Peru run-off creates market tension

Markets hate uncertainty and Tuesday’s price action in EPU, Peru’s index fund, was indicative of such as investors eagerly eye Sunday’s impending Presidential run-off.  Interestingly, though Fujimori may be considered “more pro-business than the leftist candidate Humala” other observers point out that in fact “Keiko has few incentives to govern democratically, while Humala faces constraints that may force him to govern democratically.”  Meanwhile The Economist somewhat brazenly slags the entire lot off, opining that regardless of who emerges “the single-minded pursuit of foreign investment and economic growth that marked [outgoing President Alan] García’s presidency now seems to be drawing to an end [and] many Peruvian democrats will have nightmares in the coming weeks.”  A bit much, no?  Peru remains one of the fastest growing countries in the world, up 8.8% annually in 2010 (the BRIC median, for comparison) and projected by Barclays to trail only China for current year domestic output on the back of hitherto both monetary and fiscal stimulus.  Moreover the central bank (BCRP) has not overly lagged the curve (per Taylor’s Rule) and prices remain in line with the targeted 3% upper band; the 25bp hike on May 12 (to 4.25%), while below expectations, was more a commentary on the relative slowdown to date and the private sector’s risk averse approach to the election run-up whereby GDP proxies such as electricity consumption and cements sales have visibly dipped.  To this end, policy rates should tighten fairly substantially post election to 5.5% by year’s end and, per Barclays analysts, will likely be more front-loaded in the event Fujimori wins.  That said, they write, whomever wins will need to navigate the country away from a purely economic and more towards a social agenda: “Peru’s socio-economic conditions and institutional weaknesses explain why, despite impressive growth over the last several years, Mr. Humala’s seemingly radical proposal continues to appeal to a third of the population.”  While ominous sounding, it’s hard to completely divorce oneself from a pragmatic central bank in a high growth economy, especially when copper may finally look healthy again.  More uncertainty.