Humala Replaces 10 Ministers After Mine Protests Shake Peru

Peruvian President Ollanta Humala swore in 10 new ministers led by a former army officer as he seeks to take a firmer stance on protests that halted the nation’s biggest investment project.

Humala named Oscar Valdes cabinet chief to replace Salomon Lerner, who unexpectedly quit after the four-month-old government declared a state of emergency Dec. 4 to suppress protests against Newmont Mining Corp (NEM)’s $4.8 billion Minas Conga mine expansion. Lerner, a former businessman, led the government’s unsuccessful bid to negotiate an end to a month of sometimes violent marches by peasants against the gold and copper project.

Some government allies including former President Alejandro Toledo expressed concern that the appointment of Valdes, a former army lieutenant colonel like Humala, could signal a shift to an anti-democratic, hard-line approach to brewing social unrest. While Humala’s commitment to pro-business policies looks intact for now, investors should brace themselves for more political uncertainty, said Kathryn Rooney Vera, an emerging markets analyst at Bulltick Capital Markets in Miami.

“This is going to cause some volatility,” Rooney Vera said in a phone interview. “Being one of the shortest-lived cabinets in Peru’s history doesn’t help market confidence.”

Spread Widens

The extra yield investors demand to own Peruvian government bonds instead of U.S. Treasuries rose three basis points, or 0.03 percentage point, to 213 at 9:47 a.m. in New York, matching an increase in spreads in the region, according to JPMorgan Chase & Co. Peru’s spread was 154 basis points a year ago.

The Lima General Index of stocks retreated 0.6 percent compared with the MSCI EM Latin America Index’s 2.6 percent drop. The sol weakened 0.2 percent to 2.70 per U.S. dollar, according to Deutsche Bank AG’s local unit. The Bloomberg JPMorgan Latin American Currency Index lost 1.2 percent.

Humala took office in July vowing to boost spending on the third of Peruvians that live in poverty without jeopardizing $50 billion in mining investments expected over the next decade. Lerner, a former trade negotiator and Humala’s campaign manager, had been a key part of that strategy, convincing foreign mining companies to go along with a windfall tax on profits approved by Congress in September.

Cabinet Shuffle

Humala retained in their posts independents including Finance Minister Miguel Castilla and Foreign Trade Minister Jose Silva. Jorge Merino, previously head of mining at the government’s private investment promotion agency, was named mines & energy minister.

“This is a cabinet of managers and specialists that aims to combine economic growth with social inclusion,” Valdes said in an interview with Lima-based Panorama television after being sworn in yesterday. Valdes said he’ll seek to impose discipline in his 19-member cabinet, which he described as “more coherent” than the last one.

Lerner gave few reasons for his abrupt departure. An early backer of Humala, when the candidate was still shunned by most investors for his past support of Venezuela’s Hugo Chavez, he said in his resignation letter that his departure would allow the government to begin “a new phase” and execute its policies with a freer hand.

Mine Occupation

Humala in 2000 led 50 soldiers who seized and occupied for a week a mine owned by Phoenix-based Southern Copper Corp. to protest corruption in the government of then-President Alberto Fujimori. He defeated then Congresswoman Keiko Fujimori in a June runoff that Nobel Prize-winning novelist Mario Vargas Llosa likened to the choice between two forms of terminal cancer, given the authoritarian tendencies associated with Humala and the decade-long rule of Fujimori’s father.

Valdes, 62, is also a former lieutenant colonel who taught Humala at a Lima military academy. He turned to business after leaving the army in 1991 and ran milk, flour and pasta companies in Peru’s southern Tacna region, where he served as president of the local chamber of commerce. He served as Humala’s Interior Minister until yesterday’s reshuffle.

Valdes’ appointment suggests the government “will be less willing to negotiate with rural communities, and quicker to use authoritarian tactics to break up what is a growing number of protests,” said Cesar Perez-Novoa, a managing director at Celfin Capital in Santiago. A policy of less dialogue “may not necessarily mean success,” he wrote a note to investors today.

Southern Copper, Anglo American Plc and Bear Creek Mining Corp. have all suspended work on mining projects in the Peruvian Andes as a result of demonstrations by farmers concerned that their water supplies could be polluted. Denver-based Newmont, the world’s largest gold producer, said it halted work at Minas Conga to help the government re-establish peace.

Hurting Growth

The protests risk curtailing economic growth in the world’s third-largest copper and sixth-largest gold producer by an average 2.9 percentage points next year and in 2013, Bank of America Corp. said in a Dec. 7 report. Mining accounts for about 18 percent of investment in Peru over the past 12 months, compared with 5 percent three years ago, the bank said.

“It’s a more orderly, consensual and moderate cabinet,” Maher Saba, co-portfolio manager at Compass Group Safi, said by telephone from Lima. “The clearest indication that it’s a moderate cabinet is finance minister Castilla. The fact he stayed is hugely important.”

Peru’s economy, the sixth-largest in South America, is expected to grow 6.7 percent this year before expansion slows to between 5 percent and 6 percent in 2012, according to Castilla. The economy grew 8.8 percent in 2010.

‘Fiscal Foundations’

“We’ve managed to maintain the fiscal foundations, which is why the country is attractive to investors,” Castilla said yesterday in an interview with Lima-based America Television. “We have to stay on this path. There is significant inequality that needs to be fought but we need foreign or domestic investment to keep flowing to keep the economy growing, create jobs and reduce poverty.”

Peru’s Lima General Index (IGBVL) has fallen 15 percent this year compared with an 18 percent drop in Brazil’s Bovespa index and Colombia’s IGBC index.

Toledo, who allied himself with Humala during the election, said yesterday he withdrew representatives of his Peru Posible party from the cabinet, including Labor Minister Rudecindo Vega and Defense Minister Daniel Mora, in protest at the “militarization” of the government.

Strong Tactics

While Humala’s pro-business stance remains intact, he risks losing support from members of his party that have expressed support for the protesters, Bank of America said. Alvaro Vargas Llosa, the son of the novelist, said he expects Humala to keep using strong arm tactics if the protests resurface, even if that risks boosting the role of the military and weakening civilian institutions.

“Humala has been taken aback by the scale and strength of the protests, so he wants order,” Vargas Llosa, who is a senior fellow at the Independent Institute research organization in Washington, said in an e-mail. “He has come to the conclusion that only Valdes will give him that, and that people like Lerner, who may have good intentions, cannot handle the situation effectively through negotiations.”

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net; John Quigley in Lima at jquigley8@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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