Peru Ex-Rebel Humala Driving Up Bond-Default Risk Before Presidential Vote
The cost of insuring Peru’s debt against default is jumping to a five-year high relative to neighboring Colombia on concern former renegade army colonel Ollanta Humala will win the presidential vote and expand government control of the economy.
Peruvian five-year credit-default swaps rose 35 basis points since polls released March 20 showed Humala gaining popularity, to 154 yesterday, or 49 more than similar contracts on Colombia, according to CMA. The gap was 1 basis point on March 16, the day Standard & Poor’s raised Colombia’s credit rating to the same BBB- level as Peru, citing President Juan Manuel Santos’s policies that cut crime and lured investment.
Peru and Colombia have benefitted from increased foreign investment in mining and energy in the past decade as they reclaimed areas that were under guerrilla control, resulting in the fastest economic growth for both countries in 20 years. Humala’s rise in polls before this weekend’s first-round vote pushed up Peru’s borrowing costs and sent the sol to the biggest drop among emerging-market currencies since March 20.
“You have a clear direction of policy mix in Colombia going forward, while in Peru you don’t have that,” said Bret Rosen, a Latin America debt strategist with Standard Chartered Bank in New York. “The fear is that Peru will face an important change in the investment climate.”
Gain in Polls
Humala, 48, had 26 percent support in a poll published April 3 by Lima-based researcher Ipsos Apoyo, up from 21 percent a week earlier, putting him in first place among candidates vying to succeed President Alan Garcia for a five-year term. Three candidates were in a virtual tie for second place, according to the Ipsos Apoyo poll.
Humala, chief of Peru’s Nationalist Party and an ally of Venezuelan President Hugo Chavez, was in fourth place in polls a month ago. He also consolidated his lead in polls published in the past week by researchers CPI and Datum Internacional.
While Humala has vowed to renegotiate mining and natural gas contracts with foreign investors as he seeks to make South America’s sixth-largest economy less dependent on outside investment and exports, Colombia’s Santos, 59, has pledged to avoid “changing the rules of the game” for foreign investors, saying in an interview March 31 that he wouldn’t raise mining or oil taxes.
“I want foreign investors to see Colombia as a serious country,” he said.
Colombia lured $6.76 billion of foreign direct investment in 2010 -- of which 73 percent went into oil and mining -- after $7.14 billion in 2009 and a record $10.6 billion in 2008, according to the central bank.
Peru is set to receive $50 billion of mining, energy and infrastructure investments during the next five years, according to the Finance Ministry. Foreign direct investment was $7.32 billion last year and may rise to $8.17 billion in 2011, the central bank estimates.
During the past 10 years, Colombia recorded average economic growth of 4.1 percent, compared with 5.7 percent in Peru.
The extra cost to insure Peru’s debt instead of Colombia’s is at its highest since May 2006. The yield on Peru’s 6.55 percent dollar bonds due March 2037 rose 27 basis points, or 0.27 percentage point, to 6 percent since March 20, according to prices compiled by Bloomberg. The yield on Colombia’s 7.375 percent dollar bonds due in September 2037 has increased 10 basis points over the same period to 5.98 percent.
Peru’s currency, the sol, has declined 1.6 percent since March 20, the worst performance among 25 emerging-market currencies tracked by Bloomberg. The Lima General Index has fallen 6.4 percent in the past month, the fourth worst performance among 90 primary indexes tracked by Bloomberg.
“While everyone had expected this to be a non-event election, we were proven wrong,” said Marjorie Hernandez, a currency strategist at HSBC Holdings Plc in New York. “The market was not positioned that way. Everyone was long Peru everything.”
Keiko Fujimori, a Peruvian congresswoman and daughter of the former president, had 18 percent support in the Ipsos Apoyo poll. Former President Alejandro Toledo had 17 percent, and former Finance Minister Pedro Pablo Kuczynski had 16 percent. The survey of 2,000 people was taken from March 26 to April 1 and had a margin of error of 2.2 percentage points.
A runoff between the two leading candidates will be held on June 5 if no one wins more than 50 percent in the first round of balloting on April 10.
Peru’s Congress approved an amnesty for Humala in 2000 after he seized control of a mining town and led a peaceful revolt to protest the corruption that beset the government of then-President Alberto Fujimori, who later fled into exile.
Cynthya Montes, a spokeswoman for the Nationalist Party, didn’t respond to an e-mailed request for comment.
Even as Humala’s popularity climbs before the first-round of elections, Rosen, Hernandez and Eduardo Suarez, a strategist at RBC Capital Markets in Toronto, all predict Humala will lose in a second-round ballot as voters who dislike Humala will rally around his opponent.
Suarez said in a report March 29 that Humala’s chance of becoming president is about 20 percent, and that recent declines in asset prices are overdone.
“The current sell-off should be seen as a buying opportunity, but timing is key,” he wrote.
Humala, who said during his campaign for president in 2006 that foreign companies were “looting” the country’s resources, said in a televised debate this week that he supports an “open and market economy” and backs investment that creates jobs. He also distanced himself from Chavez, who has nationalized most of the cement industry, imposed price controls and devalued the currency. Humala said March 31 that “the Venezuelan model of government isn’t applicable in Peru.”
A Humala presidency would hurt investors, Hernandez said.
“If Humala comes to power we definitely will see a big shift in policies,” Hernandez said. “I don’t think anyone trusts that this change in strategy ahead of the campaign is really an earnest change.”
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