Peru’s business community reacted to Ollanta Humala’s election as president in June by dumping mining stocks, triggering the biggest plunge in Lima’s bourse in two decades. Now the one-time ally of Venezuela’s Hugo Chavez may be their best bet for defending $50 billion in mining investment.
The retired army lieutenant colonel, who once vowed to make the state a partner in all natural resource projects, declared a state of emergency on Dec. 4 to quell protests against a $4.8 billion gold mine being developed by Newmont Mining Corp. He brought in a former military instructor Dec. 11 to lead a revamped cabinet just four months after taking office.
“Humala showed guts facing down the protesters and removing dissenting voices from his cabinet,” Patricia Teullet, general manager of exporters association Comexperu, said in a phone interview from Lima. “Before that it was like four horses dragging him in four different directions.”
Humala’s determination to maintain policies that fueled the fastest economic growth in Latin America over the past decade is reassuring, said Pedro Olaechea, president of the Lima-based National Society of Industries. Still, the crackdown on protests may backfire by strengthening anti-mining groups, splintering Humala’s party and alienating his rural base, according to the Washington-based political risk firm Eurasia Group.
The 49-year-old Humala won a June 5 runoff over then-Congresswoman Keiko Fujimori after abandoning anti-capitalist rhetoric used during a failed 2006 presidential bid to build support beyond his rural base. He promised to boost spending on the nation’s 8 million poor, a third of the population, while sustaining investment that helped Peru grow an annual average 6.4 percent over the past decade.
Peru’s stocks rose 10 percent, and bonds also rallied, in the two weeks after he asked central bank President Julio Velarde to remain in his post and appointed a cabinet of economists and businessmen. Fitch Ratings increased Peru’s foreign debt rating to BBB from BBB- on Nov. 10, praising the way Humala negotiated tax increases on mining companies without jeopardizing investment.
The strategy unraveled last month as anti-mining protests by villagers concerned that Denver-based Newmont’s mine will deplete their water resources gained momentum. The two-week-long demonstrations exposed ruptures within the government that led to the resignation of two senior officials that voiced support for the protests. Humala at first said almost nothing about the disturbances and refused to meet with protesters.
Commitment to Orthodoxy
On Dec. 4, Humala delivered his response to the unrest and declared a state of emergency in four provinces, sending troops into Cajamarca to suppress the now-illegal marches. Seven days later he fired 10 ministers, replacing them with technocrats and businessmen led by retired lieutenant colonel Oscar Valdes, who was previously interior minister.
“Humala has shown a strong commitment to orthodox policies with no signal that he would abandon his market-friendly agenda,” Felipe Hernandez, an analyst at RBS Securities Inc. in Stamford, Connecticut, said yesterday in a note to investors.
The economic stakes are high for Peru. Mining accounts for about 18 percent of investment in the country over the past 12 months, compared with 5 percent three years ago, according to Bank of America. Mining companies plan to invest $50 billion in the next decade, the government says.
In the two trading days after Humala overhauled his cabinet, the Lima General Index fell 2 percent, less than the 3 percent decline of the MSCI EM Latin America Index. The currency was little changed versus the Bloomberg JPMorgan Latin American Currency Index’s 1.8 percent drop. The yield on the benchmark sol-denominated bond due August 2020 rose six basis points.
The willingness to use force to subdue protests may harm Humala’s standing with Peruvians who were critical of previous governments’ use of the army to quell unrest. It could also strengthen the opposition, increasing gridlock in Congress where Humala’s Gana Peru party has only 47 of 130 seats, according to Francisco Rodriguez, an economist at Bank of America.
Former President Alejandro Toledo, who leads the third biggest bloc in Congress, withdrew his support for Humala after the cabinet shake-up, citing concerns about the government’s “militarization” when Valdes was appointed cabinet chief. The Peruvian Workers’ General Union, the nation’s biggest labor confederation, accused Humala of pandering to investors and called for a one-day strike in Cajamarca.
“There’s a possibility Humala may be seen as excessively friendly to business, which may carry a high political cost,” Rodriguez said by telephone from New York on Dec. 12. “Without the support of his left and without Toledo, it will be increasingly difficult to push for reforms and maintain this centrist line.”
Investors should reduce their holdings of sol-denominated bonds because of the risk yields will climb if deepening social unrest curbs mining investment and economic growth, Barclays Capital Inc. said in a report today.
One option for Humala is to build an alliance with his former opponent Fujimori, according to Rodriguez. The daughter of former President Alberto Fujimori, who shut down Congress in 1992 to gain a stronger hand in his fight against Marxist rebels, said the cabinet shake-up was “positive” and would eliminate past “contradictions” arising from Humala’s unrealistic goal of trying to build consensus.
Political upheaval and social unrest isn’t unusual in Peru. Former President Alan Garcia changed finance ministers four times during his 2006-2011 presidency.
He also left to Humala more than 200 unresolved social conflicts, many of them land disputes between peasants and mining companies, according to a monthly bulletin of unrest prepared by the government’s Ombudsman office.
Humala himself 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 Fujimori’s government. That’s also given him some unused capital with his base that even the latest crisis is unlikely to extinguish, said Alvaro Vargas Llosa, a senior fellow at the Independent Institute research organization in Washington.
“Most of the business class in Peru supports the president at this point as they understand he’s their best hope of achieving a modicum of social peace in which to invest,” said Vargas Llosa in a phone interview. “He’s the only one who has some credibility with the protestors.”