Bloomberg News

Humala Cabinet Will Test Reinvention to Calm Peru’s Markets

June 07, 2011

(Updates to add Humala’s comment in eighth paragraph.)

June 7 (Bloomberg) -- Ollanta Humala convinced a bare majority of voters that Peru’s booming economy would be safe with him as president. Now he must calm nervous investors, starting with his choices for finance minister and the rest of his cabinet.

And time is short. Peru’s stock market plunged 12 percent yesterday, the most on record, after Humala edged out investor- friendly Congresswoman Keiko Fujimori in the June 5 runoff vote. Investors are concerned that Humala’s government could reverse policies the government expects will attract $50 billion of mostly mining investment and fuel average annual economic growth of 6 percent over the next three years.

“Humala has to come out and send a signal or this selloff won’t end,” said Mauricio Cardenas, director of the Latin America program at the Brookings Institution in Washington. “The market is asking for a response. It wants to hear who the finance minister will be.”

Humala’s campaign strategy took a page from the playbook of Luiz Inacio Lula da Silva, who was elected president of Brazil in 2002 by persuading voters that his history as a union leader wouldn’t lead him to pursue policies that damage the economy. Like Humala, Lula’s climb in the polls triggered a selloff of Brazilian bonds and stocks.

Stock Trading Suspended

Humala’s confirmation as president-elect yesterday sent markets lower, with Peruvian debt trading like junk and the sol plunging the most since June 2009. Trading on Peru’s benchmark stock index was suspended yesterday for the first time since October 2008, during the height of the global financial crisis.

The extra yield investors demand to hold Peru dollar debt instead of U.S. Treasuries rose 23 basis points to 215 yesterday, the steepest rise in a year.

Today, the yield narrowed 19 basis points to 196 at 3:25 p.m. New York time. The Lima General Index rose 7 percent to 19,881.10 and the currency strengthened 0.1 percent to 2.7865 per U.S. dollar.

“I ask the country for calm,” Humala told reporters in Lima today. “We’re doing our best and we have to keep working. Every election in the world is a triumph of democracy over other systems that aren’t practiced here.”

To reassure Peruvians the country’s economic policies will remain in place, Humala may appoint in the coming days an ally of former President Alejandro Toledo to head the Finance Ministry, Omar Chehade, the second vice president-elect, said yesterday. Potential candidates include former deputy finance minister Kurt Burneo and former central bank President Oscar Dancourt, he said.

Free Trade Agreement

Both officials served under Toledo when Peru negotiated a free trade agreement with the U.S. They will form part of a 19- member team lead by first vice president-elect Marisol Espinoza to handle the transition to government.

Burneo was also an adviser to Toledo during his unsuccessful bid to regain the job he held from 2001 to 2006. Toledo, who endorsed Humala after finishing fourth in the first round of voting, said he plans to “jealously guard” Peru’s economic stability against any excesses by Humala’s government.

Humala’s economic program won’t include any “surprises,” and the President-elect will respect mining and oil contracts and trade accords, Burneo told reporters in Lima today.

Budget Tightening

As was the case with Lula, a pre-election market selloff forced Humala to issue a “Letter to the Peruvian People” vowing to maintain President Alan Garcia’s budget-tightening policies and support for an independent central bank. Ahead of the runoff vote, Humala shelved a 198-page platform that included proposals to ban gas exports to lower domestic fuel costs and nationalize airports.

Humala also played down his ties to Venezuela’s Hugo Chavez, which caused controversy during the 2006 campaign, when he lost by five percentage points to Garcia. This year, he instead hired two former Lula advisers to help manage his campaign.

To reinforce his ties with Latina America’s biggest economy, Humala plans to travel to Brasilia and meet with Lula’s successor and protege, Dilma Rousseff, before taking office July 28, Marco Aurelio Garcia, a foreign policy adviser to Rousseff, told reporters yesterday.

“The people have been waiting a long time for change,” Humala, 48, told thousands of supporters at a June 5 rally in downtown Lima to commemorate his victory. “It’s not possible to say that the country is progressing when 12 million people are living in extreme poverty.”

Smooth Transition

As he took office in Brazil, Lula moved quickly to reassure markets by naming one of their own, FleetBoston Financial Corp. banker Henrique Meirelles, to head the central bank. Officials from the outgoing government helped smooth the transition by meeting privately with banks and the International Monetary Fund to dispel fears Lula would default on the nation’s debt.

In the next eight years, inflation in Brazil was slashed to 5.91 percent in 2010 from 17.2 percent, the country won its first-ever investment grade rating and cash payouts helped 36 million people enter the middle class.

Brazil’s economy expanded 7.5 percent last year, the fastest pace in two decades, while Venezuela’s was the last in Latin America to emerge from the global recession. Chavez’s policies of nationalizing key industries have led to food shortages that are fueling inflation that at 22.8 percent in May was the highest among 78 countries tracked by Bloomberg.

Venezuela ‘Disaster’

“Humala’s had enough time since the last election to see that Venezuela’s economy is a disaster while Lula has been a success in Brazil,” said Cardenas, a former economic development minister in Colombia. “But markets aren’t going to give him the benefit of the doubt.”

Peruvian investors are more worried than their foreign counterparts that Humala’s changes are cosmetic, said Pablo Secada, chief economist at the Peruvian Institute of Economy, a Lima-based research organization.

Like Chavez, who as a paratrooper led a failed coup in 1992, Humala has been dogged by his past support for armed rebellion. In 2000, as a lieutenant colonel, he led 50 soldiers who seized and occupied for a week one of Phoenix-based Southern Copper Corp.’s mines.

“Humala may be a moderate but the people surrounding him aren’t,” said Secada, who is also an adviser to Finance Minister Ismael Benavides. “They aren’t just aiming for a redistribution of income, they want radical change.”

Collapse ‘a sign’

Chavez, who stayed quiet during the campaign, said today the collapse in Peruvian stocks after Humala’s triumph “is a sign from those who think they are owners of the world.” Garcia said he hoped all Peruvians would rally around his successor.

That won’t be easy with a gridlocked Congress where Humala’s Nationalist Party has only 47 of 130 seats. Unlike Lula’s Workers’ Party, which has its roots in Brazil’s union movement and readied itself to take power while leading the opposition for two decades, Humala created his political movement on the eve of the 2006 race. That was after he returned to Peru from South Korea, where he was military attach.

“Compared with Lula and his people, Humala is a political amateur,” said Steven Levitsky, a professor of government at Harvard University in Cambridge, Massachusetts. “The best thing to do would be to calm down the markets and name a finance minister today.”

Strong Economy

One advantage he does have that Lula didn’t is the strength of the Peruvian economy, the fastest growing in Latin America over the past decade. Growth has remained above 7 percent for each of the past 13 months. The country won an investment grade rating on its foreign debt from Standard & Poor’s in 2008, and exports rose to a record $35 billion last year on high prices for the country’s copper and gold.

Mining companies will continue to invest in Peru even if Humala doubles taxes on their profits to finance higher spending on health, education and infrastructure projects, Secada said.

“They have a ball in the front of an open goal,” said Levitsky, who is currently teaching at Pontificia Universidad Catolica del Peru in Lima. “There’s a lot of room to negotiate with the mining companies and to spend more on the poor.”

--With assistance from Charlie Devereux in Caracas, Belinda Cao and Ben Bain in New York. Editors: Richard Jarvie, Harry Maurer

To contact the reporters on this story: Helen Murphy in Lima at hmurphy1@bloomberg.net John Quigley in Lima at jquigley8@bloomberg.net;

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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