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Barclays: Recent Events Do Not Solve Instability Of Political System

PERU
  • President Castillo's distancing from his party, Peru Libre, and his recent cabinet reshuffle might have reduced the risk of some radical policies being implemented in the short run, but it does not solve the intrinsic instability of the political system, which could still keep the country in a deteriorating trend.
  • Amid a highly polarized environment and a fragmented political system, governability is likely to remain compromised. The confidence vote on the new cabinet will be a key test. In principle, there seem to be incentives for compromise, but without the full support of Peru Libre, the vote is likely to be tight.
  • The persistence of this uncertainty is likely to keep capital outflows elevated and the PEN under pressure. Inflows from external investors are being offset by outflows from locals, while FDI is likely to stay on hold.
  • External debt bond issuance could help to contain the PEN weakening, but at the expense of the composition and dynamics of the debt. Barclays think this is part of a structural change and expect the government to continue resorting to the external bond market.
  • They expect PEN's broad range of 3.91-4.12 to hold but for it to slowly move toward the top of the range. Local catalysts appear scarce in the near term, while medium-term risks abound. They think PEN is likely to underperform LatAm peers like COP and MXN.
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