Peru’s markets rallied on news that centre-left candidate Alan Garcia had won the country’s presidential election this week, but Chavez-backed nationalists will be, at the very least, a painful thorn in his side say analysts.
As stocks in major Latin American markets fell on Monday, shares on the Bolsa de Valores de Lima rose 50 points, or 0.65% as Garcia edged out populist Ollanta Humala with 53% of the popular vote. However yesterday they fell slightly as Humala, whose Nationalist Party controls most of the seats in Congress, threatened street protests against Peru’s impending free trade agreement with the United States.
Carola Shandy, Peru analyst at Credit Suisse attributed the wobble to the global flight of capital from emerging markets rather than factors specific to Peru. “I think that the whole reason why he wanted to be elected president again was because he wanted to change his track record,” said Shandy. “He is not going to make same mistakes as in 1990... when he did everything wrong. In the next two or three years he wants to get an investment grade rating from international agencies.”
Gianfranco Bertozzi, economist at Lehman Brothers, said that the socio-economic cleavages in Peru, reflected in the near-50% vote for Humala, pose a serious challenge to the ability of Garcia to maintain macroeconomic stability.
However, he also pointed out that Humala’s party is “not tightly knit”, and may not be able to influence policy as much as its leaders hope. “The markets are right to conclude that Garcia is a much better outcome than Humala”, he said.
As Peru’s president between 1985 and 1990, Garcia oversaw the ruin of Peru’s economy: real incomes sank below 1960 levels, inflation hit 7649% in 1990, and the country defaulted on its external debts. This time round, Peru is in good macroeconomic health: inflation is running at 1.6%, growth was 6.7% last year and strong demand for copper, gold and other commodities pushed exports to $15.95 billion in the country of 28.3 million people.
“He’s moved from the left towards the centre, is speaking much more market friendly jargon, and backing that up with fairly responsible behaviour in congress,” he said. “There’s every reason to believe Garcia is serious about maintaining macroeconomic stability... and probably even outsourcing policy to someone not from Apra [American Popular Revolutionary Alliance]”.
Garcia said during his campaign that he will appoint a pluralistic cabinet, and “a few market-friendly names have been floated for finance minister and central bank governor” according to Piero Ghezzi, a Deutsche bank analyst.
Peru’s sound macroeconomic footing means that Garcia will have to “work pretty hard to de-rail a solid story,” according to Bertozzi.
“He doesn’t have to implement very much. There are no very important pending reforms”, agreed Credit Suisse’s Sandy. His priority should be to control spending and keep the current account deficit below 1% of GDP: it was 0.4% of GDP last year.
Given continuing demand for Peru’s plentiful commodities, its stocks will continue to be “low beta credits”, tied more closely to the price of metals and mining stocks than to emerging market stock markets. said Bertozzi. “I don’t see a lot of volatility ahead for Peru, but I don’t think Garcia instils enough confidence to see it as an ‘outperform’ either.”
Garcia’s challenge is that, with only a slim lead over nationalist Ollanta Humala, who was backed by Venezuela’s leftwing president Hugo Chavez, he will have to meet ordinary Peruvians’ desire for change. Over half of them live below the poverty line and the bottom fifth of the population accounts for 5% of the country’s wealth.
Humala had promised nationalisation of key mining assets, following nationalisation of oil and gas fields in Venezuela and Bolivia.
“He will have to find a middle ground between maintaining the basic macroeconomic framework and also doing something in terms of social policies so that Peruvian voters not too unhappy,” said Sandy.
BCP Securities’ Walter Molano took a dimmer view, saying that while there was a “deep professionalisation” of Peru’s finance ministry, and customs and tax agencies during the 1990’s, the return of Apra “means the return of institutional corruption and professional incompetence”.
Peruvian upper and middle classes are taking their savings out of the country and that foreign mining firms are “quietly shedding billions of dollars in assets”, according to Molano.
“[Garcia] will surely assemble an impressive line-up to head up the major cabinet positions. However most of the ministers will probably be gone before the end of the year... In the meantime Humala will retreat to the high sierra. He will use Chavez’s resources to build up his political base, to be ready for the day that the electorate grows tired of Alan Garcia and Humala rides into Lima”.