On paper, Peru’s assets would be the envy of any emerging economy: vast mineral resources, a disciplined monetary and fiscal policy, and convenient access to Asian markets. All of these factors have helped the country achieve a stable economic growth rate of 7% over the past five years, arguably the best such situation in the 190 years since it gained independence.

And yet, there are many obstacles that need to be overcome to secure a steady inflow of foreign investment. When Ollanta Humala won the presidential race in June, his biggest task was widely deemed to be sustaining Peru’s economic growth. The bulk of Mr Humala’s support came from poor and underprivileged backgrounds, drawn by the “social justice” and “eradication of poverty” that he promised repeatedly in his campaign. Concerns were raised over whether his focus on satisfying these voters would come at the expense of maintaining the country's impressive economic performance.

Advertisement

Bumpy journey

Mr Humala himself has come a long way in terms of his political thinking, from supporting the idea of nationalising mining and gas-extracting companies and being endorsed by Venezuela's left-wing president, Hugo Chávez, to promoting sustainable growth and quoting the more centralist former Brazilian president Luiz Inácio Lula da Silva as a source of inspiration. But regardless of which South American politician he cites as his biggest influence, Mr Humala will have to fight hard to reconcile the interests of investors and his supporters.

Up until now, Mr Humala’s career has been all about fighting. As an army officer, he was involved in the internal battle against the Maoist insurgent guerrilla organisation Shining Path and the brief Cenepa War against Ecuador in 1995. In 2000, he led an unsuccessful uprising against the discredited former Peruvian leader Alberto Fujimori.

But Mr Humala has found that the biggest impediment to his political career has come from within his own family. During his first presidential campaign in 2006, Mr Humala not only had to fight against his brother Antauro’s accusations that he was involved in torture while a military commander in the 1990s, but also run against another brother, Ulises. Mr Humala has also had to urge his parents to refrain from any media contact after his father declared his support for the amnesty for members of Shining Path and the Marxist group Túpac Amaru Revolutionary Movement, and his mother stated that all homosexuals should be shot. Taking such hits during the campaign, it is little wonder that Mr Humala lost the first round of elections in 2006.

After losing to Alan Garcia in 2006 in a run-off, Mr Humala still could not escape the family scandals, with brother Antauro being sentenced to 25 years in prison after a failed military coup. And earlier this year his brother Alexis ventured to Moscow to participate in high-level talks with Russian officials as a self-proclaimed special envoy to the president. Although Mr Humala suspended his brother from his party, his popularity plummeted significantly even before he was able to take the presidential oath.

Voter expectations

There is no doubt that Mr Humala is a natural-born fighter, as he proved by overcoming the obstacles that stood in the way to putting on the presidential sash. Now settled in the presidential palace, he will have to make an extra effort to control not only his family, but also the whole country. This task will demand a great deal of political manoeuvring.

To meet voter expectations, Mr Humala has already announced an increase in the minimum wage to $273, starting in 2012, and introduced a new pension plan. He is also working on introducing a new windfall tax levied against the mining industry in a move that is expected to reap the country an additional $1bn in annual revenues.

After outlining his social programme, Mr Humala confirmed his pro-investment approach by appointing cabinet officials with a liberal, market-friendly approach. Luis Miguel Castillo, Peru's former vice-minister of finance, was appointed as the minister of economy, while the widely praised head of the central reserve bank, Julio Velarde, had his tenure extended for another term. This move has been the strongest signal so far as to which direction Peru will follow during Mr Humala’s five-year term.

“So far Mr Humala has greatly exceeded expectations and has pushed for economic policy continuity. While we expect increased social spending and some fiscal slippage as a result, we are encouraged by the early and favourable decisions and actions taken by the new Peruvian president,” says Eric Anderson, chief investment officer at ING Latin America Equity.

Mr Anderson says, however, that it is still too early to say whether Mr Humala’s investor-friendly approach will continue. “I suspect that his resolve will be tested in a crisis situation such as a big drop in commodity prices or an environment in which foreign capital and investment dry up, putting pressure on growth.” 

Community buy-in

Mr Humala’s ability to balance the interests of his constituents and at the same time meet the expectations of foreign investors will soon be put to the test. Ex-president Alan Garcia, although immensely successful in terms of improving Peru’s economy, had a tendency to negotiate contracts with foreign investors first and secure support from local communities later.

This approach can and will result in clashes in the future, especially when questions are raised about a project’s environmental impact and what the benefits will be for local residents, for example with mining projects. One of the most striking examples of this has been seen in the Puno region in southern Peru. Violent clashes between anti-mining protesters and police resulted in the repeal of the mining concession of Canadian mining corporation Bear Creek.

A similar decision was taken in April when clashes occurred at Southern Copper’s $1bn Tia Maria project near the city of Arequipa. Both conflicts occurred at the end of Mr Garcia’s presidency and Mr Humala could diplomatically state that all mining projects needed to be supported by the local residents, but that consent should not be revoked once obtained. The question now is how will Mr Humala handle such crises himself.

Developing potential

Since the end of 1990s, Peru has made huge steps towards creating an investment-friendly environment. “The economic potential of Peru started to be developed thanks to the presidential policy of lowering tariffs, signing free-trade agreements and actively inviting foreign and domestic companies to invest in Peru,” says Peruvian political commentator Jaime de Althaus.

Mr Humala has inherited stable economic growth, a clear tax regime and significant investments in not only the mining sector, but also retail and construction. However, in terms of foreign capital inflows, mining projects are in the lead. According to fDiMarket research, in the period from 2003 to 2010, one in every five enterprises in Peru was connected with extraction.

The commodities boom not only fills the country’s coffers, but also creates a foundation for developing other sectors and making sure that Peru can be truly one of the strongest economies in Latin America. Mr Humala inherited the country in a very good economic position, but not free from turbulence. Finding a way to reconcile investors and local communities, pushing for developments in other sectors and fulfilling promises of greater social justice may be a daunting task, but if Mr Humala succeeds he will not only secure himself another term in the office, but also ensure Peru’s strong standing in the region.