Peruvian myopia

April 16: Peruvian myopia
Edited by Richard Lapper, Latin America Editor
Published: April 16 2006 20:42 Last updated: April 16 2006 20:42

If foreign investors are shocked by the election result in Peru they might want to start questioning the quality of their political advice.

For weeks investment banks and their Peruvian contacts have been blithely assuring clients that Lourdes Flores, the pro-market favourite, was a sure winner in the second round of the contest. But for any observer who occasionally ventured outside the better-off Lima suburbs like San Isidro and Miraflores, it has been obvious for a long time that the 50 per cent of Peruvians earning less than $2 a day were unlikely to vote for a candidate so clearly associated with the interests of Lima-based elites.

Ms Flores may have showed up well in polling last year but her campaign has failed to make any impact outside the capital. The reason is in her choice of running mate and campaign advisers Ms Flores has demonstrated a total lack of political touch. With 10 per cent of the vote still to be counted, many of them from generally more conservative overseas-based voters, Ms Flores could conceivably squeeze into the second round run-off, although it looks a long shot. (Click here for a good analysis of the overseas vote and here for the latest voting figures.)

If she doesn’t make it, it is only a matter of time before Wall Street starts to warm to Alan García, the left-wing former president who looks set to contest the second round against the front-running nationalist Ollanta Humala. Mr García has disowned many of the catastrophic policies which he championed in the 1980s and has said that he favours an economic strategy via a vis Peru’s relationship with the US (although he also says he will renegotiate the recently agreed free trade deal).

In any event, with copper prices going through roof investors will soon be on the look out for reasons to buy Peruvian assets, not least because after all the recent shorting, yields will soon look irresistibly attractive. Andrés Manuel López Obrador, the Mexican front runner, has already been compared to Brazil´s President Luiz Inácio Lula da Silva. Expect Mr García to receive the same treatment. Local investors, as well as any foreigner with a long-term commitment in mining or hydrocarbons, will sensibly remain more sceptical.