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Peru’s Stocks, Bonds Fall as Humala Faces Fujimori in Runoff

Peru’s benchmark stock index fell to a three-week low and dollar bonds tumbled on concern former renegade army colonel Ollanta Humala will win a presidential runoff in June and expand government control of the economy.

The Lima General index sank 3.1 percent, extending its drop this year to 12 percent and making it the world’s second-worst performer after Egypt among 90 indexes tracked by Bloomberg. Peru’s dollar bonds due in 2025 dropped, sending yields up 3 basis points to 5.43 percent, Bloomberg data showed. The sol weakened 0.1 percent to 2.8025 per dollar.

Humala, a one-time ally of Hugo Chavez who has distanced himself from Venezuela’s president, won 31.2 percent of the first-round vote yesterday with 85 percent of ballots counted. Congresswoman Keiko Fujimori, daughter of the imprisoned former president Alberto Fujimori, finished second with 23.2 percent. The candidates have equal odds of winning the next round, Alejandro Arreaza, an analyst at Barclays Plc, said in a report.

“Humala’s chances of becoming Peru’s next president are now higher than what the market is pricing,” Arreaza said in the report. “Voters seem to be looking for a candidate who represents change rather than continuity. In this sense, the more moderate sounding Humala has become more attractive to voters in the center.”

Barclays suggests selling the sol and buying credit default swaps to bet that the country’s credit quality will deteriorate.

The cost of protecting Peru’s debt against non-payment for five years with credit-default swaps rose 5 basis points to 135 today, according to data compiled by CMA in New York.

Market Losses

The Andean nation’s stocks, bonds and currency tumbled over the past month as Humala’s surge in opinion polls raised concern that his presidency may jeopardize $50 billion of mining, energy and infrastructure investment. Humala, 48, has proposed raising royalty fees on mining and gas production and drawing up a new constitution. He also pledged to renegotiate a free-trade deal with the U.S. signed by President Alan Garcia.

“It’s difficult to get away from the thought that Humala is more left-winged than anyone else in the election,” Jeremy Brewin, who helps oversee about $3 billion of emerging-market assets at Aviva in London, said in an interview. “He perhaps leans more towards re-negotiating the things that we got used to. I am sure we are not the only people who are structurally underweight Peru.”

Former Finance Minister Pedro Pablo Kuczynski came in third yesterday with 19.4 percent support, while ex-President Alejandro Toledo won 15.2 percent.

Economic Growth

Peru, the world’s second-largest producer of copper, grew 8.8 percent last year. The government expects the investment in the mining industry and in infrastructure will help fuel 6.5 percent economic growth over the next five years.

Maple Energy Plc, the oil and natural gas producer with operations in Peru, fell 7.4 percent in Lima. Empresa Siderurgica del Peru SAA, a unit of Gerdau SA, Latin America’s largest steelmaker, retreated 4 percent.

Chilean stocks with exposure to Peru also declined.

Parque Arauco SA, a department store operator, sank 1 percent in Santiago, while Ripley Corp SA, another retailer, fell 0.3 percent. Ripley gets almost 30 percent of revenue from Peruvian operations, while Parque Arauco gets more than 15 percent, Chilean financial services firm Banco Penta said.

Both Humala and Fujimori are polarizing figures in Peru, though each has strong support in the Andean highlands where poverty affects 77 percent of the population in some areas.

Army Uprising

Like Chavez, who as a paratrooper led a failed coup, Humala in 2000 led 50 soldiers who seized and occupied for a week one of Phoenix-based Southern Copper Corp.’s mines to protest corruption that beset Fujimori’s government. His brother, Antauro Humala, is serving a 25-year prison sentence for killing four policemen during the takeover of the southern highland town of Andahuaylas in 2005, in an attempt to force Toledo to resign.

Humala has downplayed his ties to Chavez and is muting the anti-capitalist rhetoric used in 2006. Humala won the first round of balloting in 2006 with 31 percent only to lose by five percentage points to Garcia in a runoff.

Last night, at a victory rally in Lima, Humala vowed to seek national unity as president, telling supporters that “Peru wants change without shocks to bring about a big redistribution of the country’s wealth.”

Fujimori, 35, surrounded herself by her father’s former aides including running mate Jaime Yoshiyama, who served as his Minister of the Presidency. The jailed Fujimori is credited by supporters with laying the foundations of Peru’s economic boom by slashing inflation from 7,650 percent to 3.5 percent.

25 Years

He also closed Congress in 1992 and saw his grip on power tumble after his intelligence chief, Vladimiro Montesinos, was caught on videotape in 2000 bribing opposition lawmakers.

In 2009, after returning from exile, Fujimori was convicted and sentenced to 25 years in prison for ordering a paramilitary squad to kill a group of suspected Marxist rebel sympathizers.

Keiko Fujimori was elected to Congress in 2006 with more votes than any other candidate. She met her American husband, Mark Villanella, while obtaining an MBA at Columbia University in New York.

Last night, she thanked her father and tried to reassure Peruvians there will be no return to authoritarian rule.

“We must look to the future, not to the past,” she said as supporters chanted “Chino, Chino, Chino,” her father’s popular nickname. “We’re going to work with absolute respect for democracy, the rule of law, freedom of expression and the press.”

Fujimori Support

While a Fujimori presidency may revive the trauma of her father’s decade-long rule, the losing candidates are likely to rally behind her before the June 5 runoff vote to prevent Humala from jeopardizing the fastest economic growth in Latin America over the past five years, said Michael Shifter, president of the Inter-American Dialogue.

“She’s not a real recipe for stability, but given the choice, there will be more resistance from the business community to Humala,” said Shifter, who hosted Humala at an event in Washington last year.

Peru’s sol has declined 1.2 percent against the U.S. dollar since March 20, when Humala began gaining in the polls, making it the worst performer among 25 emerging-market currencies tracked by Bloomberg.

“The uncertainty ahead of the runoff will lead to some further selloff of Peruvian assets,” said Kevin Daly, who helps manage $6 billion in emerging market funds at Aberdeen Asset Management Plc in London.

Garcia’s Record

Garcia, 61, whose five-year mandate expires July 28, is banned by Peru’s constitution from seeking re-election. During his term, Peru created 2.5 million jobs and had its first-ever investment-grade ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

Whoever is elected president may face gridlock in Congress. Humala’s Nationalist Party won about 39 of the 130 seats in Peru’s unicameral legislature, compared with 31 for Fujimori’s “2011 Force” and 23 for Toledo’s “Possible Peru” movement, according to exit polls.

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