Peru:  Rising Uncertainty Ahead of Elections (continued)

Run-off elections between Toledo and García on 3 June.  The presidential run-off elections are slated for 3 June and the campaign is in full swing, as the final results of the 8 April elections have confirmed a face-off between the two contenders Alejandro Toledo and Alan García.  Markets have reacted unfavourably to the increased possibility that Alan García may once again be at the helm of the government, García left the country in economic chaos after his term as President from 1985 to 1990.  The Central Bank has had to intervene in the foreign exchange market to stabilise the currency and bond spreads jumped 225 basis points within two weeks after the elections.  On 18 April, Fitch downgraded Peru's sovereign ratings, claiming that recent national elections suggest that the downside risks to the country's economic policy framework have risen. Compared to Alan García, Toledo has become investors’ favourite after the defeat of Lourdes Flores.  In an attempt to allay financial market concerns about his economic policies Toledo has outlined his economic plans with U.S. investors, distancing himself from the populist message he carried through most of the pre-election campaigning at the beginning of the year.  Instead, Toledo pledged to push ahead with privatisations and cut the national sales tax to 17% from 18% in a bid to jump-start the sluggish economy.  Investors seem to have gained some confidence in Alejandro Toledo and certainly prefer him over Alan García, despite the latter’s vow that he has learned from his mistakes and promises to maintain a disciplined fiscal policy.  However, in his campaigning García also pledges to reduce telephone and electricity rates, create a government-run agricultural development bank to provide cheap credit to farmers and reinstitute protective labour legislation.

Toledo leads polls despite scandals.  According to the latest surveys carried out on 28/29 April by Datum Internacional, Toledo leads with 39% compared to 26% for García.  The results are virtually unchanged from the 8 April election results despite the fact that Peruvians now have to choose between two instead of eight candidates.  The number of intended blank votes rose by ten percentage points to 35%, as many Peruvians are reluctant to cast their vote for either candidate amid mounting scandals.  On 21 April Toledo’s campaign team lost the support of Alvaro Vargas Llosa, son of prominent Peruvian writer Mario Vargas Llosa, who lamented the presidential candidate’s penchant for Fujimori-like backdoor policymaking.  Alvaro Vargas Llosa accused Toledo's vice presidential candidate, Raúl Diez Canseco, of having paid US$ 10,000 to keep documents linked to alleged cocaine use by Toledo from public knowledge.  Toledo confirmed Vargas Llosa's statement that he had received US$ 1 million donation from financier George Soros for a nationwide protest march against former President Alberto Fujimori last year but said the donation was not intended to finance his political campaign but the fight for democracy.  In addition, questions arose about a bank transfer of US$ 600,000 Toledo’s nephew conducted from campaign accounts to an account in the United States.  The recent scandals increase the uncertainty over the election outcome, which will depend on last minute decisions of the many undecided voters.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.