Why Peru's New President Worries Investors

Ollanta Humala, an ex-paratrooper with a radical past, convinced a bare majority of voters that Peru's economy would be safe with him as President. Now he must calm investors. Peru's stock market slid 12 percent on June 6, after Humala edged out the investor-friendly Keiko Fujimori in the June 5 runoff.

Investors are concerned Humala could reverse policies that have attracted $50 billion in investment and fueled average annual growth of 5.7 percent in the past decade. "Humala has to send a signal," says Mauricio Cardenas, director of the Latin America program at the Brookings Institution. "The market is asking for a response. It wants to hear who the finance minister will be."

Omar Chehade, who will serve as one of Humala's two Vice-Presidents, says the future finance minister may be an ally of ex-President Alejandro Toledo, who embraced a pro-market philosophy during his 2001-06 presidency. Kurt Burneo, Toledo's Deputy Finance Minister, and Oscar Dancourt, the central bank president during the Toledo years, are both under consideration. Humala may also keep the current, well-regarded head of the central bank in his job.

Ahead of the runoff, Humala softened a platform that included a proposal to ban gas exports to lower domestic fuel costs. He also downplayed his enthusiasm for the socialist credo of Venezuela's Hugo Chávez, which dogged him during his failed run for President in 2006: Voters in that election also remembered how Humala and some troops seized a foreign-owned copper mine and occupied it for a week in 2000. For his latest campaign, Humala hired two ex-advisers of Luiz Inácio Lula da Silva, who won Brazil's 2002 presidential race by persuading voters that his union past wouldn't result in hard-left policies.

As part of a tour before he takes office, Humala will go to Brazil to see Lula's successor and protégée, Dilma Rousseff, before taking office on July 28. Brazil's economy expanded 7.5 percent last year, while Venezuela's was the last in Latin America to emerge from the global recession. Chávez's nationalization of key industries has led to food shortages that are driving annual inflation in the double digits. "Humala's had enough time to see that Venezuela's economy is a disaster," says Cardenas.

Local investors are more worried than their foreign counterparts that Humala's changes are cosmetic. "Humala may be a moderate, but the people surrounding him aren't," says Pablo Secada, chief economist at the Peruvian Institute of Economics, a research organization. One obstacle to radical change may be Peru's Congress, where Humala's Nationalist Party, founded only six years ago, has just 47 of 130 seats. "Compared with Lula and his people, Humala is a political amateur," says Steven Levitsky, a professor of government at Harvard University.

The bottom line: Peru's new President, Ollanta Humala, needs to reassure investors that he is now a centrist. His choice of finance minister is essential.

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