Peru’s Presidential Election Feud Has Come to an End: Pedro Castillo’s Upcoming Presidency is Now a Reality

Peru finally has a new President-elect.  In the evening of July 19, 2021, Peru’s electoral authority named the socialist candidate Pedro Castillo as the country’s next president. The official result was delayed by more than six weeks after the June 6 runoff vote due to fraud claims from Castillo's right-wing opponent, Keiko Fujimori. After winning 50.12% of the votes, Mr. Castillo will take office on July 28 — the same day that Peru will celebrate 200 years of independence.

Castillo ran on the slogan “no more poor people in a rich country,” espousing the idea that the nation’s vast mineral wealth must benefit all citizens. He has indicated that his government’s focus will be on education and health. However, Castillo will encounter several challenges as he inherits a country with the world’s highest death rate from Covid, in the midst of economic recovery, and exceptional political volatility in the last year.

We discuss below some of the key policy proposals of President-elect Castillo and his political party “Perú Libre” (Free Peru); as well as the challenges he is likely to encounter in the next five years.

First 100 Days of Castillo’s Presidential Regime

Castillo’s “Bicentennial” Government Plan (“Plan de Gobierno Perú al Bicentenario - Sin corrupción”) (the “Government Plan”) outlines his plan for his first 100 days in office.  It presents seven “urgent” action items, which focus on (i) combatting the COVID-19 pandemic, (ii) reactivating the economy, (iii) initiating the second agrarian reform, (iv) tax reform, (v) country-wide adoption of natural gas, (vi) safe return to in-person education, and (vii) calling a referendum to amend the Constitution.

Interestingly Castillo’s “Bicentennial” Government Plan was released a year and four months after the release of his Party’s Ideology and Program dated February 2020. The latter proposed far greater overhauls than what is outlined in the current Government Plan. For instance, it floated the idea, if necessary, for Peru to “proceed with the nationalization of mining, gas, oil, hydropower, communications sectors, among others.”[1] The Government Plan seems to intentionally distance itself from such instrument and adopts a ‘less extreme’ approach. Castillo has also signaled political and economic moderation by appointing former World Bank economist Pedro Francke as his economic advisor and stating his willingness to appoint the well-regarded Julio Velarde as the head of Peru’s Central Bank.

We address below some of the key aspects of Castillo’s Government Plan that are particularly relevant to foreign investors.

Constitutional Referendum

One of Castillo's key goals is to redraft Peru’s Constitution to bolster the role of the State and ensure that private interests are subordinated to the public interest. To that end, Castillo has suggested inserting into the Constitution language to expressly “recognize and guarantee the rights to health and education, food, housing, and internet access; recognition of native peoples and our cultural diversity; the rights of nature and good life; the redesign of the State to guarantee transparent decision-making with active participation of citizens; and a State that practices strategic planning, regulates and invests, wherein the public interest, that of all citizens, prevails over the private.”[2]

Tax Reforms

Peru is the world’s second largest copper producer, and its mining industry represents approximately 10% of GDP, 60% of exports and 16% of private investment. Castillo’s Government Plan purports to restructure the current tax and royalty regime in order to substantially increase investment in education and health.[3]  Measures proposed include: a new capital gains tax; elimination of tax exemptions for the initial stages of a project; an active policy against tax avoidance and money laundering; increasing royalties based on sales (drawing on Chile and Colombia's examples); and renegotiating tax stability contracts with large companies.[4]

To date, Peru has signed as many as 25 tax stability agreements since the 1990s. These agreements are meant to offer political and economic stability to investors and could be strongly affected by Castillo's changes, should they materialize. Future projects may also be impacted by these proposed reforms, with a number of mining projects (with a total investment value of US$ 4.6 bn) being flagged to start this year.  Castillo's proposed changes have been met with some concern domestically. In particular, Carlos Herrera, the two-time Minister of Energy and Mines who now heads Peru’s engineering society, has warned that Castillo's actions could lead to international arbitration proceedings at a time when prices for its commodities — such as copper — are soaring.

“Gas for Everyone”

Castillo’s Government Plan also outlines plans to construct a National Network of Gas Pipelines, reflecting Castillo's belief that the mass consumption of gas should be a State policy. In order to achieve this, Castillo has proposed to strengthen the management of public companies, facilitate subsidies by destination and use; and favoring social profitability of this natural resource.[5]

The Popular Economy and Employment

Castillo’s Government Plan proposes a restructuring of Peru’s economy towards a mixed economy approach.[6]  This envisages the State strengthening its regulatory role, with more pragmatic regulation of monopolies and oligopolies.  Specific policies outlined in the plan include: relevant increases in public investment; promotion of public purchases aimed at small and mid-size enterprises (SMEs); temporary and targeted subsidies for services (water, electricity and internet) as direct support to families; halting unfair competition from imports affecting the national industry and the working class; increasing employment in education, healthcare and rural infrastructure development; and the promotion of SMEs and agriculture via accessible credits.[7]

Economic and Political Challenges

In 2020, after a strict and prolonged quarantine, Peru’s GDP declined by 11.1 %. As mentioned, Castillo will need to deal with the devastating impact of the COVID-19 pandemic on the country. The economic uncertainty that Peru is facing is unlikely to abate with Castillo’s victory, as experts have commented that his policies, and plans to implement them, remain unclear. Additionally, after more than forty days of political uncertainty, Castillo has just eight days to name a cabinet and undertake a transition ahead of the July 28 handover from interim president Francisco Sagasti.

It is likely that Congress, which is deeply divided, will play a significant moderating role in the coming years – which may affect Castillo's ability to implement his planned policies. Peru’s Congress will initially comprise of 10 political groups, and, based on past trends, could fragment further amid political maneuverings. Out of the 130 members of the unicameral parliament, Castillo’s party will have 37 seats and Fujimori’s Popular Force party will be the second biggest bloc with 24 legislators. Congressional fragmentation and the barriers to constitutional change could slow the implementation of the most sweeping changes proposed by Castillo during the campaign. Accordingly, Castillo’s party will need to form alliances with smaller parties, and maintain strong internal discipline, if it wishes to implement Castillo’s proposed reforms.

Conclusion

The current political panorama seems to define that the economic and political uncertainty that Peru has been facing is unlikely to dissipate any time soon.  The impact of the COVID-19 pandemic and increased public spending is likely to raise Peru's debt levels in the near term, which could affect Peru's current BBB+ sovereign rating.  The likelihood of Peru emerging from this economic situation will depend on Castillo's ability to manage the country’s strategic sectors, maintain its private contracts, and set a sustainable fiscal policy.

Whether Castillo will align his current policies more with those outlined by his Party during the course of his presidency, and what role Congress will play, remain to be seen.  Clearer indications of economic and fiscal policy settings should emerge in the inaugural presidential address on July 28, 2021 and in the 2022 budget (which will be presented by August 30, 2021).  The appointment of key Ministers, regulators, and the Governor and Board of the Central Bank should also help clarify Castillo’s policy priorities in the upcoming weeks.

[1] See, Peru Libre’s Idearo y Programa, p. 16.

[2] See, “Bicentennial” Government Plan, pp. 13-14.

[3] Id., p. 10.

[4] Ibid.

[5] Id., pp. 10-11.

[6] Id., p. 7.

[7] Id., p. 8.