Humala defeated Keiko Fujimori, daughter of imprisoned former dictator Alberto Fujimori, who promised to move Peru to a more free market stance. However, the political baggage carried by the Fujimoris left the Peruvian electorate with a Hobson’s choice.
Although Humala has vowed (by swearing on the bible) that he has reformed from his fire-brand radical past, there are concerns over the future of the country.
The question is whether the new leader will modernise the economy or confront foreign businesses.
Major doubts surround the new president’s proposed 40%-50% tax rates for the mining industry. Shares in Grupo Mexico, a mining company with operations in Peru, fell by 8%. Other exposed mining companies saw similar falls: Hochshild fell by 5% and Southern Copper Corp saw an 11% drop.
Peru’s Lima General Index plummeted this week, down 12.4% to 18,586. Peru’s growing middle class has reacted warily, with many threatening to close businesses or emigrate if Humala enacts his more extreme rhetoric.
Currently the economy seems to be retaining its strength – GDP grew by 9.2% in Q1, followed by 8.8% in Q2. The country’s past hyperinflation issues appear to have been resolved, with price increases holding at 2.5%. Despite a booming economy, little wealth has trickled down to the large, indigenous poor.
The decision that companies with concerns in Peru need to make is: How bad is Humala? Undoubtedly, the new generation of Latin American left-wing leaders are noticeably more corporate than their militant predecessors.
The election of Lula da Silva heralded a similar level of market alarm when the left seized power in Brazil. However, the former trade union leader transformed himself and his country, as the president donned a suit and Brazil took its place among high-performing BRIC countries.
Alternatively, Peru could go in the direction of Boliva, which elected Evo Morales as president in 2005. Morales sought to reorient the economy to a more command structure by nationalising energy companies and taking over private pension funds.
Companies operating in Peru should certainly re-examine their exposure to political risk and regulatory changes within their supply chains. However, the threats by many to pull out of the state entirely are hyperbolic.
Humala made a shrewd political move by tacking dramatically towards the centre ground as the electoral contest took place and this reflects many of the new priorities of an emerging consumer state. Undoubtedly, there will be a strong redistributionist agenda to the presidency, but it seems likely to be tempered by political and economic realities – Humala lacks a Congressional majority.
The biggest issue for buyers is the anticipation of the market’s usual overreaction. Prices of its main exports (including copper, gold, zinc and tin) may spike further. Moreover, downstream goods may also see price rises, as manufacturers seek to circumvent Peruvian suppliers.
Unfortunately, as with many economic issues, the reality of the situation only partially reflects market movements. The key for exposed companies is to monitor the new political landscape and to remain mindful of the long term.
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