Garcia's Booming Peru Economy May Not Help Defeat Chavez-Like Challenger

When Alan Garcia’s first term as president of Peru ended in 1990, the economy had shrunk by 10 percent, inflation was raging at 7,000 percent, and half the population lived in government-declared emergency zones where Maoist guerrillas were active.

Two decades later, the man Peruvians nicknamed “Crazy Horse” for his unstable policies presides over South America’s fastest-growing economy, with lower inflation than Switzerland. During the first Garcia administration, Peru defaulted on $14 billion in debt. Since he returned to power in 2006, the country won its first ever investment-grade rating.

The economic success hasn’t lifted Garcia’s approval rating, which sank to 26 percent last month. Hostility to the president, and the political establishment, increases the chance of Ollanta Humala, an ally of Venezuela’s Hugo Chavez, taking power in elections next April to choose Garcia’s successor, said John Crabtree, a Latin America researcher at Oxford University.

There is a “sizable danger” that the 2011 vote will produce a populist winner, said Crabtree, the author of “Peru Under Garcia: An Opportunity Lost,” about the first Garcia administration. “More people are disenchanted by the way in which democracy works in Peru than in any other country in Latin America,” he added in a telephone interview from Oxford.

Garcia’s approval rating stands at 26 percent, according to an Ipsos Apoyo Opinion y Mercado poll taken May 12-14 for Lima’s El Comercio newspaper. That’s down from 29 percent in March and a high of 58 percent two months after he took office. The poll of 1,200 people had a margin of error of 4.4 percent.

Bubbling Discontent

Even though the economy has performed well under Garcia, poverty and corruption have kept discontent bubbling at dangerous levels, said Daniel Kerner, an analyst for the Eurasia Group, a Washington-based political risk group.

Garcia “focused on maintaining macroeconomic stability and proving that he was a responsible administrator, with the hope that growth would trickle down,” said Kerner in a telephone interview from New York. “He never did much to alleviate poverty, other than try to guarantee that Peru remained a good destination for investment.”

Peru, South America’s sixth largest economy, is rebounding faster than its neighbors from the global recession. Bank of America said in a May report that Peru “is in a growth league of its own” after gross domestic product expanded 8.8 percent in the 12 months to March, led by construction and manufacturing. The International Monetary Fund forecasts growth of 6.3 percent this year, the most in the Western Hemisphere.

Record Investment

Foreign direct investment is expected to reach a record $8.4 billion in 2011, according to Bank of America. The country became a net creditor in 2007, as reserves soared to a record $35 billion. It costs less to protect Peru’s debt against default than it does for bonds issued by Brazil, which share its Baa3 investment grade rating by Moody’s Investors Service.

The sol has strengthened 14 percent against the U.S. dollar since Garcia took office in July 2006, and the Lima General Index has gained 74 percent in dollar terms, compared with 80 percent for Chile’s IPSA index and 95 percent for Brazil’s Bovespa index.

Peru’s fast growth has been driven by high prices for commodities including gold and copper, which account for 75 percent of exports, said Cesar Ferrari, who served as Garcia’s general manager of the central bank from 1987-1988.

“Garcia caught a good wave,” Ferrari said during an interview in Bogota, Colombia.

180 Degree Pirouette

Garcia, 61, a lawyer trained at the Sorbonne University in Paris, has abandoned his former hostility to the IMF and foreign capital, said Crabtree. Instead, he’s maintained the market- friendly policies established by Presidents Alberto Fujimori and Alejandro Toledo.

“Ideologically he has pirouetted around 180 degrees,” Crabtree said.

Fujimori eliminated price controls, floated the currency and sold off hundreds of unprofitable state companies while president from 1990 to 2000. Toledo, his successor, helped secure investments in infrastructure and energy, including Hunt Oil Co.’s $4 billion liquefied natural gas plant.

Popularity Falling

There has been no equivalent under Garcia of the social programs of Brazilian President Luiz Inacio Lula da Silva, which have lifted 30 million people out of poverty since 2003 and helped keep Lula’s approval ratings at a record 76 percent, said Kerner.

Garcia did not respond to requests for an interview and his press office did not comment for this article.

In 2008, the most recent year for which statistics are available, poverty was 36.2 percent in Peru, compared with 25.8 percent in Brazil, according to the United Nations Economic Commission for Latin America.

“This government has not really had a strategy on poverty, which is still very high,” said Pedro Pablo Kuczynski, who was Toledo’s finance minister from 2001 to 2005. “They’ve expanded public works but do very little in rural areas where 60 percent of the poverty is.”

Voters blame Garcia for corruption scandals within his American Popular Revolutionary Alliance, or APRA, such as the sale of public land at discount prices to party members. Only 14 percent of Peruvians think that Garcia was “free from acts of corruption”, according to the Ipsos Apoyo poll.

Humala Factor

Garcia’s failure to win popular backing may jeopardize economic stability and foreign investment by boosting the expected candidacy of Humala, said Kerner. Garcia defeated Humala by 52.5 percent to 47.5 percent in a 2006 runoff.

Humala opposed a free trade deal with the U.S. and threatened to renegotiate contracts with foreign mining companies that include BHP Billiton Ltd. and Anglo American Plc. As an army lieutenant colonel, he led an uprising in 2000 against Fujimori, seizing the mining town of Toquepala. The event ended without bloodshed, and congress later voted to pardon him.

Humala’s backing is strongest among the poor in the rural Andean highlands outside of the capital, where the benefit of economic growth has been scarcely felt, said Crabtree. Whereas in Lima, 15 percent of homes don’t have access to running water and sewage, that number rises to 80 percent in Huancavelica, a neighboring province, according to a UN study in April.

Humala, 46, had the support of 13 percent of those surveyed by Ipsos, tied with Toledo. Lima’s Mayor Luis Castaneda, with 22 percent support, is the frontrunner. He’s followed by Congresswoman Keiko Fujimori, who has vowed to pardon her father, in jail for his role in paramilitary massacres of rebel sympathizers.

Negativist Sentiment

While Humala’s rejection rate probably will prevent him from winning a presidential bid, populist candidates may secure victories in regional elections in southern Peru and that may discourage foreign investments, said Alberto Arregui, who runs the brokerage unit of Compass Group SAFI in Lima.

“There’s a risk in regional elections,” said Arregui in a telephone interview. “On a national level, I see little risk of an extremist candidate winning.”

Any advance by Humala in pre-election polls is likely to lower asset prices and spark capital outflows, Bank of America said in a report last month. Garcia is banned by the constitution from seeking two consecutive terms and his APRA party has not yet selected a candidate.

Only 22 percent of Peruvians say they are satisfied with their democracy, the lowest among 18 countries in Latin America, according to a 2009 survey by Latinobarometro, a Santiago, Chile-based pollster.

“There is a negativist sentiment here that goes back a long time to the frustrations of the military government and then the terrorism,” saidKuczynski in an interview today in Lima. “Polls always show a lower popularity rating.”

Toledo left office in 2006 with a 33 percent approval rating, up from a low of 8 percent in April 2005, according to Ipsos.

“Inequality, poverty, corruption--all those things combine to create this demand for change from wide segments of the electorate,” said Kerner.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net; John Quigley in Lima at jquigley8@bloomberg.net

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