
For decades, Peru was a darling of emerging market portfolios: prudent fiscal management, a central bank that kept inflation on a leash, and a steady inflow of capital from London’s fund managers. Gilt yields in London may have been anaemic, but Peru’s sovereign bonds offered a healthy spread with what seemed like manageable risk. That narrative is now being rewritten.
The two leading candidates, Keiko Fujimori and Pedro Castillo, offer starkly different visions for the economy. Fujimori, a free-market conservative, promises to maintain the orthodox policies that have underpinned growth. Castillo, a left-wing trade unionist, threatens to nationalise key industries and rewrite the constitution. The market’s preference is clear. But it is insecurity, not ideology, that may decide the winner.
Peru’s homicide rate has surged by 30% in the past year. The police force is underfunded and overwhelmed. Corruption scandals have eroded trust in institutions. The middle class, which expanded rapidly during the commodities boom, now feels under siege. Voters are fleeing to the candidate they trust to restore order.
For British investors, the stakes are high. UK firms have over £5 billion in direct investment in Peru, concentrated in mining, energy, and infrastructure. The London Stock Exchange lists several Peruvian companies, and pension funds hold significant quantities of Peruvian sovereign debt. A victory for Castillo could trigger capital flight, a sharp devaluation of the sol, and potentially a default on dollar-denominated bonds.
But even a Fujimori win is no panacea. The country remains deeply polarised. Congress is fragmented. Passing any meaningful reform will be a Herculean task. The next government will inherit a fiscal deficit of 8% of GDP and a public debt ratio that has doubled since the pandemic.
The Bank of England may need to factor in Peruvian risk when setting monetary policy. If the sol collapses, emerging market contagion could spill over into other holdings, triggering margin calls and liquidity crunches in London. The Chancellor will be watching closely, but his options are limited. The UK cannot bail out Peru; nor can it force the Peruvian central bank to raise rates.
So what is the bottom line? Investors should brace for volatility. The Peruvian sol will remain under pressure. Bond spreads will widen. Some fund managers may choose to cut their losses and exit. But those with a longer horizon might see value in the rubble, provided the next government can restore confidence.
Insecurity has always been a killer of economic growth. In Peru, it may now have claimed the election too. Whether British capital will remain patient is another question entirely.
