The Andes’ Reshaped Peaks

Peruvian shares looked to stem losses as President Humala’s popularity fell to less than majority approval prompting another cabinet reshuffle which spared Finance Minister Castilla. Community and worker standoffs at mining projects have sparked violence and operating delays, although the 6 percent GDP growth forecast remains intact to lead the region on good agriculture and construction performance. With inflation within the 4 percent range on food price pullback the central bank eased export credit reserve requirements in July and has continued to selectively intervene to keep the sol within 2.6-2.7 to the dollar. The policy rate was kept at 4.25 percent and foreign ownership of local debt tops the EM universe at almost 60 percent even as external bond positions have recently been underweight. A chief cause for the latter has been preference for adjacent Colombia, pushing EMBI spreads to 150 basis points as FDI in oil and metals soared 25 percent in the first half to $9.5 billion. Resulting currency appreciation has activated a daily $20 million smoothing pool which authorities supplement with regular verbal signals as they reversed monetary course with a 25 basis point benchmark decrease. The shift came as the peso neared the 1,750 mark hurting exporters and slumping consumption brought GDP growth below 5 percent. Financial services expansion may soon slow as well as regulators issue warnings, with Bancolombia ADRs in New York feeling the backlash. With the US free trade pact now in effect, FARC rebels have reappeared with headline attacks on infrastructure and expatriate employees that may foster additional near-term caution, as paramilitary amnesty and fighter demobilization efforts show uneven results. President Santos’s bid for better relations with Venezuelan counterpart Chavez has also stirred controversy as his business and media crackdown endures amid rumors of terminal health heading into October’s election battle with opposition candidate Capriles. He vows to “pulverize” the challenger after receiving consecutive rounds of cancer therapy, as state-dominated television routinely disparages him and the voting commission bars Miami exiles from casting ballots there.

Opinion surveys are roughly split, and the incumbent has resorted again to hefty fiscal stimulus to solidify support with the deficit above 10 percent of GDP. Public debt has more than doubled the past five years as internal and external borrowing is used for pension, housing food and other initiatives to supplement oil proceeds. The government petroleum monopoly PDVSA will issue close to $10 billion in dollar bonds this year to as well satisfy currency demand through the official SITME system. It has started to line up supplemental financing from joint venture partners and Asian development lenders as runaway domestic liquidity, with money supply up over 50 percent, embeds hyperinflation with 5 percent economic growth toward a potential burst of ballot hyperventilation.