Peruvian Crystal Ball

Conclusion: The ongoing election in Peru has uniformly roiled the country’s financial markets over the last several weeks and, depending on the outcome of upcoming polls, the pain could continue. Using a wider lens for analysis, this election has broader implications for the long-term TAIL of economic policy throughout Latin America. In short, we see more economic liberalization on the horizon across the region.


Recent moves across Peruvian asset classes underscore just how concerned international investors are regarding the outcome of Peru’s current election, in which a second round runoff vote scheduled for June 5 will determine the next president of Peru for the upcoming five years: 

  • Bond Market: After Peru’s bond market posted its largest quarterly decline since 3Q08 in 1Q11 (10Y yields +93bps to 6.87%), yields continue to break out to the upside, closing yesterday +7bps to 7.17%;
  • Currency Market: Peru’s currency, the nuevo sol, has declined (-1.9%) vs. the USD in the past month;
  • Credit Market: Peru’s 5Y sovereign CDS widened +32bps in the past month, settling yesterday at 152bps; and
  • Equity Market: Since peaking on March 24, Peru’s Lima General Index has declined (-16.4%) as of yesterday’s close. 

Rightly or wrongly, these concerns are centered on the potential for the outspoken socialist, Ollanta Humala, to secure victory in the aforementioned presidential elections. As the above moves would indicate, market participants have prescribed a significant risk premium to holding Peruvian assets, should Humala prove victorious in the runoff.


This is due to his public condemnation of the “overly capitalist” nature of Peru’s robust mining industry, which is the key driver of the Peruvian economy. Peru is the world’s largest producer of silver (prices up +145% in the past year) and second-largest producer of copper (prices up +19.1% over the same duration) – two very important commodities as it relates to global growth, inflation, and the associated expectations therein.


According to the country’s Finance Ministry, Peru is set to receive roughly $50B in mining, energy, and infrastructure investment during the next five years, up from $7.3B last year and the influx of foreign investment over the past 10-20 years has been a major tailwind for Peru’s exchange rate appreciation, which, in turn, has proven beneficial for putting an end to Peru’s historical bouts with hyperinflation.


Therein lies the heart of the worry. As recently as March 23, Humala has promised to increase the Peruvian government’s hand in these key industries by renegotiating mining and energy contracts with foreign companies and raising taxes on mining production if he wins the election:


“We must recover sovereignty over Peru’s natural resources because the multinationals now own our gas and prefer to sell it abroad… there must be a mining windfall tax, as the current model isn’t sustainable.”


Taking a clue from Peruvian financial markets of late, Humala has backed off his socialist leanings somewhat, saying recently he supports an “open market economy” and “backs foreign investment that creates jobs”. In addition, he affirmed his desire for a “strong state”, while pledging to “respect investment and private property.”


Unfortunately for the future of Peru’s mining and energy industries, there’s nothing in Humala’s past that would indicate he’s being sincere about his recent pro-business proposals. In 2000, as a former army lieutenant colonel, Humala led 50 soldiers in a seizure of Southern Copper’s Toquepala mine in protest of the corruption which has tainted the legacy of then-president Alberto Fujimori – father of Humala’s competition in the upcoming election, Keiko Fujimori. In the 2006 presidential campaign, where he lost narrowly to current incumbent Alan Garcia, he denounced foreign companies for “looting” Peru’s natural resources.


Diving deeply into the 2006 election, we see that Humala did indeed lose the runoff after capturing the majority vote in the first round with 30.6% of the ballots. His reversal of fortunes in the final round was attributed to his close ties to the controversial Venezuelan president, Hugo Chavez.


Essentially, voters became so frightened that Humala would turn Peru into “little Venezuela” that they voted for Garcia out of spite; one-third of Garcia’s supporters in the runoff election said they were voting for him as “the lesser of two evils”. This is saying something about how negatively Peruvian’s view Venezuela’s economic policies, considering Garcia’s last term as president (July ’85 – July ’90) produced Peru’s last bout with hyperinflation (+7,649% YoY in 1990), a (-20%) decline in GDP, a measured reduction in per capita annual income to $720 (below 1960’s levels), and a +13% increase in the poverty rate (from 41.6% in 1985 to 55% at the end of 1990).


Humala, who won the initial 2011 ballot with 31.7% of the vote last week, continues to make attempts to distance himself from Chavez, with the latest as recently as today in his denial of allegations that Chavez was financing his election campaign. On March 31, he explicitly tried to steer public perception of his policy-making agenda away from the Venezuela-lite tag that has been assigned to it by the media and his competition by saying, “The Venezuelan model of government isn’t applicable in Peru… We’re not going to copy foreign models.”


How successful Humala is in distancing himself from Venezuelan president Hugo Chavez and the 1 socialist policies of Alan Garcia will go a long way towards determining the outcome of this election. There’s no denying he’s got the popular vote, as he remains a man of the people. What can’t be denied, however, is his vulnerability to easy political attacks by his competitors. Simply put, it wouldn’t take much negative campaigning to relinquish Humala’s current stronghold on the Peruvian electorate.


Enter Keiko Fujimori, Humala’s opposition in the June 5 runoff vote after finishing in second place in last week’s primary with 23.5% of the vote. To capture the necessarily simple majority needed to become Peru’s next president, her task is fittingly simple – use Humala’s socialist intentions and ties to Hugo Chavez against him to galvanize the voter bases of now-disqualified candidates (the other 44.8% of the first round votes) around her own campaign.


To accomplish this goal, she’ll have to successfully distance herself from her father’s increasingly corrupt regime (July 1990 – November 2000), while at the same time talking up the sound economic policies he implemented to plant Peru squarely on the path of economic prosperity. To a large extent, Keiko has been following this playbook by surrounding herself with many of her father’s former aides while publically disapproving of her father’s humanitarian crimes, for which he is currently serving a maximum sentence of 25 years in prison:


“I condemn the errors that occurred under my father’s government, and I salute the positive actions. I think we should look at the past objectively and without rancor.”


While in office, Alberto Fujimori enacted broad sweeping neoliberal reforms, known then as “Fujishock”. His policies effectively relaxed private sector price controls, dramatically reduced government subsidies and public employment, eliminated foreign exchange manipulation after issuing Peru’s new currency (nuevo sol), reduced restrictions on investment, imports, and capital inflows. In addition, he embarked on an unprecedented privatization campaign in which hundreds of state-owned enterprises were sold to private investors.


The right-wing policies enacted during his ten year in office are credited with bringing macroeconomic stability to Peru by taming hyperinflation, arresting the rise in the poverty rate, growing the country’s per capita GDP by +30.8%, and growing the country’s FX reserves to $10B from nearly zero. Given these remarkable achievements, it comes as no surprise that the elder Fujimori still garners very high public support, ranking fifth among all political figures in a recent Univerisdad de Lima survey. Moreover, in spite of a messy, public divorce that caused his daughter Keiko to assume the departed first lady’s role midway through his presidency, popular approval for his regime has grown from 31.5% in 2002 to 49.5% as late as May 2007. He remains the only Peruvian president in the post WWII era to preside for more than two terms in office (albeit after altering the rules near the end of his second term).


Regarding his current incarceration, Fujimori’s daughter has made repeated public vows to not pardon her father if elected, saying as recently as today, “I swear to God, I am not going to pardon him. I have repeated several times that that it is neither my intention, nor the intention of my family, to pardon Alberto Fujimori.” This hard line against her father’s crimes – most notably the violent and deadly crackdown(s) of leftist guerillas – might just be enough distance herself from her father on a personal level. On a political level, however, she does indeed share her father’s right-wing economic agenda as well as his popularity among the Peruvian electorate; in 2006, she was elected to Peru’s Congress with more votes than any other candidate.


All told, we think the Colombia University MBA-trained Keiko Fujimori (35) may just have what it takes to pull off the upset in the upcoming runoff election. Given, we think the recent sell-off across Peru’s financial markets and the widening of Peru’s CDS spreads might be overblown. We do, however, expect more near-term weakness until we see signs that she is indeed narrowing the gap between her and her fiery competitor, Ollanta Humala.


We’ll get our first clue on April 24, when Lima-based research firm Ipsos Apoyo publishes its first second-round presidential poll. Any strength in support of Fujimori might spark a relief rally in Peru’s equity, currency, and bond markets. Any weakness on her part will likely bring about further loess across Peruvian asset classes.


Such incremental sell-offs have the potential to destabilize the Peruvian economy and should be viewed as a warning sign to politicians throughout the region. Gone are the days of simply parlaying the poor vote into election victories – particularly at the highest office. As we are seeing currently, Latin American politicians must pay increasing attention to the desires of international investors, as well as the needs of the region’s growing middle class. As resource-rich Latin American countries continue to capitalize economically from elevated commodity prices, we expect this trend to continue. This should put incremental pressure on regional leaders like Dilma Rousseff of Brazil and Cristina Fernandez de Kirchner of Argentina to open up to investor calls for additional privatization of the region’s vast investment opportunities in the coming years.


Darius Dale




Sources: Bloomberg LP,,

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