On august 26th the first cabinet of President Pedro Castillo will present itself in Peru Congress to get an approval vote for its policies. But there are some doubts about it getting the approval from the Congress because several members of the cabinet are being questioned by the opposition parties and the public opinion. A Minister of Foreign Affairs was asked to resign from the government following criticism by several sectors of society for what was called his “apology of terrorism”. So, even if the cabinet is confirmed, it will have a low approval rate among the public, and the possibility of Ministers being censured later by the Congress is high, and this will create political instability and uncertainty in the economy. Peru suffered a lot with the COVID-19 pandemic, having accumulated up to now more than 197 thousand deaths, in a population of 32 million people. Its economy was hard hit last year, declining at an annual rate of 11.1%. And there is a high probability that a third wave of contagion of COVID-19 will hit the country perhaps at the end of next month. Given the fact that the vaccination rate of the population is less than 25% of the total, and there are doubts about the public health system being able to cope with that, the effects in the society and the economy also could be troublesome. An analysis of the new government of President Pedro Castillo will be provided in this article. It will focus in the economic and political aspect, and the perspectives of its economic and foreign policy.

1. The new government inPeru: Perspectives of its economic and foreign
policy
CarlosAquino*
On august 26th the first cabinet of President Pedro Castillo will present itself in Peru
Congress to get an approval vote for its policies. But there are some doubts about it
getting the approval from the Congress because several members of the cabinet are
being questioned by the opposition parties and the public opinion. A Minister of
Foreign Affairs was asked to resign from the government following criticismby several
sectors of society for what was called his “apology of terrorism”. So, even if the cabinet
is confirmed, it will have a low approval rate among the public, and the possibility of
Ministers being censured later by the Congress is high, and this will create political
instability and uncertainty in the economy.
Peru suffered a lot with the COVID-19 pandemic, having accumulated up to now more
than 197 thousand deaths, in a population of 32 million people. Its economy was hard
hit last year, declining at an annual rate of 11.1%. And there is a high probability that a
third wave of contagion of COVID-19 will hit the country perhaps at the end of next
month. Given the fact that the vaccination rate of the population is less than 25% of
the total, and there are doubts about the public health systembeing able to cope with
that, the effects in the society and the economy also could be troublesome.
An analysis of the new government of President Pedro Castillo will be provided in this
article. It will focus in the economic and political aspect, and the perspectives of its
economic and foreign policy.
1. Political situation of the country. -
Pedro Castillo was elected in a runoff and won by a margin of just 44 thousand votes of
a total of 17.5 million votes (he got 50.125% of the total). In the first round he got only
19% of the total votes. His triumph was due more to people voting for him to avoid
electing Keiko Fujimori, whose father, a former President, is accused of corruption and
human rights violations (and she herself has also been accused of corruption). Castillo,
a schoolteacher with no previous experience in public office, was elected in the ticket
of the political party “Peru Libre”, a left party whose main leaders are Marxist-Leninist.
In a one chamber Congress of 130 members, Peru Libre has only 37 representatives, it
is the largest party in the Congress, and together with its political ally, “Juntos por el
Peru”, a leftist party which has 5 votes, the two have 42 votes. There are two political
parties, “Somos Peru” and “Partido Morado”, that are considered close to the
government, and this two together has 9 representatives, for a total of 51 votes for the
government.
Of the remaining parties, the second biggest party in Congress is “Fuerza Popular” of
Keiko Fujimori, which has 24 votes. With the party “Avanza Pais” that has 10 votes and
“Renovacion Popular” with 9 votes, the three are considered right leaning parties and
of strong opposition to the government, having them a total of 43 votes. There are

2. three additional parties considered in the center of the political spectrum: “Accion
Popular”, with 16 votes, “Alianza para el Progreso” with 15 votes, and “Podemos Peru”
with 5 votes.
As can be seen there are ten political parties in Congress and the biggest, the
governing party, with its ally has just 42 votes in a total of 130, around 32% of the
total. The two parties must get votes from other parties to pass a law that usually
requires more than half of the total votes, around 66. To get the approval of the new
Cabinet it also needs 66 votes.
The governing party has already suffered defeats in the Congress. It presented a list to
win the Congress Board of Directors but got only 50 votes, being defeated by one of
the lists presented by the opposition, who got 69 votes. Also, the Congress elects 24
Committees and the most important ones, as Budget, Constitution, and Oversight, are
in the hands of the opposition.
In the presidential period July 2016-july 2021 Peru Congress impeached a President
(and another resigned to office before being impeached) and given the strong
opposition of some parties to the government, there are talks about the possibility of
impeaching also President Castillo. For this to happen a total of 87 votes are needed.
Getting 87 votes are not easy so now some opposition parties are talking about
questioning or censuring some cabinet ministers. The new cabinet that will present on
August 26 to the plenum of Congress has several Ministers that are being criticized and
probably could get censured. Even the President of the Cabinet is being criticized, and
he, with at least 5 Ministers: Defense, Culture, Labor, Internal Affairs, and Transport
and Communications, are said to be unfit for office because of their lack of experience
in the field, or for having legal problems, or for being apologists of terrorism1. The first
named Minister of Foreign Affairs, Hector Bejar, was forced to resign with less than 3
weeks in office because he was accused of apology of terrorism and for blaming the
Peru Navy of having initiated the terrorism in the country. He even said that the
Shining Path movement (Sendero Luminoso), that brought terror to Peru in the 1980s
and beginning of the 1990s, was in part a creation of the Central Intelligence Agency
(CIA). Bejar himself, an 85-year person, spent several years in the 1960s in jail for
committing terrorist acts.
So, the political situation in Peru is not stable. With weak political parties, a divided
Congress, and strong opposition to the Castillo government, even if the new Cabinet is
approved, the possibility of Ministers being questioned and censured by the Congress
is almost certain. To question and censure a Minister 79 votes are needed. The
opposition certainly could get those votes.
The opposition to the government is not only because some Ministers are accused of
being unfit for office but mainly because the governing party Peru Libre wants to
1 The lastone being accused is the Minister of Labor. See RPP: https://rpp.pe/politica/gobierno/iber-
maravi-niega-responsabilidad-en-actos-terroristas-y-afirma-que-buscan-condenarlo-con-atestados-
policiales-noticia-1354062

3. change Peru’s Constitution and aims for a model like in Venezuela and Cuba, where
government role in the economy is strong and there are limits to the activity of the
private sector. Also, the opposition said that the real aim of changing the Constitution
through the election of a Constituent Assembly, as Peru Libre wants, is to change the
rules of political elections and allow the President and the governing party to stay in
office forever, like in Cuba and Venezuela.
That’s why the governing party has been accused of being communist. At least its main
leaders, as the General Secretary of the party, Vladimir Cerron, have shown their
admiration for the Cuba and Venezuela regime. Cerron influence in the party is strong,
and many analysts think that he is the real power behind the throne, and Castillo will
yield to him. Cerron created the party Peru Libre and Castillo was called to be its
candidate for the Presidency.
Precisely the call for changing Peru economic system advocated by Cerron, and other
party leaders, is bringing a lot of instability and affecting the economy. A look at this
situation is given below.
2. Economic situation. -
As was said before, Peru experienced one of the worst economic performances in the
world in 2020, with the economy declining 11.1%. The poverty rate increased in the
country from 22% in 2019 to around 30% at the end of 2020.
Peru is a middle-income country, with around 6,500 dollars income per capita. But its
economic structure is weak, with a low industrialization rate, and dependent on the
export of natural resources, that has in abundance, and on inflows of foreign
investment. But from the year 2000 to 2019 the economy grew without interruption
and was considered a star in the Latin American region (See graph 1 below). Its macro-
economic figures were impressive. A low inflation rate, low or nearly zero budget
deficit, high international foreign exchange reserves, and low level of external debt. Its
exports of goods increased from a value of 7 billion dollars in 2000 to around 46 billion
dollars in 2019.

4. Source: Peru Central Bank: Annual Report 2019; https://www.bcrp.gob.pe/eng-
docs/Publications/Annual-Reports/2019/annual-report-2019-1.pdf
That was possible because from 1990 onwards Peru implemented economic reforms
to open more its economy to foreign competition, lowering import tariff rates,
welcoming foreign investment, making more flexible the labor market, and diminishing
the role of the state in the economy. State owned companies were privatized, and
many of them were bought by foreign investors, and Peru embarked in a string of free
trade agreements (FTA) with its main trade partners. Also, the country put more
emphasis in the Asia region, joining the APEC forum in 1998, and establishing FTAs
with China, South Korea, Japan, and recently ratified the CPTPP agreement.
As a result, now Asia is the most important market for Peru exports. In 2010 only 26%
of Peru exports went to Asia, but in 2020 around 46% went to that region. China has
become the main market, with 29% of total in 2020, and in a second and distant place
with only 13% of the total is the United States. And Asia importance is bound to
increase as it is the most important market for Peru exports that in a 70% are mainly
mineral, natural gas and petroleum, and fishmeal. Already in the first 6 months of this
year China accounted for 35% of Peru exports and US only 12%2.
But, despite the impressive economic growth and good export performance, Peru
economy suffered a lot in 2020 because of a combination of factors. First, the country
was in lockdown for many months because of the pandemic, paralyzing the economic
activity; second, as the economy has a high level of informality, with employment
calculated to be around 70% informal, many people lost their incomes; and third,
because of high income inequality, many people could not live and consume with the
economy paralyzed. To this it could be added the incompetence of the government in
managing the pandemic (for extending the lockdown of the economy without taking
the necessary measures to control the pandemic and avoid its propagation), and the
poor state of public health systemthat could not cope with the pandemic, resulting as
2 See Promperu statistics:https://exportemos.pe/promperustat/frmRanking_x_Pais.aspx

5. said before in more than 197 thousand deaths. Peru has the highest COVID-19 deaths
per capita in the world3.
The economy was supposed to recover and achieve pre pandemic levels this year or
the next, due, among other things, to a recovery of the world economy, as Peru
depends on a lot of this for its exports, but the situation began to change when in the
first round of elections in April Pedro Castillo came first in the ballot. His party plans to
change the rules of the game in the economy, by increasing the role of the state,
putting limits to the foreign investment participation, and especially his plans to
change the Constitution and its admiration of Cuba and Venezuela, made private
investors wary of him.
So, the Peru currency, the Sol, began losing value against the dollar, the Lima stock
exchange also decreased in value, and many people began taking its money from the
bank and changing it to dollars, or taking it outside the country. It is estimated that
around 8 billion dollars has left the country in the last months. Peru foreign exchange
reserves at the beginning of the year were about 73 billion dollars. Peru GDP is about
200 billion dollars. As Castillo won the Presidency in the runoff elections in June this
trend began to increase.
Besides the called “socialist agenda” of its economic policy, what make investors also
wary of Castillo’s regime is the sense that his government is not filling public offices
with capable people. As said before, many Ministers are being questioned for that, and
the proposal to lower salaries of high public officers (already its Ministers have said
they will receive only half of their salaries) and the fact that several posts have been
filled by people with no previous experience and of low qualifications, is creating more
economic uncertainty. Already several of them have resigned following criticismthat
they were not suitable for office (several Vice ministers and high-level officers for
example had to resign).
Peru has a problem specially because of a lack of a meritocratic systemin government,
and with each change of administration, governments posts are filled with people
belonging to the winning party (regardless of their merits). This is particularly
troublesome now, because the Peru Libre party has never been in office before, and its
General Secretary Vladimir Cerron was the Governor of a region in central Peru, but his
record of government is dismal (he was dismissed from office accused of corruption).
Corruption is an endemic problem in Peru, and present at every level. According to
Contraloria General de la Republica (Comptroller General of the Republic), the state
lost 22 billion soles to corruption in 2020. This amount was equivalent to 12% of the
general budget that year4. All 6 formers Presidents of Peru has also been accused of
corruption, and several were or are in jail.
3 See RCP Coronavirus Tracker: https://www.realclearpolitics.com/coronavirus/?fbclid=IwAR0ZgG-
ghP_Xp9rXMPN07jiPIisIr_dggoLyDaUSYg1k27aqqMS3YTt8n0w
4 RPP: https://rpp.pe/economia/economia/corrupcion-genero-perdidas-de-s-22000-millones-al-estado-
en-el-2020-segun-la-contraloria-noticia-1346152

6. To calmthe markets and investors Castillo named an economist, Pedro Francke, who is
seen as center left and worked before in government. But the pressure to spend more
to implement a populist agenda is already in force. The government announced that it
will give subsides to poor families, for a total of 5.145 billion soles. This amount is
equivalent to 0.6% of Peru GDP5, and around 2.8% of the public budget of 183 billion
soles in 2021. Also, the government has announced that it will give subsidies to lower
the price of the natural gas used by families6.
Annual inflation rate in Peru has been very low in the last years, of around 2%, but has
increased in the last month, to around 4%, fueled by uncertainty in the markets for the
economic policies that will implement Castillo government. The sol has depreciated in
the last months, from a level of 3.63 soles per dollars at the beginning of this year to
4.09 soles on august 24th7. Peru is a net importer of petroleum and natural gas, and of
wheat, corn, meat, and all this is impacting in the higher cost of food and living
expenses.
But a brighter side of Peru economy is that several commodities that the country
exports are achieving high prices. Copper, which alone account for 30% of Peru exports
are in a historic high price, even higher that the level achieved during the super cycle
boom for commodities prices that began in 2003 and finished in 2011-2012. Already
taxes paid by mining companies during the first 6 months of this years are higher than
the amount they paid in the whole of 2020 or 2019. In the first 6 months of 2021 Peru
exported for a value of 24.3 billion dollars and it is estimated it will register a historic
record of 50 billion dollars for the whole year. Strong exports are the result of not only
higher prices for commodities but also of higher exports of agroindustry products, of
which Peru is becoming very competitive.
At the beginning of this year the economy was forecasted to grow around 10% in 2021,
but political uncertainty is refraining investors and the projection is for the economy to
growth 9% or less this year and less than 3% the following two years. But all this could
be more complicated and the environment for foreign companies in the mining sector
will became bleak if Castillo proposal to tax them more as he said during the election
campaign is carried on. The mining sector is the main engine for Peru exports (60% of
Peru exports are of the mining sector: copper, gold, silver, iron ore, and others) but
investment for more production is being halted in several projects because of protests
by local communities. And Castillo also promised these communities that mining
projects will not get approval if he is elected.
So far Castillo government has refrained of taking measures against mining companies
and said that mining projects will be feasible if they are “socially acceptable”. What
that does mean is still not clear.
5 Semana Económica: https://semanaeconomica.com/economia-finanzas/politica-fiscal/bono-de-s700-
empujaria-el-deficit-fiscal-al-limite-fijado-para-el-2021
6 Gestion: https://gestion.pe/economia/precio-del-balon-de-gas-bajaria-hasta-s-39-en-promedio-con-
fondo-de-estabilizacion-glp-minem-ivan-merino-mef-noticia/
7 Investing.com: https://es.investing.com/currencies/usd-pen

7. In addition to the above mentioned, if Castillo government insist on changing the
Constitution through the election of a Constituent Assembly, this will create more
uncertainty to the whole economy and the prospects for economic growth will
become more somber.
3. Foreign policy. -
Regarding the foreign policy of the new government, President Pedro Castillo did not
mention anything about it in his inaugural address in Congress on July 28th. Some
analysts estimates that a change in Peru foreign policy could happen under Castillo
regime. For example, his first Ministry of Foreign Affairs, Hector Bejar, showed strong
support for the Cuba and the Venezuela regime. He met on July 30th with Venezuela
Minister of Foreign Affairs with whom he talked about “reestablishing relations to the
highest level”.
As is known, Peru was one of the creators of the “Group of Lima”, a group of Latin
American countries that opposed the present Venezuela regime. The Group was
created in 2017 by 12 countries but have not achieved tangible results. Peru, and
several of those governments, cut diplomatic relations with the Venezuela regime of
President Maduro. But as several leftist parties assumed power in Latin America, some
of the countries left the Group of Lima, like Argentina. Under Minister Bejar also that
could have happened in Peru.
Bejar had to resign his post and the new Foreign Minister is Oscar Maurtua de
Romaña, a career diplomat and former Minister of Foreign Affairs. Perhaps under
Minister Maurtua de Romaña Peru foreign policy will not change, but within the Peru
Libre party there have been criticismof Maurtua de Romaña designation. Vladimir
Cerron, the leader of the party, said that Maurtua de Romaña cannot represent a party
of the left. Cerron wants a foreign policy independent of US and rejects foreign
interference on the affairs of Latin America8 .
When Castillo was campaigning for the Presidency, he and leaders of his party also
criticized the FTAs signed by Peru. They talked about achieving an integration of the
Latin American region instead of searching FTA with countries in other regions. They
even talked about the possibility of renegotiating some FTAs because they said it has
not benefited Peru.
It has been told, and when Bejar was Minister even said it, that under a Castillo
government Peru will put more emphasis in working with countries of the UNASUR, a
group of countries that in 2007 created this organization looking to achieve an
integration of the region. The Constitutive Treaty of UNASUR entered into force in
2011. Most of its members where countries that at the time had leftist governments,
but in 2018 several countries decided to suspend their membership (among them
Peru) and even some withdrew from the organization.
8 Gestion: https://gestion.pe/peru/politica/vladimir-cerron-nuevo-canciller-oscar-maurtua-no-
representa-el-sentir-de-peru-libre-nndc-noticia/

8. Also, under Castillo government Peru participation in the Alianza del Pacifico, a group
of 4 countries in the Latin America region with liberal economic policies and open to
foreign trade and investment, could change according to some analysts. Countries in
this group, Peru, Mexico, Chile, and Colombia have the most open economies in the
region and have signed many FTAs with countries outside Latin America. But besides
Peru that have now a leftist government, it is probably that in next year elections also
Chile and Bolivia could elect leftist governments. The South America region could by
next year have more leftist governments, in addition to the ones in Peru, Venezuela,
Bolivia and Argentine. See next Map.
More leftistgovernmentsinSouth Americain 2022?
Source: Macroconsult:Alianza del Pacifico: Viraje a la izquierda
There is a possibility that regarding policies about FTAs for example, Castillo
government could adopt a pragmatic approach, as the one adopted by President Lopez
Obrador in Mexico. The Mexican President is also a person of leftist ideas but given the
fact that Mexico economy is highly integrated to the North American market, he has
kept its country economy integration under the USMCA. Peru´s economy is also
becoming more integrated in the international economy. The external trade
represents around 40% of GDP, and accumulated foreign direct investment is around
60% of GDP. So, the stakes are high. The problem with Castillo is that his party is
Marxist-Leninist, and several leaders of its organization have criticized FTAs.
It seems President Castillo is aware of the growing importance of Peru main trade and
business partners as China. He visited the Chinese Embassy on July 15th, even before
he was officially declared the winner in the election. And after the elections several
Ministries in his government have meet the Chinese Ambassador and executives of
Chinee companies, giving them assurance that Peru will continue business with them
as usual. China is not only the main trade partner of Peru but is also one of the main

9. investors in the country. Chinese investment represents around a quarter of all
accumulated foreign investment in Peru. And Chinese companies produce around 25%
of copper, 100% of iron ore, and 30% of petroleum of the country. If Castillo
government put more taxes to foreign companies in the mining sector, Chinese
companies will be among the affected.
But as it is said foreign policy reflects domestic policies, so special attention must be
given to how Castillo government implement domestic policies. In this regard, next
presentation of the Cabinet on August 26th in the National Congress has a special
meaning.
August24th
, 2021
*CarlosAquinoisDirectorof the CenterforAsianStudies,San Marcos National University