Is he Lula or Chávez? When Ollanta Humala won the run-off election for Peruvian president last month, the stock market fell 12 per cent and the country’s currency, the neuvo sol, dived.
Since then, Mr. Humala has tried hard to convince investors that Peru will not turn into Venezuela after he takes power on Thursday. Soothing words and sensible picks for key cabinet posts and the central bank have restored confidence. The election proved a nice buying opportunity; stocks are up 20 per cent since then and the sol has rallied to a fresh post-crisis high.
But there is a big difference between being president-elect and real power. It will be trick to placate the lunatic fringe of his nationalist party without sacrificing Peru’s enviable fiscal position. Public expenditures are only about 30 per cent of output, a proportion set to rise as Mr. Humala tries to fulfil promises to tackle corruption, poverty, and insecurity. Still, if commodity prices stay high and mining taxes rise, he need have no great problem funding these worthy goals.
But social spending must not explode out of control. Investors should also watch out for changes to the minimum wage, hiring and firing rules, new import tariffs and ad hoc levies on mining profits. And markets would take any sniff that Mr. Humala intends to nationalize anything very badly indeed.
Further, Lulismo may not work as well in Peru as it has in Brazil. President Lula da Silva’s arrival coincided with the start of the commodity boom. Global interest rates were falling. Peru might also be lucky, but these positive macro-forces are surely closer to their end than their beginning. If commodities fall, things could easily turn ugly for Mr. Humala.
According to MSCI equity indices, Peru trades at Latin America’s highest book multiple, with a higher earnings multiple than Brazil’s. Best to wait and see before bidding these numbers higher.