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A postcard from pre-election Lima

Please find below the article published in IKN627 this weekend regarding the Peru elections. Polling and the campaign, effects on the economy with an emphasis on mining, plus some personal views:

Peru election polling and commentary

Today Sunday is the last Big Event day in the Peru election campaign, with this morning the final raft of voter intention surveys from the known pollsters, then this evening (I have had an eye on it while finishing this edition), the final  head-to-head Presidential debate, coming from the Southern city of Arequipa.  First, we update our poll tracking chart and show its evolution:

This weekend’s message from the collective of pollsters is “It’s getting tighter, but Pedro Castillo retains his lead.” We again underscore the general unreliability of Peru polls, but as we now have three recent results from Peru’s flagship pollster IPSOS, let’s separate them out. Above is the total of emitted votes, when “valid votes” are polled here are the results:

  • IPSOS poll May 14th: Pedro Castillo 51.1%, Keiko Fujimori 48.9%
  • IPSOS poll May 21st: Pedro Castillo 52.6%, Keiko Fujimori 47.4%
  • IPSOS poll May 28th: Pedro Castillo 51.1%, Keiko Fujimori 48.9%

This chart (below) updates last week’s “Datum Only” data with their 6th and final poll, same story. The newspaper carrying the IPSOS results, the right wing El Comercio, frames today’s numbers as “Keiko tightening the gap” but when we consider the three IPSOS polls as a group, the relative fluctuations are well inside any statistical margin of error and the image is of one that backs up the overriding influence in this second round, that of the “Keiko Antivote”.

This desk repeats, any other candidate against Castillo in Round Two and this whole election would be far lesser influence on the prices of mining stocks.

This evening’s debate has been framed as decisive by those who believe the polls and their “it’s getting closer” message. The polished political image and delivery of Keiko Fujimori isn’t going to be personally challenged by the less experienced (and less pugnacious when speaking) Castillo, so there’s little doubt who the newspapers and media channels will say “won the debate” today. However, the low expectations of Castillo make his job easier and in real terms, all he has to do is keep his message on policy and the Plan of Government that has evolved around his candidacy during round two. We knew he would move to the centre to capture votes and he has done so, e.g. removing references to Marxism in his plan and insisting on his democratic values. Or this (9), one of the left wing economists from the Verónika Mendoza party who latched onto Castillo, looking for the FinMin job. Pedro Francke reassures Peru that, “We don’t want to nationalize the mining industry.” It was all too easy to predict, the toning down talk of swathing nationalizations has morphed into Perú Libre (PL) focus on specific cases, such as guaranteed water supply as a human right, or vague (and almost certainly unworkable) plans to nationalize the current private pension funds system.

As for economic effects on Peru, there would be many under the change of direction proposed by Castillo and most of them bad news. However, we now set aside the political and economic effects of other areas and turn to our focus subject of mining. In an interview in September 2020, the head of Moody’s defended his entity’s decision not to change Peru’s credit rating to a negative outlook in light of the worsening political backdrop at the time, which ended with dead protesters and an interim President, you may recall. At that time, Moody’s “gave the benefit of the doubt” to Peru, which means this week’s decision to lower Peru to A3 with a negative outlook (10) shouldn’t come as any surprise. As an illustration, Moody’s outlined the situations at Volcan (BVL: VOLCABC1) and Buenaventura (BVN), who planned to emit U$499m and U$550m in debt this year in order to continue their business plans. Those are already delayed, the risk premium they’ll need to pay after a Castillo win may see wholesale changes in future plans (assuming there are still willing lenders, that is). Moody’s highlights issues for the mining industry in particular, now almost certain to bear the brunt of fiscal changes no matter which candidate wins, but surely worse under Castillo. Along with immediate tax hikes, they see changes possible for mining in concessioning and ownership rules, higher royalties, delayed projects, higher operating costs and lower profitability. In other words, no surprises to readers of these pages and while on the point, I’m sure you too have heard warning shots from mining CEOs exposed to Peru, telling the world they have long-term fiscal stability agreements and any new tax is illegal (and will be contested). That’s fair enough, ladies and gents, but those same companies will still have to make provisions in their financial statements while disputes continue so, like it or not, any new laws or rule changes in Peru shows on your company balance sheet.

As for next weekend and the vote, polls may have it close but there’s no mistaking the sense of pessimism on the streets of Lima and among the political chattering class, most sense polls skewed toward Keiko and “la realidad sera otra” next Sunday. My personal opinion hasn’t budged an inch and while I’ll be watching the debate tonight for reasons to change my mind, it all becomes moot by the next edition of The IKN Weekly, anyway. [EDIT: The debate went much as expected].

There is a growing argument (10) that even under a Castillo government, there won’t be much room for meaningful change and the country’s Congress will act as a counterweight. We hear of “real limitations” and how “Covid-19 will slow any reform”, particularly Castillo’s doubled-down push for a Constitutional reform (a la Chile), which the Whore Left have promoted strongly. That sounds fine in theory, but this desk doesn’t buy it that easily. For one, recall that behind this potential President is no ordinary political party, these are self-named, self-confessed and proud Communists who adhere to Marx and with a political doctrine I personally pigeonhole as “Latino-Maoist with Catholicism”, they will not think twice about closing down Congress and ruling by executive decree. Or at least attempting to, until the violence begins.

Finally, we must mention the potential trade in mining companies next week being fully aware that, by guiding this readership toward a Castillo win, if Keiko upsets the odds next weekend every single mining company exposed to Peru is going to fly higher without me. That’s my call and risk, however I will re-state that no matter who wins next Sunday, Peru will remain a sell. This is not the same as the situation in Ecuador, where two distinct ideologies squared off and the right wing won out, as Lasso is a far more palatable person than Keiko Fujimori. This isn’t lost on 87% of Peruvians and yes, I agree that Castillo win will be an economic disaster, but under Keiko the divisions that made Castillo and have seen the Left rise will only get worse. Be careful what you wish for, it may come true.

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