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Peru: Continuity or Radical Changes?

Peru next month will choose between continuity or market hostility, experts say.

Inter-American Dialogue

According to unofficial results from Peru's April 10 election, leftist former soldier Ollanta Humala will face off against Keiko Fujimori, the daughter of disgraced former president Alberto Fujimori, in a June 5 runoff election. However, both candidates had the highest negative ratings among the five people in the race, with Nobel laureate Mario Vargas Llosa declaring that it would be like choosing between AIDs and cancer. What does the first-round result say about the state of democracy and the political system in Peru? How is the race likely to play out? Will either of the candidates, after elected, have a strong mandate to govern? Should the political events in Peru be of high concern to investors and international observers, or will Peru maintain its current economic course under either leader?   

Felipe Ortiz de Zevallos, former Peruvian ambassador to the United States and founder of Grupo Apoyo in Lima: Our democratic system is very inadequate. The state apparatus is rather weak and social inequality is still very high. An apparently successful government -- with 7 percent average annual economic growth and very low inflation -- finishes its term with a rather low approval rating. (In spite of that, many presume that President García will run again as candidate in 2016 and probably win.) In a Congress of 130 representatives, his old official APRA Party would only have 4 members elected and was incapable of nominating an adequate presidential candidate. So we still have a high dose of 'caudillismo' in every election. It is going to be a very close race. Both candidates will obviously move to the center, looking for the votes of urban middle classes: Humala, in order to proclaim that his model is Lula not Chávez; Fujimori, to say that she is not the same person nor will she follow the same autocratic policies as her father. At the same time, their political supporters will probably engage in very extreme negative underground campaigning: 'Humala IS Chávez'; 'the daughter IS the father.' My current guess is that Fujimori could finish a couple of points ahead, but the election is seven weeks from now and anything could happen in the meantime. President García is a world class political operator. During the last five years, his party had no majority in Congress; however none of his ministers was censored. The new Congress is as much divided. Humala, if elected, would only have a first minority 46/130 (35 percent) in Congress, insufficient to 'change the rules of the game.' However, he could use the fiscal surpluses the state has accumulated for future populist measures with the intention of improving his 31 percent current vote (or approval) to expand it to more than 70 percent, in order to then call a Constitutional Assembly for forcing a change in the 'rules of the game'. He talks about a 'national market economy,' instead of a 'market economy'. What 'national' really means is anyone's guess. Fujimori will follow the current economic course. It is her political credentials and her potential autonomy from her father that is in question.

Ben Ramsey, executive director of Latin America research at JPMorgan in New York: Based largely on the experience of 2006, we have long held the view that Humala would likely be defeated in an eventual second round runoff. However, we concede that the dynamics have become cloudier as Humala has moved to the center, and the match-up versus Keiko Fujimori has revived concerns over the darker side of her father's administration. Keiko indeed has liabilities but she has substantial assets as a campaigner, too. There is lingering nostalgia for her father among many Peruvians, particularly among the rural poor, which allows Keiko to be competitive among Humala's base. Moreover, given her orthodox economic views, the bulk of the establishment vote should be inclined to support her over a risky 'anti-system' candidate (similar to when a relatively unpopular Alan García beat Humala in 2006). On the other hand, for Humala to win, we believe his move to the center will have to be credible in the eyes of the voters. Humala this time around has portrayed himself as a moderate -- endorsing conservative fiscal and monetary policy and opposing presidential re-election, while softening his tone on issues such as contract renegotiation and resource nationalism. While there are arguments that Humala's moderation is for electoral purposes only, we think in any case it would make it more difficult for him to swiftly pivot toward a more radical stance post election. But while we think Humala will have incentives to govern as a moderate, market uncertainty over his government should linger given the strongly statist bias of his official government plan (published just last December) and his past proximity to Venezuela's Chávez. Indeed, even if portfolio investors think (hope) prospects for a more centrist Humala would prevent extreme pressure on Peruvian assets, they will likely sell first and watch to see what Humala actually does if and when elected before re-entering.

Roberto Flores Saona, foreign exchange analyst at Inteligo: The results of the first round demonstrate that the Peruvian party system is still nascent. The population does not vote for the platform of a political party, but rather for the virtues and strengths of the candidates. A consequence of the weak party system is that democracy does not function in an optimal way. In terms of the second round, both candidates will rethink their strategies to capture the voters who supported Toledo, Castañeda and Kuczynski, a majority of which belong to the middle class. Along this line, we believe that Ollanta Humala will continue to moderate his discourse, from the left to the center-left, with the goal of capturing the votes of the electoral sector that is worried about a possible change in the economic model. For her part, it is likely that Keiko Fujimori will distance herself from the negative parts of her father's presidency, and firmly demonstrate that she would respect the freedom of the press and democratic rule. It is clear that under a Keiko administration, the current manner of managing the economy would continue since her agenda is pro-market. However, in the case of a Humala government, we are not sure about the continuity of the country's economic direction. Although Humala has moderated his discourse, his agenda is clearly unfriendly to the market. Thus, we believe that the electoral situation will continue being the focus of investors in the next two months.

Julio Carrión, director of Area Studies at the University of Delaware: The emerging narrative about the election seems to be that it reflects Peruvians' rejection of the economic model. In fact, the returns easily dispute this interpretation. If we add the votes cast for Keiko Fujimori, Pedro Pablo Kuczynski, Alejandro Toledo and Luis Castañeda, we obtain over 65 percent, hardly a rejection of the candidates who openly embraced the current economic model. Even Humala adopted a much more moderate stance this time around. Right after the election, he declared to a Colombian radio station that he does not plan to change the market model. Therefore, to understand the electoral attraction of both Humala and Fujimori we need to look elsewhere. In the same interview, Humala stressed that he seeks to correct Peru's unjust wealth distribution. There is no question that voting preferences reflected wealth distribution. Strata D and E (the poor) voted overwhelmingly for him and Fujimori. The lower middle class (Stratum C) split its vote among Humala, Toledo and Kuczynski. The middle and upper classes (Strata B and A) went overwhelmingly for Kuczynski and, to a lesser degree, Toledo. Humala and Fujimori made it to the second round because they dominated the strata D and E, where two thirds of Peruvians are located. Humala was able to outvote Fujimori because he attracted the provincial middle class, a sector where she did poorly. It now seems that the more affluent voters get to decide who will eventually be elected. This explains Humala's efforts to moderate his image even more, and Fujimori's attempts to paint him as a dangerous radical. Whom will the more affluent voters choose? Will they split their vote between the two, making this election truly unpredictable until the very last day?

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 



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