FACTBOX-Key political risks to watch in Peru

LIMA, April 11 Mon Apr 11, 2011 11:57am EDT

LIMA, April 11 (Reuters) - A tight presidential election, drug violence, strikes by miners and environmental disputes are all points to watch in Peru -- one of the world's fastest-growing economies.

HUMALA WINS FIRST ROUND

Left-wing nationalist Ollanta Humala won the first round of Peru's presidential election on Sunday and looks set to face right-wing lawmaker Keiko Fujimori in what could prove a tight run-off on June 5, official results showed. [ID:nN11271691]

With 76.5 percent of Sunday's ballots counted, officials said Humala won 29.9 percent of the vote, followed by Fujimori with 23.03 percent. She was just ahead of former Wall Street banker Pedro Pablo Kuczynski at 20.55 percent. [ID:nN11267668]

Two months of uncertainty will follow Sunday's first-round vote, weighing on asset prices that have been dented since Humala surged ahead of three rivals backed by big business in one of the world's fastest-growing economies.

Polls show Humala, 48, and Fujimori, 35, in a virtual tie in the run-off and political analysts expect a bruising and polarized campaign between the two leading candidates with the highest rejection ratings.

Fujimori could benefit from a sizable party infrastructure left behind by her father, former president Alberto Fujimori. But her candidacy may be hurt by memories Peruvians have of her father, now in jail after being forced from office under a cloud of corruption and human rights scandals.

Humala overtook his rivals in the closing weeks of the campaign as he softened his leftist tone, framing himself as a moderate in the mold of former Brazilian President Luiz Lula Inacio da Silver rather than Venezuela's Socialist leader, Hugo Chavez, his former political mentor.

He has promised to honor Peru's many free-trade pacts, respect the central bank's independence if elected, and be fiscally prudent.

However, local financial markets have been volatile in recent days on fears he would tighten state control over the economy that would hurt foreign investment, especially in the country's vast mining sector. .IGRAPEN=PE

To fund social programs, both Fujimori and Humala favor higher taxes on miners that are enjoying windfall profits thanks to high global commodities prices.

Despite a decade-long economic boom, a third of Peruvians live in poverty and Humala tapped into demands for more even distribution of wealth.

Both he and Fujimori have a strong support base among poorer voters in rural areas, meaning the run-off could depend on who manages to garner more middle-class and urban votes. [ID:nN10295432]

Neither Humala nor Fujimori's party will have a majority in Congress, limiting their scope for more drastic reforms.

Orthodox economic policies, which Fujimori supports, have been in place in Peru for nearly two decades, helping the nation achieve investment-grade ratings. [ID:nN23249523]

What to watch for:

-- Repeated pledges by Humala to maintain the pillars of current economic policy could help him build credibility on Wall Street and appeal to more centrist voters

-- Crucial endorsements for either Humala or Fujimori from losing candidates

-- A run-off that becomes divisive along lines of class, region or ethnicity in a country with indigenous roots

SOCIAL CONFLICT

Social conflicts over natural resources have been a key issue in the presidential race, as poor Peruvians demand a bigger share of the windfall from a commodities boom. [ID:nN23113586]

The national ombudsman's office says more than 100 communities have joined forces to stop big mining or energy projects. It has blamed the government for failing to mediate effectively in conflicts that pit poor towns in the Andes mountains or Amazon forest against foreign companies. [ID:nN19447160]

Hundreds of millions of dollars in capital spending have faced delays. Peru's government ruled that a Southern Copper environmental impact study was inadmissible, putting the brakes on the company's $1 billion Tia Maria project that has been the focus of violent protests by local residents. [ID:nN08157212]

President Alan Garcia's push to lure foreign investors to build new mines in Peru has angered environmental and indigenous groups, which are becoming increasingly assertive. Deadly clashes broke out several times last year and there is little evidence that tensions are easing.

In November, the government said it would ask a special U.N. agency to help prepare and evaluate environmental impact studies for large and complex projects that generate conflict.

More recently, some members of Congress have backed a bill that would lift royalties for mining companies, though industry officials say it will likely fail after the election is over.

What to watch for:

-- Strikes that could halt mineral or natural gas exports

-- Stance of eventual winner of presidential election

-- Violence that prompts Garcia to lose support in Congress or pull bills that he has backed

-- The U.N. agency could help calm divisions and generate more credibility for big mining projects

DRUGS TRADE, SHINING PATH REBELS

Garcia has struggled to capture a remnant band of left-wing Shining Path rebels who run drugs in a violent region rife with cocaine known as the VRAE, the most densely planted coca region in the world.

At least 50 soldiers or anti-drug police have been killed in the VRAE or other jungle areas controlled by Shining Path in the last two years.

More deaths or clashes could prompt the next president to overhaul anti-drug policies as the United Nations says Peru has surpassed Colombia as the No. 1 coca leaf producer.

Possible corruption in Peru's army and political system could also be hindering the drugs war, according to a U.S. embassy cables released by WikiLeaks that Peruvian officials have denied.

The drugs trade and the Shining Path are widely considered to be Peru's main domestic security challenge, though the group's Maoist leaders were captured in the early 1990s after waging a brutal war against the state. [ID:nN15111638]

Garcia has said the United States must boost anti-drug aid to Peru, which receives far less than Colombia.

What to watch for:

-- Arrests of key leaders of the insurgency

-- Position of eventual winner of presidential election

-- Any serious attacks against the army that undermine its ability to win control of the region (Editing by Helen Popper)

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