Peru's Presidential Runoff

The outcome in Peru's presidential runoff may hinge on whether voters fear Hugo Chávez more than they dislike their former President Alberto Fujimori. The runoff, on June 5, pits Ollanta Humala, an admirer of the Venezuelan strongman, against Keiko Fujimori, a daughter of the President who ruled Peru from 1990 to 2000 and now sits in a Lima jail after being convicted in 2009 of directing a death squad.

Many voters feel they must choose the "lesser of two evils," says Enrique Alvarez, head of Latin America fixed-income at researcher IDEAglobal in New York. Some Peruvians worry that Humala will boost state control of the economy and squander the country's recent economic progress. His rival, meanwhile, evokes for many voters the traumas associated with Fujimori's administration, members of which have been convicted of human rights abuses, embezzlement, and graft. Although Humala faces opposition from Peru's growing middle class, "Keiko generates so many antibodies in Peruvian society that it's possible Humala could win," says Alvarez.

In the first round of voting, on Apr. 10, Humala won 31.7 percent to Fujimori's 23.5 percent. An Apr. 16-21 poll by Lima researcher Ipsos Apoyo shows 42 percent of voters backing Humala, vs. 36 percent for Fujimori.

Humala, 48, has softened the anti-capitalist rhetoric of his unsuccessful run for President in 2006. He says he won't jeopardize investment that drove 7.2 percent average annual economic growth over the last five years, the fastest of any major Latin American economy. (The fastest overall, Panama, grew an average of 8.1 percent.) Last fall, he even donned a suit and tie—a change from the red T-shirts he favored in his last campaign—for meetings with U.S. investors. He is, though, proposing higher royalty fees on mining and gas production and the renegotiation of a free-trade agreement with the U.S., signed by outgoing President Alan García, that Humala says favors multinationals. He also wants to abandon the neoliberal constitution imposed by Fujimori in 1993 in favor of a new one that gives Peruvian investors preference over foreigners and grants the government a stronger role in planning the economy.

While voters may give Humala the benefit of the doubt, investors are more skeptical. Since the first-round election, the Lima Stock Exchange has dropped 16 percent and the Peruvian sol has fallen 1.1 percent against the U.S. dollar, the worst performance among 25 emerging-market currencies tracked by Bloomberg. Investor fears of a Humala victory and closer ties with Chávez "add up to less investment and a hindrance for the economy," says César Pérez-Novoa, managing director for strategy and economics at brokerage Celfin Capital in Santiago.

Nostalgia for Alberto Fujimori's role in defeating Maoist guerrillas and laying the foundations for Peru's economic boom by slashing inflation from 7,650 percent to 3.5 percent helped his daughter reach the second round. To allay concerns that at age 35 she lacks experience, Fujimori has surrounded herself with former officials of her father's government. Her team includes José Chlimper, a former Agriculture Minister and a director of the central bank since 2006. This has reassured investors that a Fujimori administration would be "pretty market-friendly," says Bret Rosen, a Latin America debt strategist at Standard Chartered Bank in New York.

Still, few have forgotten the scandals and brutality of her father's rule. After returning from exile, the former President was sentenced to 25 years in prison for ordering a paramilitary squad to kill suspected rebel sympathizers. His daughter said on Apr. 18 that she won't pardon her father, though in 2008 she indicated she wouldn't hesitate to free him if she became President. García, whose five-year term ends in July, says a pardon for Fujimori isn't on his agenda.

With Peru's solid economy and the Shining Path rebels largely disbanded, voters are less inclined to back an authoritarian candidate. So to win, Fujimori must distance herself more clearly from her father's policies, says Pablo Secada, chief economist at the Peruvian Economic Institute, a Lima-based researcher. "Keiko won't have a blank check like her father, when the country had the Shining Path and hyperinflation," says Secada.

The bottom line: Peru's markets have tumbled as voters appear to favor the leftist Ollanta Humala over a daughter of former President Alberto Fujimori.

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