Investors eyeing Peru, South America’s fastest-growing economy over the last half-decade, remain cautiously optimistic that newfound president-elect Ollanta Humala, the former army officer who officially takes to the stage this week, is more bark than bite vis a vis alleged socialist leanings: the overall moderate ideology of recent economic team appointments, for instance, suggests more pragmatism than populism, though the ambiguity of an impending mining sector profit windfall tax regime saw the proportion of private sector firms considering increasing investment in the next six months decline from more than 50% in Q1 11 to approximately 10%.  This private investment pullback, in fact, combined with the lingering effects of contracting public expenditures (20% government-project capex reduction over the first four months of the year) stemming from the relatively restrictive election-time, legal framework, should contain inflation in the near-term (~3.0% in 2011 and 2.5% projected in 2012) though at the expense of the output gap, a dynamic which analysts expect will slash GDP growth from 8.8% last year to roughly 6.5% in 2011 (confirmed by the recent slowdown in the consumption of durable goods and investment) and around 5% next year.  What will be interesting to monitor, therefore, is the extent to which Humala’s policy agenda moderates (the minimal gasoline price increase, which left prices 16% below international prices per analysts, was a start) to compensate–a phenomenon which should translate into a public sector balance deficit (as a % of GDP).  At the same time, monetary policy (current rate is 4.25%) should remain dovish given the slackening backdrop, meaning said deficit’s inflationary effects over the longer-term could be somewhat amplified.  Yet fiscal expansion should not necessarily be viewed negatively; not only is Peru sitting on a sound fiscal foundation (expected gross public debt of ~22% of GDP and a reserves to external debt ratio of 1.12x), but spending could go a long ways towards reversing an inequality gap that appears to be boiling over: observers note that in January 2010, 35% of the social conflicts presented at least one event of violence, while in May 2011, this proportion increased to 51%, causing analysts with Barclays to remark last month that “Peru’s socioeconomic conditions and institutional weaknesses show the need for greater government presence in areas in which it currently lacks and in which all these social conflicts clearly emerge.”  Let the juggling act begin.

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