Analysis – Peru markets experience political drama as investors focus on fundamentals

NEW YORK (Reuters) – In a day of high drama for Peruvian politics as the president threatened to dissolve Congress before being ousted, the Andean country’s financial markets absorbed the blow.

Peru’s sol currency and dollar bond prices recovered early losses after President Pedro Castillo was ousted in an impeachment trial following his attempt to dissolve Congress.

The stock market fell sharply earlier in the day, only to end higher after Congress voted to impeach the president, who was photographed at a police station, although it was unclear if he was taken into custody.

“We saw a big selloff when Castillo tried to dissolve Congress and there was some uncertainty about what that actually meant not just for Congress but for the impeachment vote, but we’re seeing the country recover,” said Brendan McKenna, an international economist and FX strategist at Wells Fargo.

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“A lot of the stress we saw at the beginning has been absorbed. Peruvian assets are not under as much pressure as they were when the news first broke.

Peruvian markets were resilient in what was expected to be the third vote to impeach the leftist president by the current Congress, with investors focusing on the solid fundamentals of the South American economy. The sol remains one of the few emerging market currencies with gains against the US dollar so far this year.

“You have a fairly high credit rating – on the back of a low debt-to-GDP ratio – a high level of international reserves, a large share of local currency debt, a current account deficit almost entirely covered by foreign direct investment,” said Alejo Cervonko, CIO for emerging markets at America at UBS Global Wealth Management.

“So much political uncertainty is never welcome, but the reason markets have historically dismissed political developments in Peru has to do with the fact that the country’s fundamentals are quite strong.”

Sol fell more than 2% against the dollar at session lows of 3.8898 before recovering slightly to trade up 1.4% at 3.8625 per dollar in early afternoon trade.

The broad stock market index fell 3.6% to a session low but ended up 0.5%, while some dollar-denominated government bonds fell as much as 1 cent before paring losses and trading higher.

Spreads against US Treasuries widened to as much as 211 basis points from Tuesday’s close of 198 basis points, before narrowing again to 200 basis points. Salat in Peru is among the lowest in Latin America.

“Castillo’s attempt to bring down Congress and other political institutions was clearly the president’s Hail Mary to avoid impeachment that clearly failed,” said Aaron Gifford, sovereign emerging markets analyst in the fixed income division at T. Rowe Price.

“I think we’ll see how the nerves calm down from here.”

Vice President Dina Boluarte was sworn in as president until 2026 and the Andean nation’s first female leader.

(Reporting by Rodrigo Campos in New York, additional reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Sandra Mahler)

Copyright 2022 Thomson Reuters.

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