Peru’s radical left government weighs bond issue after wooing investors

Peru updates

Peru may have recently elected a hard-left president, but its finance minister says foreign investors have shown so much interest in buying bonds that the government may consider a fresh issue to take advantage of their appetite.

The Andean nation alarmed markets in June when it chose its most radical president ever. On the campaign trail, Pedro Castillo, a primary school teacher and union activist from a remote Andean village, promised sweeping nationalisation, the renegotiation of government contracts and a rewrite of the constitution.

But after taking office, Castillo toned down his message and picked Pedro Francke, an academic economist who briefly worked for the World Bank, as his finance minister. This week, the two men toured the US to win over sceptical investors.

“I think the meetings [in the US] have been useful to clear up their doubts about the political scenario which some were worried about, that’s their main concern,” Francke told the Financial Times. “I think the explanations we gave strongly dissipated the doubts the investors had.”

Castillo played his part. Wearing his trademark wide-brimmed straw hat, the president told a business audience in Washington: “We have not come here to scare off capital investment. Go invest in Peru confidently, without doubt and fear.”

Francke said he and Castillo had a close working relationship and their message in the US about the importance of private investment had been so well received that while Peru did not need to tap international markets again this year, it could now do so.

“It’s possible that we see an opportunity which suits us, in which case we’ll take it,” Francke said. “. . . . There seems to be quite an appetite among buyers for Peruvian bonds, that was quite clear in . . . all the meetings we had”.

Graham Stock, emerging markets sovereign debt strategist at BlueBay Asset Management, said he would take such claims “with a pinch of salt” because investors wanting to increase exposure to Peru could always buy in the secondary market, where the country has not outperformed recently.

“It is generally expected that Peru will issue in the near future . . . and I think there will be decent demand,” he said. “But the uncertainty over the outlook may still mean that they have to offer a larger new issue premium to investors than normal for a high-grade sovereign.”

Nonetheless, Francke’s message of moderation is starting to win over some key investors in Peru, the world’s second-biggest copper producer. This week Freeport-McMoRan boss Richard Adkerson said he was “encouraged” by a recent meeting with Castillo and a BHP executive and complimented the government’s “strategic” approach, Bloomberg reported.

Peru-based investors who are witnessing day-to-day political turmoil in Lima with cabinet members under fire or resigning over links to Maoist guerrillas are less convinced. “It’s hard to believe that anyone will invest in Peru while this . . . .continues,” one business person said.

Peru’s economy was crippled by a long lockdown in 2020 which sent GDP plunging 11.1 per cent but failed to curb coronavirus. The IMF forecasts that growth this year will rebound 8.5 per cent and Francke’s projections to congress show the budget deficit coming down from more than 8 per cent last year to around 4.7 per cent this year.

“Fiscal sustainability should not be something of the left or the right,” Francke said. “It’s something reasonable, it’s good economic management., just like keeping low inflation.”

Where Castillo’s government wants to differentiate itself, he added, is in increasing public investment in infrastructure by raising Peru’s very low rates of tax collection.

“We want to do a tax reform, cut tax evasion, raise fiscal revenues and in that way be able to make a big effort in education, in health, in basic infrastructure for rural areas, in the Andes and the jungle, where there’s a lot of discrimination, lots of inequality and lots of poverty,” Francke explained. “That’s our agenda for change”.

A wealth tax is not on the agenda and changes to income tax will focus on improving collection rather than raising contribution rates, he added. In the mining sector, contracts will not be renegotiated but there will be an initiative to raise the tax take at times of high global prices.

A senior banker with experience of Peru said investors liked what they heard from Francke but their biggest concern about the finance minister was that “he’s not the one calling the shots”. “He’s the best of the lot in that cabinet . . . but can he stop bad ideas emerging from this government?”

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