June 6, 2011 / 8:25 AM / 8 years ago

Snap analysis: Humala's victory to hit Peru market

LIMA (Reuters) - Left-wing Ollanta Humala was headed for victory in Peru’s presidential election on Sunday, defeating the daughter of jailed ex-president Alberto Fujimori and setting the stage for a market sell-off.

* Peru’s financial markets have ridden a roller-coaster for week on fears that a Humala win could spell trouble. Volatility will likely continue despite his efforts to reassure investors that he would safeguard robust economic growth by keeping inflation low, running a balanced budget and respecting the central bank’s independence.

Analysts expect Peruvian shares and the sol currency to fall on Monday, along with its sovereign bonds and credit default swaps linked to them. Investors worry that Humala could extend the state’s role in the economy and boost public spending on social programs, undermining the boom of the last decade.

* Peruvian officials have urged him to quickly send signals to markets that he will appoint moderates to key economic policy posts so as to limit any sell-offs. Losses could prove short-lived if Humala shows himself to be a moderate leader in the vein of Brazil’s popular former President Luiz Inacio Lula da Silva.

* Since Humala will not have a majority in Congress, his legislative agenda will be hamstrung and he will be forced to make compromises with opposition parties once in office.

His congressional allies will likely form the biggest single bloc in Congress. But they would have trouble pushing through any radical proposals to change the constitution or roll back an economic model based on private enterprise.

* Humala’s win could further hit investment as business leaders wait to get a good look at his policies and governing style before expanding their operations. Finance Minister Ismael Benavides has said the government trimmed its 2011 GDP growth forecast to 6.5 percent from 7.5 percent because election uncertainty had hit investment. [ID:nSAG002870] On Sunday he said the government had a “contingency plan” to inject liquidity into the market in case asset prices tumble.

* The sol depreciated after Humala led the first round of voting on April 10, but then rallied as investor favorite Keiko Fujimori clawed back in polls, and it has been trading within striking distance of three-year highs.

Peruvian stocks lost as much as $14 billion after Humala took the first round before largely recovering. They bounced back as Fujimori closed in, before sinking again as the race tightened to a technical tie this week.

Markets believed Fujimori would have closely adhered to tight fiscal and monetary policies, along with liberal trade policies, that have been in place for the last two decades, many of which her father first implemented.

* Humala has moderated his political discourse since narrowly losing the 2006 presidential election and in the face of more recent criticism. He dropped a proposal to raise the corporate income tax rate on mining firms and vowed to leave $30 billion in private pension funds untouched rather than implementing a mandatory government-run pension system.

But he still talks about vigorously regulating strategic sectors such as mining and oil, and some voters are troubled by his constantly changing message.

* While Humala has a cordial relationship with U.S. diplomats he meets with regularly, he will likely tighten ties with Brazil, which has risen as South America’s new leader. Brazilian companies are major foreign investors in Peru and Brazilian President Dilma Rousseff has had a similar political trajectory to Humala. She now promotes business but was once a leftist guerrilla. Humala wants to position Peru as a strategic Pacific Ocean trade hub between Brazil and China.

Writing by Simon Gardner, editing by Christopher Wilson

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