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What to expect from Peru’s new leftist government

Ismael Noya de la Piedra

On July 28 2011, Peru's newly-elected President Ollanta Humala will take office. This unexpected outcome in the election process resulted in what will be Peru's first leftist democratic government. Perceived as an anti-system candidate with a radical position close to that of Venezuelan President Chavez, it was hard to imagine that Humala could add enough votes to the 31.7% obtained in the first round to end up with over 50% and win the election – particularly when all the other candidates with whom he competed were supporters of the economic model upheld by a majority of the electorate and that had turned Peru into a success story.

Humala was quick in reacting to this after the first round, and immediately softened his position. In the light of the results, he announced a revision of his controversial government plan and came out with a new one intended to calm fears of traumatic changes in the economic model or fiscal prudent management. His message was that there would be an emphasis on more inclusive social policies, but that such policies would be implemented taking care not to affect Peru's growing economy.

In addition to specific promises of his campaign on social measures (25% increase in the minimum wage, pension to people over 65 years old, a more extended subsidy programme for people in extreme poverty, gas price reductions) and the concern about their financing sources and impact in the treasury, other promises that affect investors have raised worries. These are the creation of a tax on excess income of mining companies and the renegotiation of the gas licence contracts of Block 88 for its exclusive dedication to supply the local market. It is still unclear what exactly the new government proposals on each subject will be, though it is certain that they will come soon after the new president takes office.

On the other hand, Humala has promised not to create other taxes, and has said that he expects additional fiscal resources to finance the implementation of his proposals to come from a more efficient fight against corruption and improvements in tax collection. Also, and in addition to positive messages to calm the markets and investors, some moderation factors may be expected from the influence of his supporters, former president Alejandro Toledo and Nobel Prize novelist Mario Vargas Llosa, both well known liberal free market believers.

Also, to sooth the fear of a Chavez resemblance or influence, Humala has constantly declared that he aspires to the Brazilian model instead of Venezuela's and a gist in that direction has been that his first trip abroad was to Brazil to visit both President Rousseff and former president Lula. That sign is also consistent with Peru's geopolitical and economic interests in which Brazil is much more relevant than Venezuela.

In the meantime, the main characters of his economic team still remained undefined. If the right people with market credibility are chosen, that will be a well-taken sign which will help to dilute current uncertainty from investors.

Being a new government with a leftist ideology, there are expectations that state intervention in the economy could materialise in the shape of more regulation on market concentration, merger and antimonopoly controls, consumer protection and antidumping measures to protect local producers. Also, more strict environmental measures, additional participation and influence of communities affected by new projects, as well as labour measures in favour of workers that will increase labour costs are expected.

On the positive side, social inclusive policies handled with care do not necessarily have to alter the macroeconomic framework, and can generate improvements in social peace, helping disarm anti-system political options and also stimulate a friendly incorporation into democracy of the radical left. If the Humala administration passes the test, this will certainly benefit Peru through the long-term stabilisation of its economic model.

Ismael Noya de la Piedra

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