EM investors exercise caution amid Peru's political tensions

EM investors exercise caution amid Peru's political tensions

Capital Markets Equity Project & Infrastructure Finance Peru

Fund managers will exercise a higher degree of caution towards investment in Peru, as the country tackles fresh political tensions.

President Pedro Pablo Kuczynski's (PPK) pardoning of former leader Alberto Fujimori, only days after PPK narrowly passed an impeachment vote, generated public protests. The President's actions have sowed mistrust among Peruvians after he campaigned strongly against pardoning Fujimori.

According to Laura Sharkey, a principal analyst at Control Risks, PPK's pardoning of Fujimori comes off as a "last ditch effort" to save his position. "He is seen as untrustworthy," she said. "[PPK] might have saved himself, but I do not think he is clear by any stretch... He won the election promising he would not pardon Fujimori."

Political tensions will likely see funds hold off on any immediate decisions surrounding investments, but Sharkey said this would not forge heavy negative changes to Peru's business environment.

"Going into 2018 [investors] will put decisions hold," she added. "Whatever happens, there is not going to be any major negative changes... That is quite far off."

Odebrecht's bribery scandal, meanwhile, still lingers over Peru's infrastructure pipeline. The Brazilian construction firm's woes hindered Latin America's project pipeline and in Peru, the central question is around its Gasoductos Sur Peruano (GSP) project.

"The Odebrecht effect is still in play," Sharkey said. "It has dented the growth and that will continue... The government is still trying to find a sponsor for GSP, for example."

Local agribusiness Camposol, which is looking to do an IPO, may also have to wait for a later market window, ECM sources have said.

"It is a day-to-day, wait-and-see kind of thing," one banker said of Camposol's IPO plans. A second banker, however, remains confident an IPO can cross the tape before the end of Q1 2018.

Copper futures, meanwhile, have increased in the last month, quoted at roughly $3.23 per pound on Thursday afternoon. PPK's administration will welcome the elevated commodity prices as the Andean nation seeks further means for metals and mining investment.

Turmoil undermines governance

According to a report from Fitch Ratings, Peru's political tensions have raised governance challenges. The rating agency said this would likely have a negative impact on investments and economic growth over the next two years.

The events could undermine Peru's ranking on the World Bank's governance indicators survey due to weaker public perceptions surrounding the rule of law, control of corruption and political stability, Fitch said. Political paralysis is expected to dominate the remainder of PPK's term through 2021, despite a cabinet reshuffle.

Fujimori's pardon prompted the resignation of ministers and advisors and alienated a portion of PPK's electoral base. Nine new members were inaugurated this month.