President Ollanta Humala’s first year: a score card

During the first half of last year, presidential candidate Ollanta Humala rose in the opinion polls and went on to become the overall winner in the first round of voting. Then, the day after his victory, the Lima Stock Exchange fell 12.5 percent, the worst one-day decline in its history. Looking toward a second round of voting, and a fight for votes at the center of the electoral spectrum, Gana Peru, Humala’s five-party coalition, adopted a strategy of moderating the proposals in its original governing plan. Among other things, it guaranteed the independence of the cabinet chief and the economic and finance minister, as well as respect for the rule of law and for Peru’s international commitments.

Nevertheless, uncertainty and incredulity continued to dominate public opinion until after Humala took power. Some of the most serious misgivings were over the possible revocation of the Constitution, the renegotiation of free trade agreements already in effect and the nationalization of strategic economic sectors, including energy, telecommunications, seaports and airports.

Country risk increased and business expectations plummeted. After posting an average of 68 points during 2010 and the first few months of 2011, the BCR business expectations index abruptly fell to 55 before starting a slow recovery in August.

But one month after Humala took power, S&P raised Peru’s sovereign risk qualification to BBB, based on promises of continuity in economic policy with an emphasis on growth and social inclusion, as well as the positive signal taken from the appointment of technocrat Miguel Castilla as minister of economy and finance.

In September, the Exe-cutive reached a consensus with the main players in the mining sector on tax reform so that, among other things, future calculations of royalties would be based on operating profits rather than on sales. In October, the government took an important step toward keeping its promise of social inclusion with the creation of the Ministry of Development and Social Inclusion.

GDP grew by just 6.9 percent in 2011 despite rates of 8 to 10 percent early in the year. The Ollanta Humala government had to face a complica-ted international situation as growth slowed in the world’s largest economies and with it demand for products, including those exported from Peru. Last year, it managed to stave off a crisis, even achieving an all-time record in international reserves of $45.726 billion, a 38 percent increase over 2010. This was due mainly to the increase in commodity prices and the consolidation of international commercial agreements, among which the most recent are with Japan, Singapore, South Korea, Costa Rica and the European Union.

However, the deepening of the European crisis in 2012 had a negative impact on exports, which fell at an average year-over-year rate of 17 percent between February and May. The measures the Executive took to strengthen the export sector with stimulus packages have not been sufficient, due to inefficiency and slowness in carrying out the approved measures.

The same is true in the execution of investment projects. Although investment projects totaling $10.352 billion have been announced for the next few years, there remain obstacles to their execution. In the mining sector alone, the value of stalled projects, $34 billion, is more than triple the announced investment plans.

Inefficiency in the execution of the budgets of local and regional governments, combined with factors such as the absence of a state presence in rural areas; conflicts between the private sector and the people; and personal and political interests have combined to pose the most serious obstacle that confronts the current administration: social conflicts. Typical cases are those of the Conga project in Cajamarca and the Tintaya project in Cuzco, which have cost the lives of nine Peruvians, as well as placing at risk investments worth $6.3 billion dollars (8 percent of 2011 GDP). In this sense, the efforts of the Executive have been insufficient.

The problem of social conflict and the consequent paralysis of large investment projects have put the sustainability of economic growth at serious risk. According to Apoyo, an opinion research company, investment intentions in the private sector are decreasing month by month: after reaching 45 percent in a survey in April, they fell to 26 percent in June.

In general terms, we must recognize that Peru finds itself in a somewhat better position than the private sector predicted it would be in a year ago. President Humala has quickly demonstrated that he understands the importance of investment for development of the country, and has carried out a cohe-rent and prudent discourse at the national level, as well as making efforts to attract foreign investment. The continuity of economic policy and the technical focus on social inclusion are important achievements.

Nevertheless, the Executive must try even harder to resolve the bottlenecks impeding the stimulation of exports and investment projects. In addition, it should take measures to optimize the administration of regional and local budgets. Lastly, it will be important to improve political management and monitoring of social conflicts from the earliest stages, to guarantee rule of law and security of investment, which are just as necessary for the country.

On the to-do list, no less important than the items mentioned above, are public safety, the improvement of competitiveness, the quality of education and the reduction of bureaucratic constraints. These are all problems that must be confronted, since in the past year there has been little or no progress in these areas.

In spite of this, comparing pluses and minuses, the overall balance is positive.

Aldo R. Defilippi

Photo: Agencia el Universal/El Universal de Mexico/Newscom






Aldo R. Defilippi is Executive
Director of the American
Chamber of Commerce in Peru


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