Wednesday, September 21, 2011

Mood Of Cautious Optimism Takes Hold In Peru

September 20, 2011 5:09 pm

Mood of cautious optimism takes hold

President Humala
Smart mover: President Humala has so far shown a moderate approach on policy, although sceptics are worried he may launch into greater state intervention if the economy falters
Ollanta Humala admits he sometimes looks in the mirror and cannot believe he is president. Members of the exclusive Club Nacional, styled on the English gentleman’s model and situated a few hundred metres from the presidential palace in central Lima, feel the same way.
It has been less than four months since Mr Humala, a former army officer with no government experience, unexpectedly won the June 5 run-off. His narrow victory over centre-right candidate Keiko Fujimori, the daughter of a former president, sparked a record sell-off on the Lima stock exchange.
Since then, Mr Humala has dispelled many of the concerns held by investors – including the buttoned-down businessmen lunching in the Club Nacional’s chandeliered dining rooms. “There is a mood of cautious optimism,” admits one.
Even by Latin American standards, it has been a remarkably volatile year in Peru. It is the world’s second-biggest producer of copper, silver and zinc, and one of the globe’s fastest-growing economies, having trebled in size since 2000.
Electoral tensions really began to heat up in April, after centrist candidates split the electorate and Mr Humala scooped up their votes in the first round. Local debt markets subsequently clammed up. Some feared Mr Humala’s rise in the polls might jeopardise the $42bn of investment that international mining companies – such as BHP BillitonXstrata and Freeport-McMoRan – were set to pour into Peru’s $168bn economy.
Since then, markets have rebounded, the country’s debt rating has been upgraded and pledges of even more foreign investment have come in, after the little-known Mr Humala has proved not to be the bogeyman many feared he was.
The 49-year-old has assembled a rainbow cabinet consisting of leftwing radicals and former military men, admixed with orthodox economists. Luis Miguel Castilla, the finance minister, served in the previous government. Julio Velarde, the widely respected head of the central bank, has been reappointed.
“We are all very non-ideological,” says Salomón Lerner, a millionaire businessman who is Mr Humala’s prime minister. “What’s important is not the colour of the cat, but that it catches mice.”
If at times Peruvians’ worries have seemed hysterical, it is with good reason. In 2000, Mr Humala, then a colonel, led a failed revolt against Alberto Fujimori, the president at the time. After he was pardoned, he ran in the 2006 elections, espousing the kind of socialist rhetoric bellowed by Venezuela’s radical president Hugo Chávez – and only narrowly lost.
This year, advised by Brazilian political image-makers, he adopted a more moderate approach. Following former Brazilian president Luiz Inácio Lula da Silva’s lead, he dropped talk of nationalising companies and spoke instead about economic centrism and social-inclusion policies for the poor.
The rhetorical switch helped Mr Humala win the election. But it also left doubts about where his true instincts lay and whether his political make­over masked a latent authoritarianism.
Such concerns are particularly pertinent in a country that is still traumatised by recent hyperinflation, insurgency and authoritarianism. After all, it was only in the mid-1990s that former president Fujimori, now serving a 25-year prison sentence for human rights abuses, suppressed the Shining Path guerrillas and brought order to the macroeconomy.
Everyone is wondering if there are any more shocks on the way, says Hernando de Soto, the internationally acclaimed Peruvian economist. “Yet, so far, the change in Mr Humala’s approach shows he realises he has to be the president of all Peruvians. That shows he is a smart politician.”
Certainly, the president is going to need all the good ideas he can assemble if he is to deliver on his central promise of social inclusion, while keeping Peru’scommodity-heavy economy thrumming.
Nobody disagrees with his government’s patently reasonable desire to fight corruption, beat crime and reduce poverty by expanding social services to the poorest regions, especially the Andes and Amazon. There, more than 200 social conflicts have flared up this year as indigenous groups have protested the impact of new mining projects.
It will still be a delicate balancing act, however, to keep public finances trim, while meeting the high expectations Mr Humala has nurtured among his core constituency – the third of Peruvians who live on less than $4 a day.
So far, the ramp-up in social spending he promised during his campaign has been well calibrated and carefully targeted. The government budget, which is running a surplus, can easily meet the extra $370m cost.
A tax on windfall mining profits has also proved digestible – and followed a very un-Chávez-like consultation between the government and mining companies. Instead of seeking to raise $2bn-3bn as companies had feared, the extra tax bill is about $1.1bn.
As a political outsider, Mr Humala has so far turned to a close circle for advice, in particular his wife, Nadine Heredia, and the prime minister. The 35-year-old Ms Heredia is telegenic, grew up in the same area as Mr Humala and accompanies her husband to all high-profile state functions. She has his ear.
The president’s appointment of former military colleagues to key advisory positions has been more controversial. “This stirs understandable fears,” says one western diplomat. “But it’s also understandable that Mr Humala has gone first to those he knows best – and it may be that they will also prove good at their jobs.”
It is all part of the ambiguity that surrounds Peru’s new president. He wants to strengthen the role of the state, but at the same time the state is renowned for its corruption and inefficiency. Improving it is the work of generations, not a single presidency.
Indeed, as consecutive terms are not allowed under the constitution, many wonder if his wife might run in 2016, allowing Mr Humala to return again in 2021 – just as the Kirchner husband-and-wife team sought to do in Argentina. When asked, he replies that it is too early to say.
For now, high commodity prices give his new government the financial elbow room to be all things to all people. Growth remains high – a 6-7 per cent expansion is forecast for this year and 5-6 per cent for 2012.
“strategic alliance” with Brazil will see the continent’s largest country build roads linking its agricultural markets to the Pacific, benefiting from Peru’s many free-trade agreements with the US and Asia. This could even turn Peru into “one of the most dynamic regions on earth”, says Walter Molano, head of research at BCP Securities, the emerging-markets focused investment bank.
Nonetheless, sceptics worry about what would happen if Mr Humala’s popularity sagged, or commodity prices collapsed. Then he could launch into greater state intervention and become the populist authoritarian many fear he is at heart.
“While commodity prices are high, he can be a Lula,” says Moisés Naím, a senior associate in the Carnegie Endowment think-tank’s economics programme in Washington, DC. “Should they fall, he could become a Chávez.”
So far, Mr Humala has followed the Brazilian script. He has been fiscally prudent and politically pragmatic. There is little evidence – yet – that he will not continue that way.