Peru’s radical left government considers issuing bonds after attracting investors

Peru Update

Peru may have recently elected a far-left president, but its finance minister said that foreign investors have shown great interest in buying bonds, and the government may consider issuing new bonds to capitalize on their appetite.

The Andean country shocked the market by choosing the most radical president ever in June. During the campaign, Pedro Castillo, a primary school teacher and union activist from a remote village in the Andes, promised to nationalize thoroughly, renegotiate government contracts, and rewrite the constitution.

But after taking office, Castillo downplayed his message and chose Pedro Francke, an academic economist who had worked briefly at the World Bank, as the Minister of Finance. This week, the two travelled to the United States to win the support of skeptical investors.

“I think the meeting [in the US] It helps to dispel their doubts about the political situation that some people worry about. This is their main concern,” Frank told the Financial Times. “I think the explanation we gave has effectively eliminated investors’ doubts. “

Castillo played his role. Wearing his iconic broad-brimmed straw hat, the president said to business audiences in Washington: “We are not here to scare away capital investment. Invest in Peru with confidence, without doubt and fear.”

Frank said that he and Castillo have a close working relationship, and their message about the importance of private investment in the United States is very popular. Although Peru does not need to open up the international market again this year, it can do so now.

“We may see an opportunity that suits us, and in this case, we will seize it,” Frank said. “… buyers seem to be very interested in Peruvian bonds, and this is in all the meetings we hold”.

Graham Stock, an emerging market sovereign debt strategist at BlueBay Asset Management, said he would “reserve” this statement, because investors who want to increase their exposure to Peru can always buy in the secondary market. China’s recent performance in this market has not been outstanding.

“It is generally expected that Peru will be released in the near future… I think there will be good demand,” he said. “But the uncertain outlook may still mean that they must provide investors with a higher premium for new issuance of higher-level sovereign bonds than under normal circumstances.”

Nonetheless, Frank’s gentle message began to win the favor of some major investors in Peru, the world’s second-largest copper producer. According to Bloomberg News, this week’s Freeport-McMoRan boss Richard Adkerson said he was “encouraged” by a recent meeting with Castillo and BHP Billiton executives and praised the government’s “ “Strategic” approach.

Peruvian investors who have witnessed the daily political turmoil in Lima, cabinet members being criticized or resigned because of links to the Maoist guerrillas are not convinced. “It’s hard to believe that someone will invest in Peru during this period…continues,” a business person said.

Peru’s economy was paralyzed by the long-term lockdown in 2020, which caused GDP to plummet by 11.1%, but failed to contain the coronavirus. The International Monetary Fund predicts that this year’s growth will rebound by 8.5%. Frank’s forecast to Congress shows that the budget deficit will fall from more than 8% last year to about 4.7% this year.

“Fiscal sustainability should not be left or right,” Frank said. “This is reasonable and good economic management. It’s like keeping inflation low.”

He added that the Castillo government hopes to increase public investment in infrastructure by raising Peru’s extremely low tax rate, thereby distinguishing itself.

“We hope to implement tax reforms to reduce tax evasion and increase fiscal revenue so that we can make great efforts in education, health, infrastructure in rural areas, Andes and jungle areas, where there is a lot of discrimination, a lot of inequality, and a lot of poverty.” Frank explained. “This is our change agenda.”

He added that wealth tax is not on the agenda, and the change in income tax will focus on improving collection rather than raising payment rates. In the mining industry, contracts will not be renegotiated, but taxes will be actively raised when global prices are high.

A senior banker with Peruvian experience said that investors liked what they heard from Frank, but their biggest concern for the Minister of Finance was that “he is not the one calling the shots.” “He is the best in that cabinet… but can he stop this government from coming up with bad ideas?”

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