Now for his note sent out today about an hour and a half ago, which you can see below. Enjoy.
PERU: Risk of major policy shifts under Humala will be low at first, but could grow over time
6 June 2011 04:08 PM EDT
With nationalist candidate Ollanta Humala headed to become Peru's next president on 28 July, there is tremendous uncertainty amongst investors and businesses alike over what his agenda will be. Humala is likely to begin on a positive note. We expect him to signal continuity on fiscal and monetary policy and nominate reasonably well-respected economists to his economic team. Nevertheless, over time Humala will be challenged to manage the trade-offs between his goals of increasing spending and expanding the role of the state in the economy without threatening macroeconomic stability. As a result, we expect the direction of economic policy to deteriorate over the course of his mandate. The sector most immediately at risk is mining. Humala will seek to increase revenues substantially by increasing royalties and instituting a high windfall tax that will affect new and existing projects. Humala will probably try to negotiate changes with companies who have contracts guaranteed by Peru's constitution. The overall dynamics of how the increase is implemented will be a good litmus test of the overall direction of policy during his presidency.
In line with our expectations, official results and private estimates show nationalist-candidate Ollanta Humala appears to be headed to become Peru's next president (see Eurasia Group Note Peru: Humala is likely headed to a narrow victory 1 June 2011). The latest results from the National Office of Electoral processes (ONPE) show that with 94.3% of the vote counted Humala has 51.27% of the valid vote, while center-right candidate Keiko Fujimori has 48.7% of the vote. Quick counts (estimates based on a sample of voting stations), that in the past have proven to be fairly accurate, show Humala ahead with a comfortable margin. According to NGO Transparencia's latest quick count Humala defeated Fujimori 51.37% to 48.53%. A quick count by reputed polling agency Ipsos-Apoyo Humala had 51.4% and Fujimori 48.6%. While Fujimori has not yet conceded, the trends are unlikely to change. Moreover, the difference seems to have been wide enough to avoid any possible dispute or conflict over the results.
The main question now turns to what to expect from Humala after he takes office on 28 July. Our view remains that Humala will likely begin on a positive note, but that policy risks will likely materialize in the medium to long term (see Eurasia Group Outlook Peru: A low risk of radical change under Humala, but policy would likely take a negative turn for investors 5 May 2011). Humala has moderated his discourse throughout the campaign, and there are reasons to believe such a stance extends beyond a pure electoral strategy to help win the election. Humala and his advisors, for example, do seem to be earnestly concerned with containing the negative impact that his election could have on markets and they look to be placing a premium on maintaining economic stability in the short term. . We wouldn't be surprised if Humala announces part of his cabinet and economic team, including appointments to the central bank board of directors, relatively soon. Humala will likely nominate moderate individuals that would assuage market concerns. After the first round, many former President Alejandro Toledo economic advisors' joined the Humala campaign, so Humala has a pool of respected economists to choose from. The next administration will take office on 28 July, but Humala will probably announce appointments to key economic posts within a few weeks.
It's very hard to anticipate who Humala's next Minister of Finance will be, but Kurt Burneo probably has the highest chances of securing the post. He was one of Toledo's economic advisors, was an ex-Central Bank and Ministry of Finance official. He joined Humala's team in the second round, and the fact he has already been giving strong signals of policy continuity today could be seen as an indication of his growing standing vis-à-vis Humala. If he doesn't assume the Ministry of Finance, he could be a candidate to assume a position in the Central Bank (the government will appoint 3 directors plus the president within he first month of office).
The problem for Humala will be to strike a balance between his goals of increasing spending and expanding the role of the state in the economy without threatening macroeconomic stability or generating market uncertainty. Our view is that given the high demand for change among voters (this was a driver of Humala's victory) and Humala's desire to avoid seeing his approval ratings plummet, when faced with difficult trade-offs he would probably lean towards higher spending. It is unlikely that Humala would put broad stability at risk, but he will push the limits on fiscal and even monetary policy. As a result, the direction of economic policy could very well deteriorate over time.
Nevertheless, Peru's good overall macroeconomic fundamentals will give Humala some room to maneuver without significantly altering the policy framework. Moreover, and although we think this should not be overstated, Humala will face institutional constraints, including constitutional limits and a divided congress, that will limit how much he can do.
The sector that would be most immediately at risk would be mining. Humala wants to increase revenue to finance his policy agenda, and has clearly stated his intention of increasing revenue by 4% of GDP (Humala has stated a desire to raise revenue from 14% of GDP to 18%), and mining is the easiest source. As a result, he will most likely seek to increase revenues by increasing royalties and has mentioned his intention of instituting a high windfall tax. This will affect both new and existing projects. Humala will also seek to renegotiate current tax stabilization agreements to boost tax revenues (they represent around 25% of mining production). If he were to encounter difficulty doing this companies would probably face strong pressure to accept tighter terms, but risk of nationalization is low. In fact, how strongly Humala pressures companies and the overall dynamics of how the increase is implemented will be a good litmus test of the overall direction of policy during his presidency.
Erasto Almeida
Analyst, Latin America