Markets Shudder at Prospect of Nationalist Peru

Ah, the smell of nationalism at election time warms the heart - but not the markets! Financial markets and foreign investors brace themselves for a possible victory by presidential candidate Ollanta Humala, a nationalist who vows to fight multinational companies.

Humala advocates giving Peru's poor a greater share of the nation's mineral wealth and redoing contracts with foreign companies to make the state an equal partner.

Markets don't like that.

Four exit polls gave Humala a plurality victory in Sunday's vote, which means a runoff election will be held against an as yet undetermined rival.

A Humala victory would put Peru in the camp of Venezuelan President Hugo Chavez and Bolivian President Evo Morales, who favor curbing company profits to help the poor benefit from the region's oil and mineral wealth. . . .

Humala won support among Peru's 13 million poor for pledging to fight the multinational companies he says are looting the nation's natural resources. Half of Peru's 27 million inhabitants survive on less than $1 a day, according to Farid Matuk, director of the National Statistics Institute in Lima. . . .

Peru is the world's fourth-largest producer of copper, the fifth in gold, the third of zinc and the largest of fish meal. The country has Latin America's fifth-largest reserves of natural gas.

One of his opponents . . .

Lourdes Flores . . . campaigned on pledges to support free trade with the U.S., grant greater access to credit and training for farmers and small businesses and respect contracts signed between the government and investors.

You can guess who wants her to win.

Michael Gomez, who manages about $28 billion of dollar- denominated emerging market debt for Pacific Asset Management Co. in Newport Beach, California, said a Flores-Humala runoff would be "welcome news."

"Flores is generally perceived as market friendly, and also was forecasted in polls to defeat Humala in a second round run-off should that pairing materialize," Gomez said in an e-mailed response to questions after exit polls were published last night. Pimco was the largest holder of Peru's 9 1/8 percent bond due 2012 as of January.

On the other hand . . .

A run-off between Mr García [a third candidate] and Mr Humala would be a nightmare scenario for local and international business interests. Although Mr García has promised market-friendly policies, he is widely distrusted because of his record in government from 1985 to 1990, when banks were nationalised and debt payments restricted. [hot dang!] When he left office, inflation was running at more than 7,000 per cent and Maoist Shining Path guerrillas [no doubt, backed by financiers] were threatening to take over the state.

Let's keep our fingers crossed!

And to make things interesting . . .

[Humula's] father, Isaac, founded the Etnocacerista movement, a group that takes its name from field marshall and former President Andres Avelino Caceres, a hero of Peru's losing 1879-1883 War of the Pacific against Chile.

The movement fosters xenophobia against Chile, the United States and Israel as part of a platform that also includes indigenous demands and Inca myths.

All the more reason for financial markets to oppose him, as indeed they already have.

Humala [complained] that he was the victim of a "fascist act ... (and an) organized ambush" by his political rivals, who "marred the election" when an anti-Humala crowd gathered at the Ricardo Palma University, where he showed up to cast his ballot.

But, should Peruvians suspect fraud during elections . . .

Lloyd Axworthy, head of the Organisation of American States' observer mission in Peru, told the FT that the nationalist "has warned us directly that he could take street action in response to the perception of fraud".

That'll teach 'em not to mess with the democratic process!