Peru: A Lula or a Chávez Premium

Leftwing aspirants need to present pragmatist credentials

Lula or Chávez? Every leftwing aspirant to Latin American high office has to answer the same question. They must convince markets that they are a pragmatist in the mould of Luiz Inácio Lula da Silva, who presided over the economic and market renaissance of Brazil, and not Hugo Chávez, the leftwing populist who appears to be running Venezuela into the ground.

Ollanta Humala, who won Peru’s presidential election unexpectedly on Sunday, is thought plainly to be a Chávez. A 12 per cent fall for the Lima stock exchange makes that clear, while the sol shed 1.3 per cent against the dollar. With such policies as a windfall tax on miners and minimum wage increases, this is understandable.

But Mr Humala has surrounded himself with veterans from Mr Lula’s campaigns, and moderated his rhetoric. He sensibly wants to present himself as a Lula.

Thanks to booming commodities, he inherits a much stronger economy than did Mr Lula in Brazil, growing at almost 10 per cent per year after a brief, shallow recession in 2009. Shares have tripled since the crisis. Debt is 24 per cent of gross domestic product (compared with 37 and 60 per cent in Mexico and Brazil). With core inflation of less than 2 per cent, and foreign reserves of about $45bn, he has a lot to squander, should he wish to do so.

But Peru is increasingly reliant on Brazil, and the benefits of aligning with its huge neighbour are obvious. Markets will keep up the pressure until a Humala economic team is up and working. That might yet create an opportunity, even if Peruvian stocks start from a high base. Since Mr Lula was elected in 2002, Brazilian stocks have outperformed the FTSE-All World index by about 700 per cent in dollar terms. There is money in the market’s misjudgments of Latin American populists.

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