Peru's markets are an inch larger because the elections are too brief to name

© Reuters. Peru's presidential candidate Pedro Castillo distributes food during breakfast with members of his family and before casting his vote in Chugur, Peru June 6, 2021. Andres Valle / Agencia Andina / Handout via REUTERS

By Marc Jones

LONDON (Reuters) – Peru's financial markets appeared to rise a fraction higher on Monday as the weekend presidential runoff election between socialist candidate Pedro Castillo and more conservative Keiko Fujimori fell short to name.

The final outcome may not be known for days, but Peru's currency and bonds have suffered since Castillo scored a surprise first-round victory in April when he promised more state control over the country's mining, energy and telecommunications industries.

"If Castillo is confirmed as elected president, we believe the central bank would be tested under regime change and likely face capital flight after the election results," JPMorgan (NYSE 🙂 said in a research note.

"If the candidate for the continuation of the regime (Keiko) Fujimori wins in the end … we expect financial conditions to normalize in a very polarized society despite the political challenges ahead."

The latest results from the election agency ONPE showed that Fujimori with 50.5% and Castillo with around 49.5%, with around 90% of the votes counted, and the narrowing of the gap with belated votes, which will be more rural, in favor of the leftist candidate .

The country's small selection of euro-dominated government bonds pushed their prices up inches in European trading, but most investors waited for the foreign exchange market and the much larger dollar-denominated bonds to reopen.

The election came after a turbulent year in Peru. The Andean nation has stirred up three presidents since late 2020, has the world's highest per capita death rate from COVID-19, and has seen the worst economic crash in three decades.

Fujimori, a 46-year-old who has served twice in the presidency, has pledged to follow the free market model and maintain the economic stability of the world's second largest manufacturer.

Castillo, the son of smallholders, has promised to reformulate the constitution to strengthen the role of the state, to collect a greater share of the profits from mining companies and to nationalize key industries.

The country's solar currency has fallen around 6% against the US dollar since April as uncertainty escalated.

This is despite the fact that the country's central bank is using the equivalent of $ 11 billion, or 5.4% of GDP, to intervene in the currency market either through direct purchases or swaps, JPMorgan estimates.

"Whoever wins, Peru probably won't have a great next five years," said Federico Kaune, Global EM Senior Portfolio Manager at UBS Asset Management, before the election, as politics would remain deeply divided.

"Peru is an investment-grade country. So if things go wrong it could come as a pretty nasty surprise to us," added that some of Castillo's views on government participation in the economy are somewhat similar to Venezuela or similar to Bolivia.

Gustavo Medeiros, deputy head of research at the emerging markets fund manager Ashmore Group, said: "Keiko would be the candidate where you would have more visibility on your policies."

"She has promised a number of tax transfers and she has promised a number of more heterodox measures than you would expect from a center-right candidate."

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