(Bloomberg) -- Investors who had been scared away from Peru by political turmoil are warming up to the South American country, betting the region’s fastest economic growth and higher interest rates will propel the sol’s rebound.
The Peruvian currency has risen 3.6% this month, bringing its rally from an all-time low on Sept. 30 to 7%, the world’s worst performance over that period, paring the losses inflicted by concern that newly elected President Pedro Castillo would damage the business climate. Local stocks are also outstripping most global peers, rising 11% this year, along with domestic short-term bonds as the central bank moves to rein in inflationary risks by lifting benchmark interest rates.
“As long as Castillo’s commentary doesn’t rattle sentiment for the time being, the sol’s run shouldn’t be disrupted by political noise,” said Brendan McKenna, a strategist at Wells Fargo in New York who was the most accurate forecaster for Latin American currencies last quarter, according to Bloomberg rankings.
That positive sentiment is a marked turnaround from last year, when the sol posted its biggest annual drop in six years and touched a record low amid the surprise victory for the leftist Castillo, who has pledged to overhaul Peru’s economy for the benefit of the poor. Coming after a presidential impeachment in 2020 and a myriad of scandals that engulfed previous leaders, investors were prepared for more volatility. But instead mostly calm has pervaded since early December, when lawmakers rejected a motion to start impeachment proceedings against Castillo amid corruption allegations.
It’s a similar situation to what’s going on in Chile, where assets are on a rally this year amid optimism that leftist President-elect Gabriel Boric will name a fiscally prudent finance minister. Boric has been tuning down his more left-wing rhetoric since winning the election on Dec. 19, when his victory sent the peso close to a record low.
As the Peru’s politics settle, investors have been encouraged by rapid economic growth and an aggressive cycle of interest-rate increases by the central bank. Policy makers have raised borrowing costs at six straight meetings and have adopted a more hawkish tone as inflationary pressures mount. Gross domestic product probably expanded 12.7% last year, the most in Latin America, according to analysts surveyed by Bloomberg.
Eduardo Jimenez, an economist at Macroconsult in Lima, said Peru’s economic fundamentals are good and justify the currency’s appreciation. He cites a trade surplus that climbed to a record in November and the steep interest-rate differential with the U.S.
“To the extent that the government renounces severe changes in the economic system, the sol will follow its fundamentals,” said Jimenez, who forecasts the sol will strengthen to 3.8 per dollar by the end of the year. On Wednesday, it traded at 3.8630 per dollar.
Expecting political stability in Peru, however, might be a risky bet. In recent years, constant battles between congress and the government have destabilized the country and the nation’s past six presidents before Castillo were all embroiled in political scandals and controversy. In December, public prosecutors opened a preliminary investigation into Castillo’s administration for alleged interference in the state-run energy producer’s award of a biodiesel supply contract.
“If more evidence appears incriminating Castillo, we think that would move markets,” Bank of America economist Alexander Muller wrote in a Jan. 17 note.
Investors will also keep an eye on any cabinet changes. In early January, Castillo’s advisers were said to be seeking candidates to replace Finance Minister Pedro Francke as part of a wider overhaul. But Prime Minister Mirtha Vasquez later said strong economic performance is shoring up Francke’s status, signaling stability for now.
“Political noise can return, but the bar is higher” when it comes to hurting the sol, said Alejandro Cuadrado, the head of Latin America currency strategy at Banco Bilbao Vizcaya Argentaria SA in New York.
(Updates with Chile’s background in fifth paragraph.)
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