Peru’s Sol Sells Off on Uncertainty Over New Cabinet

(Bloomberg) -- The Peruvian sol led losses among emerging market currencies with investors in suspense about the composition of President Pedro Castillo's cabinet following the resignation of his prime minister.

The sol weakened 0.9% on Tuesday, its biggest daily decline since July, after Prime Minister Mirtha Vasquez said Monday that she was quitting due to differences with Castillo over a dispute between the Interior Minister and the head of the national police.

The nation's bonds were also hit, with dollar-denominated notes due 2051 down 1 cent to 95.2 cents on the dollar, the lowest in 11 months.

Castillo said on Twitter that he had decided to “renew” his cabinet and thanked Vasquez for her work, without giving details of upcoming changes or saying whether they would include Finance Minister Pedro Francke, who is popular with investors.

“The extent of the underperformance will depend predominantly on the appointments for the PM and Minister of Interior seats, and if Finance Minister Francke stays,” Citigroup strategists including Dirk Willer and Ernesto Revilla wrote in a note Tuesday. “If Francke stays and Castillo decides not to opt for more radical left-leaning options for his cabinet, the negative market reaction may be short-lived.”

Health Minister Hernando Cevallos, who has been cited by local media as a possible replacement for Vasquez, told La Republica newspaper that such an idea isn't on the table.

Castillo has repeatedly made changes to his cabinet since taking office last July, as some of his close aides were hit by scandals, while the president is pulled between the need to appease radical socialists in his own Peru Libre party while also maintaining a working relationship with congress.

Read More: Peru PM “Extremely Concerned” About Political Situation: Guillen

The president is contending with a series of simultaneous crises, including an environmental disaster caused by an oil spill, the resignation of his interior minister, and an increase in crime that has forced his government to declare a state of emergency in Lima.

Peruvian assets rallied in October after Castillo named Vasquez to replace a far-left prime minister in a bid to improve his administration's relations with lawmakers. Local markets were already closed when the cabinet overhaul was announced Monday.

In December, Castillo survived an attempt by some opposition lawmakers to start impeachment proceedings against him. The economy has shrugged off the political volatility and last year grew at the fastest pace of any major nation in the Americas, according to estimates of economists surveyed by Bloomberg.