A New Road for Peru

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Written by Oscar Montealegre, Contributor

On June 6th, Peru’s stock market spiraled downhill rapidly, dropping 12.5 percent, a historical record for the Lima General Index. The market’s bearish attitude rattled investors so much, that trading was suspended for the first time since the global financial crisis of 2008. More wounds were inflicted on June 6th, bond prices and the Peruvian currency (nuevo sol) dropped, as investors dumped these assets frantically. So what happened on June 6th to cause such a sell-off? Nothing. But the day before was a different story. On June 5th, Peru elected a new president, Ollanta Humala, who before has expressed verbal solidarity with the likes of Venezuela’s Hugo Chavez and Bolivia’s Evo Morales, two leftist leaders that ignite fear in the Peruvian business community and foreign investors.

Peru is a peculiar country. In the last decade it has experienced unprecedented economic growth, adopting a free market policy formula that averaged 5.6 percent growth in the last 12 years. Just last year, the economy grew 8.7 percent, and in the last thirteen months the growth rate has been above 7 percent. Moreover, employment has increased, albeit gradually, and per capita income has increased 82 percent—all bullish (positive) economic indicators.

Also, Peru’s economic boom is largely predicated on its’ commodities. It is the world’s largest silver producer, and third in copper and zinc. In 2010, investment in the mining sector captured $7.3 billion in foreign direct investment. Without much media attention, real estate in Peru is booming with such tenacity, that conversations of a looming bubble are suddenly appearing. Also, Peru’s stock market has been a darling for investors, out of 21 developing nations in the MSCI Emerging Markets index, Peru was the leading performer in 2010. Peru is in full attack mode of this newfound opportunity, signing a regional pact with Chile and Colombia (MILA) in merging their stock markets for late 2011, aspiring to attract more international and regional investment.

Peru is also a divided country. Like many South American countries, Peru suffers from deep inequality and poverty. Lima—Peru’s capital—may be prosperous, but the indigenous Andean and Amazonian regions are poor, and for centuries have been marginalized and impoverished. It has been noted that at least a third of Peru’s population (total population: 29 million) have not benefitted at all from the economic boom. Latinobarometro, the top Latin American survey research company, released a report that ranked Peruvians the lowest in the region in their confidence towards the government—a recipe that the political leaders of the incumbent and centrist-right wing party overlooked, freeing up space for a so-called ‘has been’ in mobilizing the poor and ‘forgotten’ Peruvians.

Mr. Humala promised the poor a chance to participate in Peru’s robust economy. He pledged higher social spending and advocated an antipoverty agenda. Ideas that are coined as populists, but nevertheless they remain effective under Peru’s social, political and economic condition. Mr. Humala’s plan worked, beating Keijo Fujimori by a slim margin, a surprise to many international observers due to the fact that Mr. Humala formerly had strong ties to the controversial Mr. Chavez. As a result, the election has reignited the ideological debate in Latin America between market-oriented economies and controlled/populist economies. Before the election, Peru was categorized with market-oriented economies, together with Brazil, Chile, Colombia and Uruguay. The business and financial community are worried that with Mr. Humala as the elected new president, Peru might tip toe towards the other economic school, joining the likes of Venezuela, Bolivia, Nicaragua and Ecuador.

It appears in the short-term investors will stay alert and apply caution towards Peru, which incidentally might cause a slowdown of private investment causing the economy to stall. However, President-elect Humala argues the contrary, stating the market downfall and the negative reviews from the Jun 6th decline and onwards are just mere speculations, appealing that Peru’s economic fundamentals are too strong, attributing the strong economic foundation on Peru’s consistent growth of the last ten years. To further calm the jitters surrounding Peru’s economy, Mr. Humala has declared numerous times that his intentions are to emulate Brazil’s Lula and his pro-market policies. Lula’s work during his presidency is naturally in style, but Lula delivered on his promises of being economically pragmatic. Time will tell if Mr. Humala will do the same. Also, unlike the last election, Mr. Humala has walked away from controversial issues, promising that he will respect established international treaties and agreements, respecting freedom of the media, and honoring the constitutional limit of presidential terms. Indeed Mr. Humala’s tone has changed compared to his last campaign, but the difficulties for the future president will be delivering on his promises to the poor and maintaining the confidence of the business and financial sectors.

Currently, the economic stats are the following: In the first quarter of 2011, the economy grew 8.8 percent, down from 9.2 percent compared to the fourth quarter of 2010. In the wake of 2011, analysts predicted that Peru could grow 7 percent by the end of the year. Now some analysts are penning that Peru’s economy could decline to 4 percent to 4.5 percent, a significant drop to prior forecasts. On June 13th, the Lima Stock exchange dropped 11 percent, reason being that Mr. Humala needed more time to dissect the details behind the Colombian and Peruvian stock merger. In a matter of days, Peru went from being an Andean Jaguar (a rising Latin American economic star) to being an international concern.

Peru’s future is unknown. The reality is Mr. Humala will be the next president and at the very least Peru and its citizens deserve a chance with their new elected president. Whether Peru will nationalize certain sectors and lose its’ luster is speculation. Mr. Humala may toe the line in regards to economic policies, maintaining its solid fundamentals and stable growth. The main issue is that Peru and other Latin American countries are experiencing a subtle economic rise, without shedding the gross income inequality, high unemployment and poverty. Ignoring these issues will only cause more instability and perhaps derail continuity. The unthinkable was that Peru would elect a leftist, populist politician amidst a robust economy. The lesson in this is that regardless of the economic state (good or bad) if citizens have no faith in their government and elected officials, the government and the private sphere will constantly encounter difficulty in paving stable continuity for their country and citizens.