Peru’s PPKO Feint Maneuver

Peruvian shares rocketed 35 percent as the top MSCI performer despite signaled downgrade to the frontier roster with only three listings traded, as Pedro Pablo Kucyzynski,  a former Finance Minister and private equity executive, won the presidency by a hair over longtime opinion favorite Fujimori. The contest was not focused on economic policy as both candidates promoted continued discipline and free-market approaches, although PPK’s business elite credentials were attacked and he countered with a detailed anti-poverty platform. The decisive factor raised in the campaign’s final days seemed to be the strongman legacy of Fujimori’s father and his supporters, as corruption and money laundering allegations were directed at leaders of the Popular Force party, which secured parliamentary control and can foil the President’s plans. Fujimori was also neck and neck with past competitors who were disqualified by the election commission, setting off protests. PPK has indicated he may release former President Fujimori, serving a 25-year jail sentence for ordering assassinations, on age and health grounds provided the pardon applied to a broad prisoner category. Q1 growth was 4.5 percent with construction and manufacturing down, but mining, telecoms and financial services powering ahead to buttress domestic consumption and investment. Copper output jumped 50 percent, with a half dozen project expansions and launches sustaining FDI despite lower global prices. Inflation at 3.5 percent is above the central bank range, partially due to currency depreciation at 15 percent against the dollar last year, with further monetary tightening on course. Non-commodity exports have responded to cut the projected current account deficit below 4 percent of GDP this year, and the budget gap is also manageable at just 1 percent. Government debt is less than 25 percent of national income and international reserves at $60 billion cover almost two years imports. More than 20 percent of the population remains poor according to the UN, and the incoming administration’s mantra will be “inclusive growth” in a concerted effort to defuse income inequality and rural community tensions, advisers emphasize including likely Finance Minister Thorne, a former Wall Street economist.

Colombia racked up a 15 percent gain despite weak 2.5 percent Q1 growth due to oil and mining drags and El Nino-induced drought. Food price spikes and peso depreciation caused 8 percent inflation in May, with the central bank hiking the benchmark rate to 7.25 percent. The current account deficit is stuck around 6 percent of GDP with FDI off one-quarter on the commodity slump. The fiscal gap is nearing the 3.5 percent of GDP statutory ceiling as a tax reform bill awaits congressional action. Ratings agencies have warned that the outlook may go negative without debt stabilization within their investment-grade assignment. Another risk damaging business and consumer confidence is the proposed peace settlement with guerilla rebels after an initial March deadline passed. It will be put to a referendum, and demobilization spending may be financed by a special wealth levy, just as the military ramp-up to defeat the FARC and ELN was in the early 2000s. Officials also rely on another phase of the US Plan Colombia aid program to restore rural public services, but the free trade agreement has provoked clashes that may deal expansion a knockout blow, according to donor agencies involved in the conflict.