RE: Split vote likely to hinder reforms9 Jun 2021 11:48
"Whoever wins is going to have to govern with a very fragmented congress and that is going to complicate any radical structural legislative changes," he said, adding that market weakness from a Castillo win could create a buying opportunity.
Castillo said in a statement on Monday evening that if confirmed as president he would respect the central bank's authority and that he was not planning nationalizations or expropriations, but added a tax overhaul on mining was needed to help pay for planned healthcare and education reforms.
Julio Ruiz, chief economist for Mexico and Peru at Brazilian bank Itau, said a win for Fujimori - who has pledged to keep in place market-friendly policies that underpinned Peru's economic growth in recent decades - would be more positive for markets.
A win for Castillo, said Ruiz, could lead to pressure on the exchange rate and raise the probability that the central bank would hike rates before the end of the year to avoid inflationary pressures.
Alejo Czerwonko, Chief Investment Officer for Emerging Markets Americas at UBS Global Wealth Management, said a Castillo win would lead to a sell-off in Peruvian assets, though he faced challenges turning his rhetoric into reality.
"Whether he manages to deliver will depend on how well he navigates the institutional constraints he will face given his party only enjoys 42 out of the 130 seats in congress," he said.
“Key to watch is whether he is successful in his attempt to push for a constitutional reform.”
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Castillo has confirmed this week there aren't plans for nationalizations or expropriations which was the initial fear when Castillo defied polls to win the first round vote. In addition most analysts report the divided legislature will be sufficient opposition to any radical tax plans.
Castillo has referenced Chile's recent copper mining tax suggesting a similar 70% tax on profits for Peruvian based operators. Both Chile and Peru have near identical tax rates of around 40% on mined profits currently.
Chile's National Mining Society (Sonami) has warned that the royalty project proposes levels of taxation that are "akin to expropriation" and would paralyze investment.
The government has indicated it could seek to block its passage via the Constitutional Court given it was introduced by the opposition. The new system wouldn’t be introduced until 2024 after lawmakers voted to respect companies’ stability agreements that expire in 2023.
Both company and government representatives in Chile want the existing sliding tax on profit, rather than sales, to be given a chance to operate at high prices of $4-plus a pound.
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