Peru Sees Limited Downside to Election

Analysts and investors see a limit to downside for Peruvian assets as voters sent Ollanta Humala and one of his closely-polling opponents to the second round of Peru’s presidential elections set to take place June 5. Newswires reported late Sunday that the race for second place could take days to determine, as Keiko Fujimori held a slight lead over Pedro Pablo Kuczynski. Though there has been concern in the markets as Humala took a strong lead in polls recently, his ability to make major changes to Peru’s successful economic framework is seen as limited. “We expect a positive market reaction if it’s [Alejandro] Toledo in the second round [with Humala], while Pedro Pablo Kuczynski or [Keiko] Fujimori would see a bit more pressure, says Eduardo Suarez, senior emerging market strategist at RBC. Speaking Friday, he notes a growing consensus that Toledo is the strongest opponent for Humala in the second round. Even if Humala prevails in the second round, the leftist is not seen as jeopardizing Peru’s track record of GDP growth and investment-grade status with a major leftward shift. “In any event he might find himself somewhat like Toledo was [in a previous term] where he was something of a lame duck and didn’t have the clout in the congress to push through some of his less market-bearable ideas,” says David Spegel, head of EM strategy at ING. Spegel notes Peru’s 5-year CDS traded at 130bp Friday, back from their widest level of 154bp April 5, and are only about 15bp wider on the year. Peru’s stock market rose 0.5% Friday to 21,256, after having lost 10.4% on the year. “The paths are either for a steady recovery on lost Humala momentum in the second round polls or for much higher credit spreads on a Humala victory and then an eventual recovery once the investment grade rating holds,” says Siobhan Morden, head of LatAm strategy at RBS. She tells LatinFinance that most important will be the polls in early May. When he went to the second round in 2006 versus outgoing presi