Peru's Bribery Scandal Is Threatening Region's Best Carry Trade

Peru’s political turmoil is imperiling the best carry trade in Latin America this year.

The country’s assets sold off in recent days amid calls for President Pedro Pablo Kuczynski, a technocrat beloved by investors, to resign after opposition lawmakers accused him of receiving bribes while he was a government minister a decade ago. It’s a stark reversal after a combination of relatively high interest rates, a steadily gaining currency and bets on faster growth rewarded investors who borrowed in dollars and bought Peruvian soles.

Peru’s sol and its benchmark stock index have declined for three consecutive days since the latest allegations emerged, taking a shine off year-to-date gains that had been some of the best in Latin America. While Peru is generally considered one of the region’s least volatile nations, the political crisis escalated rapidly after an investigative committee said Wednesday it obtained information showing a consultancy set up by Kuczynski received payments from Brazilian construction giant Odebrecht SA when he was finance minister. Kuczynski rebuffed calls to resign Thursday and has denied any wrongdoing.

“The political crisis is likely to increase volatility and put pressure on Peru’s sol,” said Cesar Arias, an economist at Deutsche Bank AG. Still, “the country’s fundamentals remain strong and the central bank has ample room to lean against the wind.”

The benchmark equity gauge is still up 24 percent this year in dollar terms, besting counterparts in Mexico, Colombia and Brazil. The sol has gained 3.2 percent this year, trailing only Mexico’s and Chile’s currencies among major regional counterparts.

— With assistance by Ye Xie, and Carlos Torres

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