Pedro Castillo, the school-teacher son of illiterate farmers, has claimed victory over Keiko Fujimori, the US-educated former president’s daughter, in the second round of Peru’s presidential elections. The far left has claimed victory over the far right by the tightest of margins: currently 50.2% vs 49.8% with 99.9% of the votes counted.
The business community and political elite are terrified, some have already left the country, others are waiting to see who may be nominated as Minister of Economy and President of the Banco Central de Reserva del Perú. The more measured executives have found some solace in the fragmented Congress that will make any radical changes, such as constitutional reform, a very difficult task. In any event, not much will happen before 29 July when the ministers are appointed and the head of the central bank elected, with the approval of Congress.
Castillo came from nowhere to win the first round. To have said he was an underdog would have been an overstatement, he was unknown – his only claim to fame being the leader of a schoolteacher’s strike in 2017. He trailed consistently in the polls until a matter of weeks before the first round which he managed to win with 18% of the votes.
This unexpected victory lined up a second-round show-down with Keiko Fujimori, who had secured 13% of the first-round votes, finishing second. At this point, the stock market fell, the currency weakened and about 70% of those who had voted felt stuck between a rock and a hard place when considering the second round. Castillo was seen as a radical socialist and Fujimori’s name is toxic to many, not only because of her father’s legacy of human rights violations but also her own run-ins with the law.
Castillo had concerned markets with talk of reforming the constitution, nationalisations, wealth redistribution and sky-high mining taxes but between the first and second round, he tempered some of his more radical policy proposals to win the centre-left, the anti-Keiko vote and those who are disillusioned with the ‘elite’. A mining executive despaired, “It is a shame because macroeconomic progress had been made but inequality and neglect took too long to solve, especially in rural areas. I understand why people voted for Castillo but he is not the solution. Redistributing wealth from the rich to the poor works only once, and then everyone is poor, we need to encourage the rich to invest.”
“Macroeconomic progress had been made but inequality and neglect took too long to solve, especially in rural areas.”
Mining executive, Peru
Castillo’s win [not officially confirmed yet] marks a significant victory for Latin America’s left who have seen their popularity surge amid rising social discontent over inequality and poverty that have been worsened by the COVID-19 pandemic. There are rumours, however, of foreign support for the socialist candidate, according to a political analyst in Lima, “Pedro Castillo’s campaign had resources – he has been flying around in a private plane. I believe the Puebla Group and Foro de Sao Paulo helped provide resource and expertise. It is said that electoral campaign specialists have been in Lima working hand in hand with Vladimir Cerrón, doing psychosocial work on social networks.” A board member of a mining company operating in Peru agreed, “There are very good and experienced advisors in Brazil, Bolivia and Cuba who will be delighted with Castillo’s victory.” A political analyst did not believe that Castillo was coordinating international support for his campaign, “He’s a trade unionist, used to small, local negotiations, his campaign was actually quite weak and not intelligently run, if there is any international involvement it will be through Cerrón.”
“[Castillo’s] a trade unionist, used to small, local negotiations, his campaign was actually quite weak and not intelligently run, if there is any international involvement it will be through Cerrón.”
Political analyst, Peru
Vladimir Cerrón is the founder of the socialist party, Free Peru, which supported Castillo’s presidential bid. Initially rivals, Cerrón later joined Castillo’s ticket before being disqualified by the National Jury of Elections because he was still serving a prison sentence for corruption (La Orya case)! [On 9 June, a judge from Huancavelica declared null the corruption case.] A political commentator explained the unlikely alliance, “Castillo’s alliance with Cerrón is strange because Cerrón isn’t Maoist, he’s Muscovite, so he’s more on Fidel Castro’s line, etc. They became allies because they thought they had no chance alone and because they both are communists. However, when power became a more tangible possibility, a grotesque rivalry started between the two alpha males. So, Castillo has some loyalty to Cerrón but there is also rivalry. Both have a totalitarian mindset so it should be interesting to watch.”
Down to business, how bad could this actually be for Peru and what sectors are likely to be most affected? Is Castillo as radical as he seems to be? Will Congress be able to shackle him?
“The economic situation will worsen,” believed a Peruvian economist, “unemployment and poverty were already rising and there is a feeling of chaos, death and desolation. The discontented people are over optimistic that things will change, they don’t understand about macroeconomics they only care about the price of bread and chicken.” A political analyst shared these concerns, “There will be a very tense environment, the private sector will pause investments to wait and see what happens, ultimately the economy will suffer as it is built on trust, investment and security.”
“There will be a very tense environment, the private sector will pause investments to wait and see what happens, ultimately the economy will suffer as it is built on trust, investment and security.”
Political analyst, Peru
A local asset manager was equally concerned but had seen some signs of Castillo softening his position, “In contradiction to his initial campaign, in recent weeks Castillo has been saying that he is not going to expropriate, nationalise or take funds away from the AFPs [private pension funds], we’ll see. The Russians and Chinese will continue to invest, everyone else will slow down or stop. There may not be widespread expropriations, but they could make some ‘trophy’ moves like in Argentina, the gas sector would be a prime target.”
The mining company board member was more concerned, “Castillo appears to be a danger to the country but when they get into government these people often soften their positions. Despite this, the investment climate will worsen, I don’t think we will see too much capital flight but no new capital will come in so the state will have to spend. Our sector is obviously concerned, Castillo has mentioned increasing taxes to 70%, the tax rate is already at 47% and if it goes higher, we will not be able to invest in exploration so only the useful life of the mine will remain, which is about 3 years.”
“Castillo appears to be a danger to the country but when they get into government these people often soften their positions.”
Board director, mining company, Peru
In parallel to the presidential elections, the politically weary Peruvians also voted on their congressional representation. The result is, once again, a highly fragmented legislature: the socialist Free Peru party won the largest representation at 13% with the right-wing Popular Force and Popular Renewal rounding out the top three with 11.3% and 9.3% respectively.
Such a fragmented Congress has made life difficult for the four previous presidents of Peru, severely limiting their ability to enact change on the country. To the relief of many in the business community, it appears that Castillo will suffer the same fate. A political commentator explained, “I don’t think we will see too many radical changes as they would require two thirds of congressional votes to pass, which Castillo doesn’t have. Furthermore, if Castillo pursues a radical agenda, then Congress could attempt to get him impeached. Even expropriations require the approval of Congress.” Meanwhile, the “Fujimorismo” seems to be destined to go back to the opposition bench with a parliamentary majority and exert pressure and form alliances to counterweight Castillo’s agenda. Fujimori herself may even be facing trial after a Peruvian prosecutor called for her preventative detention.
“I don’t think we will see too many radical changes as they would require two thirds of congressional votes to pass, which Castillo doesn’t have. Furthermore, if Castillo pursues a radical agenda, then Congress could attempt to get him impeached.”
Political commentator, Peru
It seems like nationalisation and expropriations are unlikely, but what can we expect? According to our sources: higher public expenditure, higher tax on natural resources, reduction in private sector investment leading to higher public debt and inflationary pressures which in turn will lead back to social discontent. Obviously, Castillo’s advisors disagree, they believe their policies will create a million jobs within a year, tackle inequality, relieve social discontent, protect private property and savings and deliver better contracts with mining and energy companies. Time will tell who is right.