Jamestown Trends + Views Peru - 20130722


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Jamestown Trends + Views Peru - 20130722

  1. 1. EXECUTIVE SUMMARY Peru’s economic performance over the last decade has been the best in the region, yet the political backdrop continues to provide investors with some surprises. •  Dominating local media headlines of late is the possibility that First Lady Nadine Heredia could be a candidate for the Presidency in 2016 •  Due in part to a slowing economy, and perception that the First Couple wishes to perpetuate itself in power, support for President Ollanta Humala has slipped •  Meanwhile Humala announced he would not pardon former President Alberto Fujimori, adding to the intrigue surrounding the jailed ex-leader of Peru •  Candidates are already trying to position themselves for the next elections, even though they are three years away POPULATION: 29.8 million 2012TOTAL GDP: $200 billion (global ranking: 49) GDP PER CAPITA: $10,719 (based on purchasing power parity, global ranking: 83) 2012 GDP GROWTH RATE: 6.3% 2012 UNEMPLOYMENT: 5.6% 2012 INFLATION: 2.7% PEN / USD: 2.78 COUNTRY SNAPSHOT Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS JAMESTOWN LATIN AMERICA Real Estate Private Equity www.jamestown-latam.com Contact: Bret Rosen – Managing Director, Research +1 212-652-2141 brosen@jamestown-latam.com Rio de Janeiro • Bogotá • Atlanta • New York
  2. 2. Peru’s Politics: Always Entertaining but Economy Should Stay the Course Open up the leading newspaper on a Monday morning in Lima, and one could mistakenly assume that Peru is a country in the midst of a crisis.The political headlines could indeed create cause for alarm. The two prior Presidents are fending off corruption charges. Another ex-President is trying to secure his release from prison, where he has been situated for four years due to widespread corruption in his government and grave human rights violations. The current President is the targetofvariouscriticismsfromthebusinesscommunity, as he is accused of perhaps moving in the direction of more state intervention in the economy. Meanwhile, the First Lady is expected by many to run for President in 2016, even though currently the Constitution (according to most observers) prevents this from occurring. Many Peruvians are wary that the President and First Lady may want to arrange a political dynasty in the country not unlike the alternation of power that has occurred with the Kirchners in Argentina. Is this the same country that has been Latin America’s economic star over the last decade? Is this the same Peru whose economy is growing over 6 percent, whose poverty rate has halved in the last decade, whose levels of investment have reached record highs? Indeed the political backdrop in Peru has always been described as somewhat dysfunctional. This may seem to be inconsistent with the excellent economic performance over the last decade and indeed the local economy seems to grow in spite of its political backdrop. Unfortunately political institutions have not matured in the same way that the economy has and Congress is regularly criticized for its malfunctions. In fact, a recent poll from Peruvian research firm CPI shows that approval for Congress’ performance stands at 17 percent.1 Meanwhile, political parties are weak if not non-existent. The major political actors are constantly positioning themselves for the next election rather than focusing on developing parties, political frameworks for governing and so on. Indeed, the Peruvian political system revolves around individuals – not institutions – which creates an inherent weakness to the system. Some of this dysfunction is to be expected of a country whose history of democracy is quite short. Civilian government was only restored in 1979, and the government of Alberto Fujimori, from 1990- 2000, did little to advance democratic institutions. Indeed, in 2000 Fujimori resigned from office, shortly after winning a third term in office; he faxed in his resignation from his self-imposed exile in Japan, to avoid bribery charges that surrounded his reelection. One can thus argue that Peru has truly advanced in a democratic fashion only since 2001, when Alejandro Toledo was elected to the Presidency. Consequently, it may take years for Peru’s democracy to ‘catch-up’ with its other Latin American peers, such as Chile, in terms of development of political parties, formation of a deeper political class, and greater transparency in general within the political system. Nonetheless, the key point on which to focus is that while politics will make headlines, real estate investors should understand that there is little risk of a move away from market friendly economic policies. The current administration of President Ollanta Humala assumed office in 2011, under much concern that he would advance a more radical, leftist economic plan. Indeed, Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS 1 CPI, “Ultima encuesta de opinion publica a nivel Peru urbano.” May 2013. PAGE 2TRENDS + VIEWS JUNE 17, 2013 Despite the best growth in the region in recent years, political institutions have yet to mature
  3. 3. the first day after Humala edged out Keiko Fujimori in the second round of the 2011 elections, thus securing the Presidency, the local stock index collapsed, falling over 12 percent as investors feared that Humala could move forward with a heterodox agenda.2 While his campaign advocated relatively pragmatic policies, investors recalled his earlier pronouncements in this campaign and in the 2006 contest, when he tended to veer toward a more socialist-leaning speech. Yet, President Humala has surprised many investors with an approach that has been more orthodox than expected. He appointed responsible technocrats to head the Ministry of Economy and the Central Bank. Fiscal policy remains relatively disciplined and in fact the country posted a 2 percent/GDP surplus last year. Social programs have been increased but not in a fiscally irresponsible fashion. The Central Bank remains independent. State intervention in the economy is less than in many other emerging markets. As a result, after an initial hiccup, once Humala assumed office, business confidence recovered, investment spending rebounded, and the economy has continued to post the best growth rates in the region. In our view there is a consensus among most of the major political actors in favor of policies that encourage investment, economic growth, free flow of capital and free trade. Humala realized that to successfully govern, he could not move in the direction of the “Gran Transformacion (the Great Transformation)” that many had feared.3 To implement the social reforms his administration sought requires tax revenues to increase, which can only occur with economic growth and an acceptable investment climate. More radical solutions are still advocated by some, but such candidates tend to fail to attract a national consensus and even Humala was a viable candidate for office only when he seemed to move more in the direction of a Lula rather than a Hugo Chavez. The Main Topics In Peruvian Politics: Already an Eye on 2016 Elections Politics will indeed continue to make headlines, and can illicit volatility in financial markets. Investor and business confidence, in the short-term, can still be impacted by political developments. There are several swirling issues at the moment, which dominated our discussions with analysts in our most recent visit to the country.The main topic on everyone’s mind in Lima currently is the possibility of the ‘reeleccion conyugal,’ which refers to the possibility that First Lady Nadine Heredia may seek election for the Presidency in 2016.4 This would require a Constitutional reform (though some dispute this notion), but with Humala’s popularity in the 40-50 percent range, considered high for a Peruvian President, and Heredia’s even higher, many observers believe there is a grand plan to allow the First Lady to gain eligibility for the 2016 vote.5 For Nadine Heredia to be eligible to run for the presidential office in 2016, most observers suggest that some combination of Congress, the electoral board and a Constitutional Court will have to amend the Constitution.There is some disagreement regarding this topic, as the head of Peru’s National Elections Board recently stated that the Constitution does not bar Heredia from running.6 The prohibition PAGE 3TRENDS + VIEWS JUNE 17, 2013 2 Bloomberg. 3 The GranTransformacion refers to Humala’s initial communications which suggested that he intended to move Peru away from a market-oriented economy and toward a more redistributive system. 4 Reuters: ”Peru’s dynamic First Lady has presidential aura,” February 20, 2013. http://www.reuters.com/article/2013/02/20/us-peru-heredia-idUSBRE91J19J20130220 5 After 21 months in office, Humala’s popularity according to CPI’s nationwide survey stands at 49 percent. At similar points during their terms, prior Presidents AlejandroToledo and Alan Garcia had support levels of 16 and 32 percent respectively. In fact at one point duringToledo’s term, Peru’s GDP growth was higher than his popularity rating. Hence, support in the 40-50 percent range for Humala is uncharacteristically high for a Peruvian President, especially in a backdrop where the population generally has a high level of rejection for politicians. 6 http://www.peruviantimes.com/23/national-elections-board-constitution-doesnt-bar-first-lady-from-running-for-president-in-2016/17532/ President Humala’s economy policy mix has been generally a responsible one Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS
  4. 4. on the First Lady’s potential candidacy is based on a law that apparently prevents a family member of the President from succeeding him in office, but the legal framework is confusing to some political observers. The potential candidacy of Nadine Heredia is a very controversial topic within the country. According to a poll from local firm Datum, by a margin of 55-39 percent, the population is against her candidacy.7 Many believe it is distracting the administration from focusing on the economy, reducing poverty and income inequality, etc. Additionally, Peruvians tend to be wary of political dynasties, especially after Alberto Fujimori used constitutionally questionable means to perpetuate his stay in office. According to the same Datum survey, 69 percent of respondents believe that if Nadine Heredia is a candidate that it would represent a ‘sensation of reelection’ for Humala. Six months prior this response rate stood at 52 percent, which shows an elevated concern about this topic. Furthermore, 55 percent say the political aspirations of Nadine Heredia harm Humala’s image. Clearly, should the Presidential couple advance with this idea of making Nadine Heredia eligible for the nation’s highest office, political capital will have to be spent, and the country will be quite divided on the topic. Regardless of whether Heredia is a candidate or not, many political analysts suggest that her role in the current government has been outsized relative to the supposed responsibilities of a President’s wife. A recent poll by Datum reveals that 40 percent of respondents believe it is her that ‘governs the country,’ versus 32 percent for Humala, while 24 percent said they govern jointly. The aforementioned CPI survey tabbed her support at 59 percent, down from 68 percent in November 2012, with the population more critical of her perceived role within the administration. Anecdotally numerous observers refer to her as involved in important political decisions and appointments, even though she does not hold elected office. There have also been accusations that public funds have been used to further her image, and that the unofficial campaign has already begun, as Heredia criss- crosses the country. The same Datum polls shows that over 2/3 of respondents believe that public resources are being utilized to further her potential candidacy. Meanwhile the recent declines in Humala’s popularity are partially a function of perceptions that he is using the Presidency to further his wife’s political aspirations. Datum puts his approval rate at 47 percent, down from 60 percent in April. CPI put his support at 49 percent (from 54 percent in May), while Ipsos/Apoyo divulged on June 16 that Humala’s favorability rating is just 41 percent, down 10 percent in two months.8 Some weaker economic activity in the early part of 2013 certainly 7 Encuesta Nacional de Datum, appears in June 6th edition of Peruvian daily, “Gestion.” 8 http://www.cronicaviva.com.pe/index.php/politica/2-politica/69905--ipsos-apoyo-aprobacion-de-humala-cae-5-puntos-en-junio PAGE 4TRENDS + VIEWS JUNE 17, 2013 Yes No Don’t Know 0 10 20 30 40 50 60 70 80 CHART 1: WOULD A CANDIDACY OF NADINE HEREDIA REPRESENT A SENSE OF RE-ELECTION IN PERU? (%) Source: Datum December 2012 February 2013 April 2013 June 2013 Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS While the next election is three years away, the mere possibility that the First Lady could position herself to run is a major focus of the national media
  5. 5. contributed to this decline. But in the eyes of many observers, the perception that the Presidential couple is working behind the scenes to stain potential political opponents while also positioning Nadine for a run in 2016 also is hurting his popularity. With the vote still a full three years away, this talk about succession serves as fodder for local press but also represents a distraction both for the government and local investors. Time will tell if Nadine Heredia can run for office but we wouldn’t expect any clarity on this issue for at least 18 months, which will cast a further cloud on the overall backdrop. The‘reeleccionconyugal’isnottheonlysubjectweighing on Humala’s Presidency. There is also substantial dissatisfaction within the private sector about the direction of his term in office, and these feelings have been escalating. In particular, businessmen believe that the government has been particularly clumsy in terms of promoting large investment and infrastructure projects, which would theoretically increase the country’s potential GDP. Firms that are trying to execute large investments in the country face increased bottlenecks, ranging from zoning approvals, environmental licenses and overall bureaucratic inefficiencies that obstruct projects from advancing. The government hopes to improve accountability in these areas but time will tell if it can deliver; this topic is especially crucial in a country where numerous large capital-intensive investments are facing delays, in areas such as transportation, energy and mining. A number of separate measures and announcements also strained relations with the private sector, and this trend came to a head with the government’s supposed interest in pushing PetroPeru, the state energy company, to purchase the Spanish energy giant Repsol’s assets in the country.9 In late April, Humala and others in the government expressed that the government would evaluate this possibility, which incited a sharp reaction from business leaders and a sell-off in the Peruvian sol. The apparent intentions led to fears that Humala could be returning to his more socialist roots, and might opt to pursue a more statist agenda in terms of economic policy. Business confidence indicators immediately took a sharp fall but after Humala met with the Repsol CEO, any potential plans to move forward with the acquisition of these assets were shelved.10 From the perspective of many observers, the damage was done: the Humala administration had once again planted the seed that it could veer to the left and given the roots of his movement, it takes very little from this President to send a shiver through the minds of business leaders in the country. However, investor confidence is gradually recovering after this episode, April GDP was an impressive 7.7 percent year on year, and most observers agree that the government may have realized 9 FinancialTimes, Beyond Brics. “Beefing up PetroPeru…with Repsol?” April 30, 2013. http://blogs.ft.com/beyond-brics/2013/04/30/beefing-up-petroperu-with-repsol/#axzz2WUJLgWvh 10 Note that in 2012, the Argentine government nationalized Repsol’s assets in that country.The Humala government was not evaluating a hostile seizure of Repsol assets in Peru, in contrast to what occurred last year in Argentina. By stepping away from a deal involving Repsol, Humala further distanced himself from the economic policies of the more left-leaning governments in the region. PAGE 5TRENDS + VIEWS JUNE 17, 2013 April May June 30 35 40 45 50 55 60 65 70 CHART 2: PRESIDENT HUMALA’S APPROVAL RATINGS (%) Source: CPI, Ipsos-Apoyo, Datum. June information from CPI not yet available. CPI Ipsos-Apoyo Datum Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS Business confidence improving after fears in April about a move toward greater state involvement in economy
  6. 6. that any signs it could be shifting the policy agenda will be met with harsh reactions from the so-called “Lima Consensus,” a group of business leaders, media, economists and analysts that advocate the benefits of a more free-market approach.11 The Fujimori Soap Opera Another hot political topic in the country revolves around the former President Alberto Fujimori, who remains locked up in a Lima jail, for corruption and human rights abuses that occurred during his time in office. Recently, Humala denied an appeal for a pardon for the ailing Fujimori, who suffers from mouth cancer but the Fujimori camp, led by the runner-up in the 2011 Presidential election, and Alberto’s daughter, Keiko Fujimori, continues to pressure the government to give in on this subject.12 Indeed, 60 percent of the population according to the aforementioned CPI poll is supportive of a pardon for Fujimori and the press maintains an obsession with this topic, perhaps a reflection of the impact, both positive and negative that the former President had on Peru. Fujimori was most responsible for eradicating inflation in Peru which helped put the country on the path to economic stability while his hardline against the Shining Path movement was vital to ridding the country of an ongoing terrorist campaign. However he is a polarizing figure, due to the various crimes that occurred during his government and his dictatorial tendencies. Meanwhile, Keiko Fujimori remains a leading political figure in Peru, and is a likely candidate for the Presidential office again in 2016. Her campaign clearly advocates a pardon for her father and those that vote for her are almost unanimously admirers of Alberto Fujimori’s government. Some observers believe that if Humala were to eventually release Alberto Fujimori this could clip the wings of any Keiko candidacy, as her main reason for seeking the country’s highest office could perhaps disappear. However other observers believe that if Alberto Fujimori was freed, he could, should his health recover, once again become a major player in Peruvian politics, and hence it would not benefit Humala to pardon him. Regardless, this topic is bound to be one that does not disappear any time soon. The Lineup for 2016 Perhaps Peruvians are obsessed with elections, and polls, as we are already seeing research firms asking the population who they would support in the 2016 Presidential campaign, even though Humala is not even 40 percent through his five year term. The other likely main players are familiar names. Aside from Keiko Fujimori and potentially Nadine Heredia, ex-Presidents Alejandro Toledo and Alan Garcia are mentioned as likely candidates. Both however have seen their images take a beating in local press, for various corruption 11 http://www.larepublica.pe/columnistas/aproximaciones/el-consenso-de-lima-11-05-2013 12 http://www.bbc.co.uk/news/world-latin-america-22823488 PAGE 6TRENDS + VIEWS JUNE 17, 2013 The fate of former President Alberto Fujimori continues to captivate the population ECONOMIC STABILITY 21% SOCIAL PROGRAMS 19% FOCUS ON SOCIAL INCLUSION 16% DOESN’T FULFILL PROMISES 41% SECURITY ISSUES IN PERU 21% POOR ADMINISTRATION 14% TABLE 1: MAIN REASONS FOR APPROVAL OFTHE HUMALA GOVERNMENT… TABLE 2: AND FOR DISAPPROVAL… Source: CPI Source: CPI Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS
  7. 7. allegations that have come to light. Also hurting Garcia’s image are press reports stating that in his just completed administration, from 2006-2011, he pardoned over 5,000 individuals, hundreds of whom were alleged drug traffickers. Garcia and his supporters deny the allegations.13 Toledo’s rejection rate is even higher than Garcia based on some real estate deals that the former President supposedly benefited from. But in Peruvian politics, the leading names tend to have ‘nine lives,’ and many observers believe that Garcia can be very competitive again in 2016, as he seeks the Presidency for the third time. Others believe that these stories have all hit the national media as the government tries to discredit potential rivals for Nadine Heredia. Pedro Pablo Kucyznski (PPK) is another important player. PPK finished third behind Humala and Keiko Fujimori in the first round of the 2011 election, after posting an impressive rally in voter support in the final weeks of the campaign. He could battle it out for support of the center-right and urban middle class with Garcia, Toledo and others. Political analysts also mention the threat of an anti-establishment candidate perhaps gaining support, especially after the Humala government has been a disappointment to many in his political base, the impoverished class primarily in the rural areas who expected greater benefits from his administration. Gregorio Santos, regional president of Cajamarca province, and an active leader of protests against large mining projects in his area, is mentioned as one potential candidate.14 Very preliminary polls, according to CPI, showed that Keiko Fujimori leads in intentions to vote, with 26 percent, followed by Nadine Heredia at 21 percent and PPK with 14 percent. If Heredia is removed from the list, Keiko Fujimori tops the list with 32 percent. However we would refrain from viewingKeikoFujimori as a front-runner as the Fujimoristas have a hard core support based of 25-30 percent but a very high rejection rating that likely prevents her from soaring much higher in the polls. More relevant figures are the approval ratings of the leading names, as published by the previously cited Datum poll, which shows that Heredia has a higher approval rating than any major politician in Peru. AlejandroToledo has an approval rating of just 19 percent, versus 74 percent disapproval, respectively, with Keiko Fujimori at 38-52%, Alan Garcia 23-68% and PPK 32-45%. In our view, if the elections were to be held tomorrow, Heredia would have to be considered a favorite against any of the aforementioned, especially as she would be the sole candidate to occupy the left- center segment of the spectrum. Concluding thoughts Peruvian politics never fail to entertain, but the economy seems to advance nonetheless. Going forward the 13 http://www.insightcrime.org/news-briefs/ex-peru-president-pardoned-400-drug-traffickers 14 Santos and his supporters were able to halt further advances at Minas Conga, the largest foreign direct investment project in the history of Peru. They focused on the environmental impact to the rural communities in the area of where the mine is supposed to be developed. PAGE 7TRENDS + VIEWS JUNE 17, 2013 Nadine Heredia 0 5 10 15 20 25 30 Keiko Fujimori Pedro Pablo Kuczynski Lourdes Flores Alejandro Toledo Alan Garcia CHART 3: INITIAL INTENTIONSTO VOTE FOR PRESIDENTIAL ELECTION (%) Source: CPI Voting Intentions Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS At this early stage, Keiko Fujimori and Nadine Heredia lead in voting intentions
  8. 8. Humala government faces many challenges, though of late, it appears to be ‘saying the right things.’ Specifically, the administration must strike the proper balance between large natural resources projects, especially related to mining, and their impacts on local communities. While a host of large copper and gold mines are moving forward with their capital expenditures, others have been halted, due to protests from primarily indigenous communities. These groups fear the environmental impact of these investments, but perhaps more importantly feel they are not sharing in the wealth generated from large-scale mines. The government has at times treaded awkwardly on this subject. Efficiency of public investment must improve. Business confidence after the events of the last couple months will hopefully rise again. Perceptions of dysfunction within the administration should be reversed. Many analysts expect to see Cabinet changes in the months ahead. The Datum poll revealed a number of interesting statistics about public perceptions of Humala. Only 5 percent of those questioned believe that the business community has ‘total confidence’ in the President. 58 percent of respondents do not believe the President when he stated that he is in favor of private investment. Clearly there remain important doubts in the eyes of some about Humala’s stance vis-à-vis market economics, even after two years in office, and the Repsol episode did little to help these perceptions.Yet, when one looks at the economic performance of Peru: growth of over 6 percent per year, inflation of 2.5 percent, a fiscal surplus, an independent central bank and record inflows of foreign direct investment, it is hard to argue that this government is looking to undermine the private sector, words that should comfort institutional real estate investors in the country. PAGE 8TRENDS + VIEWS JUNE 17, 2013 Peru’s Politics: Always Entertaining – June 2013 TRENDS + VIEWS