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May 31, 2011 14:33:28 | in economy

2011 Peru elections: What are the best case scenarios for investors?

peru
Growth in the Lima Stock Exchange over the past year. The dip seen was on Monday, April 11, after Humala and Fujimori passed to the second round of elections. (Image taken from Bloomberg.com)


By Kelly Giem

Unlike most developed countries, Peru’s 2011 election represents a crossroads for the future of Peru’s investment potential and in turn its future economy. At the moment the world knows more about the worst case scenarios and pasts with troubling histories for both candidates than they do the potentials that both parties hold.

Large projects and foreign investments in Peru are at a complete standstill waiting for the election results, projects that were in development have been halted and investors are waiting for clarity.

Unlike any other time in history Peru has a choice of investors to choose from. This advantage puts Peru in the driver’s seat of selecting the investors best capable of being a partner in the overall development of Peru and provides Peru with cheaper money.

So, if both candidates were to execute their proposed plans for Peru in the highest caliber what would be the best possible outcomes:

Ollanta Humala (Gana Peru)

Ollanta Humala Peru
Investors will need a few years to gain confidence in an evential Ollanta Humala administration, writes Kelly Giem. (Photo: Marco Mendoza)
Ollanta Humala represents a turn to the left if elected and has made clear his pledge to follow a socialist movement in the vein of Lula De Silva of Brazil. If this is to be the case, part of Humala’s plan is to change the Peruvian constitution and to renegotiate concession leases, which play a large part of the Peruvian export economy and employment picture.

Anytime dramatic changes are in process, there is a severe lack of willingness to risk capital. Large investment require a long term risk assessment and without a clear foundation the most basic first steps cannot be made. For example, Portugal and Greece are paying 16% on newly issued national debt and that is only with guarantees from the EU, and with clear and proposed plans to assure restructuring of their governments so they’re capable of repaying the loans.

Investors will need a minimum of two to three years before a track record is developed that will develop sufficient confidence to explore investing. Major projects that require a billion or more dollars will wait at least this long. Once financing is in place, it will be another two to three years before any construction or visible action that employs any number of people. Completion and operation on such projects can normally be expected to take another two to three years at minimum.

Also, this is without discussing the added expense of paying for the higher risk profiles that investment money will charge. That translates to more money that exits Peru from the first profitable dollar, rather than staying in Peru.

The unfortunate result is that the vast majority of development needed to continue the trend of lowering unemployment and raising the earning potentials of all Peruvians will not be seen in Ollanta’s first term as president.

But, if Ollanta is able to provide the foundation needed for investor confidence he will prove that Peru is a safe place for money overall in the long run. This would create a profound and dramatic change in the long term view of Peru that no matter who or what party is president, Peru will be a safe to place to do business. This point of view will take five to seven years to become a reality, but it would create a very long term position for Peru in the world’s investment portfolios.

Keiko Fujimori (Fuerza 2011)

Keiko Fujimori Peru.
Keiko Fujimori will keep the status quo for economic policy: expect a surge in investments if she wins, writes Kelly Giem. (Photo: Marco Mendoza)
At this moment, Keiko Fujimori is the candidate that is expected to provide continuity in Peru’s marketplace. She has expressed the desire for Peru to expand upon its current course. This should show immediately in Peru’s with surge from investments and projects that have been on hold during the election cycle.

A large part of Peru’s potential to follow this trend lies in its resources. For example, last month China’s inventory of copper has fallen by half. With the largest inventory and demand for copper in the world, prices will be back on the rise again and Peru’s proposed copper mines are amongst the largest in the world.

Willingness to enter the Peruvian market bodes well for smaller projects and businesses other than the mining and retail sector. The desire to risk capital will open the doors for businesses willing to create something new or unknown in the current marketplace. Expansion of employment outside of the traditional sectors will help broaden and secure sustained growth and develop a new class of jobs.

An unexpected benefit for Keiko Fujimori comes from her father’s administration. While international investors are aware of the problems of corruption in Alberto Fujimori’s governments, they also recognize the economic expansion that resulted in a lot of profit for investors. This creates a demand to participate that will carry the economy past the initial surge after the election.

Very large infrastructure and development projects that were started 15 to 17 years ago have finally reached a point where pre-project engineering and risk assessments have been done. The world’s expanded investment community provides a larger pool of groups and interests that have the ability to invest large sums.

Since these projects are outside of the mining and oil and gas sectors, they’re considered secondary, but vital for supporting an expansion of Peru’s economy. With the western economies on slow growth tracks, Peru has an opportunity to attract capital to secure its future at much more reasonable rates than in the past. This is important to consider when developing infrastructure projects because it allows future users, small business and individuals, access at lower rates.

These projects also are the fundamentals of expansion to a larger overall economy that will carry Peru into a long term growth cycle no longer dependent solely on extraction.

So for Fujimori there will be an expected surge. But if she is not able to deliver the clarity of direction, transparency of process, and consistent stewardship required with continued expansion at the best of international standards, the results could be very painful and frustrating.


Kelly Giem has been developing and implementing investment strategies in Peru since 2004.

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8 Comments

# Peru-N-English Blog says :
1 June, 2011 [ 01:52 ]
Good fact based article. Thank you LiP. I agree with most of this thoughtful piece. If we are to lift the poor out of poverty we need investment to continue in Peru. That means we need a Keiko presidency. The one thing I do question here is the long term stable outlook with Humala. Mr. Kelly Giem says it will take 5 to 7 years. I say if it takes that long it will likely never happen. If you lose the momentum it can take decades to recapture those investments. There will be lots of pain and suffering in that period. Beside the fact that in 5 to 7 years there would be a new president if it took that long. And, many more new questions.
# Chris says :
1 June, 2011 [ 07:48 ]
Maybe it would be better to have an article the worst case scenarios.
# A. Paul Gill says :
1 June, 2011 [ 12:47 ]

How to build an economy 101:

1) Jobs, jobs, jobs, jobs - I know so many hard-working Peruvians with 3 or 4 jobs because they are the qualified ones.

2) Preventative medical care - so much can be accomplished with regular medical check-ups in villages for children and dental care - handing out tooth brushes, floss and teaching people how to use them.

3) Training, training, training - teach people how to do a job, on the job.  Give investors a break to hire people and train them.

4) Education - Learning how to learn - I've had four careers in my life and have been through 4 four companies since our first investment in Peru in 2003.   If you know how to learn, to teach yourself, you need no employer.

5) Attract and keep investment and keep the costs of government within your means as taxpayers to pay.

6) Stamp out corruption, bribes.

7) Respect the judicial - pay judges more so you get better smarter judges and coherent decisions.  Too often, the judges don't know the law and depend on lawyers to give an opinion.

At the end of the day - capital flight is a huge risk.  Money is flowing in.  Why risk Humala when the country will grow with Fujimori?
# Peru-N-English Blog says :
1 June, 2011 [ 04:07 ]
Mr. Gill ignorant poor people understand nothing you said. They also don't understand how interest rates impact them. That's why Humala is still in the race. I want to see Peru continue on the current path that will lift all boats. So I am supporting Keiko. If I was a selfish person I would be supporting Humala. Because it my situation it benefits me to have a falling (Peruvian curency) Sol. With a Humala win the Sol falls and I win, too. But I would rather lose and see Peru advance for the good of all.
# Keiko Humala says :
1 June, 2011 [ 09:33 ]

Surely you jest! Seems the world markets all sold off at the same time because of the Peru elections, not to mention the ability to foresee the future, lol.


There's a presidential election every 5 years, and with it, a future of uncertainty. Even after Garcia screwed Peru and fled to France, only to return and be welcomed with open arms to screw Peru once again, Peru survived. Or did it? Investors & markets will thrive regardless of who is president. The only thing preventing Peru's development, are the greedy & selfish.

Peru's electoral run-off election process is absurd, and costs money that could be used to improve Peru, but most likely it would fill the pockets of the greedy anyway, so why change it. Besides, like all other absurd ways and things in Peru, it's just the way it is, no need for change. Peru will forever remain a doormat unto it's self unless there's a change in behavior & attitude.

# Robert Broughton says :
2 June, 2011 [ 08:00 ]
Kelly, you lost me on the subject of copper.

If, as you say, there's going to be a big demand for copper in the next few years, will that demand suddenly disappear if Humala wins instead of Fujimori? No, I don't think so.

Are you trying to tell us that the consumers of copper will take their demand elsewhere? If so, should Peru (regardless of who wins the election) be a participant in a race to the bottom?
# HECTOR TORRES says :
5 June, 2011 [ 07:41 ]
As Carlos Mariategui said "peruvians are a bunch of hypochondriacs". And we are ; we like to suffer. But what I found on this remote place of the world (Australia) is that; even here we are not united and we look evrything towards our benefit. I could tell by experience that the comments above are true and the main reason this country I am living is prosperous. Forget the chauvinism and be more patriotic by allowing to come external investment to give work to our brothers. We lost many oportunnities before; so please let the them alone. your country man from Australia
# Brian McAdams says :
8 July, 2011 [ 08:18 ]

...now that the election is over, let`s talk about the present time...Humala is here and the reality will unfold itself...for those living in the Cusco area and are wanting to help poor villagers with basic health care, contact me, Brian, at bspirit3@hotmail.com   ...be well all, Brian


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