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Ollanta Humala, JP Morgan and a report

Want to know what Ollanta Humala of Peru’s Nationalist Party plans for the country if elected President next year? Here’s a copy of a JP Morgan publication that reports on JPM’s meeting with Ollanta late last week. I hear this report is causing a bit of a stir in certain Peru circles, by the way. so much so that certain members of Peru’s academia have been trying to make out that it’s a false report on a meeting that never happened. Well dudes, you’re wrong. The report is real, the meeting occurred and make sure you wipe that huevo from your cara before leaving the house this morning. Enjoy.

Peru: Key takeaways from a meeting with presidential candidate Ollanta Humala

Ollanta Humala tried to clear some of the anti-market perceptions that investors had about his political project dating back to the 2006 elections.? Today we met with Ollanta Humala, one of Peru’s leading candidates for the April 2011 presidential race, during his visit to New York to speak to the investor community at an event organized by the Peruvian-American Association. His key message was that Peru’s high growth needs to be better balanced with social development, which is still lagging despite the country’s improved macroeconomic indicators, adding that securing “social peace” would enhance growth prospects and reduce operational costs for the private sector. He also tried to clarify his stance on the treatment of foreign investment, his willingness to respect private property, and his proximity with other Latin American presidents, all of which had raised concern among investors about his true policy intentions during the 2006 presidential campaign.

Overall, while details of specific policy proposals were generally lacking, many investors took his remarks as suggesting a low probability of a sharp policy U-turn or a shift to economic populism in Peru. Humala made general remarks about his intention to pursue conservative economic policies; to limit the fiscal deficit to no more than 2% of GDP; to maintain central bank independence and its inflation target of 2%; to keep a level of international reserves equivalent to at least 18 months of imports; further promote the development of the domestic capital market in PEN to reduce the dollarization index from 55% to 40%; facilitate the access of SMEs to capital markets using guarantees under discussion with the World Bank and IADB; and seek to increase FDI from US$7-9 billion to US$11-12 billion over the next five years. He also stressed the need to reduce Peru’s huge infrastructure deficit estimated at US$35 billion, particularly in the highlands and jungle areas, which along with the improved provision of education and healthcare could help Peru increase manufacturing of goods with higher value added and reduce its reliance on commodity extraction and exports. When asked about the issue of FX appreciation, he said that he did not believe in capital controls because they had already been tried in Peru in the 1980s and they had led to too many distortions. Instead, he would advocate measures to reduce production costs of exporters.

Some of the lingering questions among investors were related to how the proposed increase in government spending would be financed and the tax treatment of mining companies. Humala stressed the need to increase the share of government spending in the economy, which currently stands below 16% of GDP, in order to improve the presence of the state across the whole country, improve the quantity and quality of public services, and develop the infrastructure–in public-private partnerships whenever possible. However, beyond efforts to reduce tax evasion, it was not clear how his government would manage to increase spending without increasing the fiscal deficit. When asked whether he would increase taxes on mining companies, he said that he would honor existing contracts but would seek to discuss new terms for new investments. He also stressed that he would not pursue nationalizations, but would seek to induce companies operating in primary sectors–particularly oil and gas–to link extraction with more value added activities like petrochemicals, so that Peru could export energy instead of just the raw materials. What follows are Humala’s key remarks.

Introductory comments:
Humala reminded investors that he won the first round of the 2006 presidential election and that eventually he lost the second round to current President Garcia by only two percentage points.

Despite the published early opinion polls showing him in fourth place (behind Lima’s mayor Castañeda, Congresswoman Keiko Fujimori, and ex-president Toledo), he is confident about his prospects for the April 2011 election. He noted that he only formed his political movement (Nationalist Party of Peru) in 2005, so his success in 2006 came despite not having an established party with wide political and economic backing. This time around, he feels his political party is more consolidated and should be more of an asset. Humala made the analogy of Peru as a store where sales were increasing but the infrastructure was insufficient to achieve higher economies of scale. At the nationwide level, he sees a US$35billion infrastructure gap. His proposal is to address this gap with public-private partnerships.


On Peru’s structural vulnerabilities:

Humala and his team cited Peru’s still poor statistics on extreme poverty, lack of basic services, and poor record on education, despite the very high growth over the past decade.

He mentioned that the would promote a goal of 6%-of-GDP spending in education, and noted that the problem is not the resources budgeted for this purpose as much as poor execution in spending. Separately, he commented that Peru remains overly depended on commodity extraction and commodity prices and as such, too exposed to Chinese demand for commodities (as the marginal price driver). This relates back to the infrastructure demands and the need to promote more sustainable and domestically oriented development.

On the role of the state:
The goal is to reduce Peru’s dependence on commodity extraction and international commodity prices, and to increase the value added of domestic production. He wants to foster an educational revolution, especially for the most needy. The state needs to extend its reach across the country not just the coast. The other candidates have discussed reducing the size of the state and increasing its efficiency. His proposal, on the other hand, is for the state to be the primary driver of development, with the market playing an important but not a dominant role.

The state needs to be the actor promoting equilibrium between the economy, society and politics–these things should not be left to the whims of the market. Peru’s private investors pay the price for social conflict, which comes when the state does not adequately play its role as mediator. They intend to reduce social conflict by promoting direct dialogue with social groups.

On preserving macroeconomic stability, they advocated:

  • Maintaining BCRP’s independence
  • No capital controls
  • Limiting the fiscal deficit to 1-2% of GDP
  • Deepening local capital markets in PEN
  • Commitment to low inflation Honoring and servicing the public debt

Regarding energy sector, tourism, FDI and free trade: 
Overall, they identify needs/opportunities for US$80-100 billion of FDI in the coming years; they expect US$25 billion of FDI in the mining sector alone in the next 5 years. They concede they would study windfall taxes in the commodity sectors, looking at the experiences of Chile and Australia.

In general, they think the laws regarding commodity extraction are “too liberal” and they would review them in order to give increased prioritization to national benefits over export revenues. In the north, they see development of heavy crude oil production that could in 3-4 years double output to around 300kbd, which would make Peru self-sufficient.

Regarding natural gas, Peru can more than double output to 20 TCF over eight years, but the priority would not be to export it all, but rather to produce electricity and petrochemical products. They hope to export cement to Bolivia and Chile.

Tourism has great growth potential; they hope to increase employment in this sector from 800K to 1.5 million people by developing both the traditional Inca-related tourism of the south as well as further developing beach areas in the north. US$4-5 billion is needed to develop tourism.

Promoting investment in all of these areas is consistent with their overall program, since growth will increase tax collection and allow more and better investment in social development. Regarding how they will finance public investment and infrastructure, they see PEN84 billion of possible increased revenues from curbing tax evasion, which they will try to go after (though they concede some of this is very hard to actually collect). Humala initially opposed FTA with the US because they didn’t know the intention of the agreement. They think that FTA is a misnomer, since trade is not free but conditional. They think the FTA agreement only benefits the formal sector; they would like to better protect those working in the informal sector that cannot compete by fostering their formalization, and also to defend local producers against improper trade actions like dumping.

Regarding the Chavez / Correa comparisons:
They would have anationalistic Peruvian government, not modeled on any other country’s experiences. “We will look at Peru in the context of its own possibilities and problems.” There is no ready-made remedy for Peru based on another country’s policy mix.

Specifically, he doesn’t support indefinite re-election or capital controls, and he supports an independent central bank–drawing a contrast with Venezuela. He firmly stated Peru would honor contracts and external debt, and rejected the notion he was ever an advocate of reneging on debt. He mentioned that external debt is no longer a problem for Peru, and cited the country’s US$40 billion in international reserves.

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