June 20, 2011 / 4:23 PM / 8 years ago

FACTBOX-Key political risks to watch in Peru

LIMA, June 20 (Reuters) - Investors will be closely watching left-wing President-elect Ollanta Humala when he takes office on July 28 to see if he will be a steady hand on economic policy or roll back years of free-market reforms.

Humala, who has never held office before, tried to shed his radical image during the campaign but still worries Peru’s financial markets.

He will also face a growing illegal drug trade, strikes by miners, and environmental disputes that could hurt one of the world’s fastest-growing economies.

HUMALA’S VICTORY

Humala, 48, narrowly won the June 5 run-off election for president. He overtook right-wing lawmaker Keiko Fujimori at the end of the campaign as he softened his hard-line leftist tone and says he plans to emulate former Brazilian President Luiz Inacio Lula da Silva, a moderate leftist.

Humala vows to tackle widespread corruption and has appealed to poor voters by promising to better distribute Peru’s growing wealth, though he has ruled out taking over private companies to achieve his goals like his former political mentor, Venezuela’s socialist President Hugo Chavez.

The election left a deeply divided country as 48.5 percent of voters and most of the business class voted for Fujimori. But a poll from Ipsos Apoyo on June 19 gave Humala a 70 percent approval rate and said 78 percent of voters believe he will govern as a moderate, suggesting reconciliation is possible.

Humala made numerous changes to his platform throughout the campaign to win over moderate voters, including dropping a call to renegotiate free-trade agreements and replace a privately-run pension system with one run by the government.

Skeptics are awaiting cabinet appointments Humala has said he will make before July 1 to confirm his intentions to govern from the center. He is expected to reward former President Alejandro Toledo’s party for endorsing him in the second-round by naming technocrats from Toledo’s cabinet team to head the finance ministry and other key ministries.

Still, some investors fear Humala will gradually tighten control over the economy and hurt foreign investment, especially in Peru’s vast mining sector. Before the election, those fears caused real estate buyers, lenders and builders to pause and postpone projects, triggering a moderate deceleration in second quarter economic growth.

No party will have a majority in Congress, limiting the president’s scope for more drastic reforms.

To fund social programs, Humala favors higher taxes on mining companies that are enjoying windfall profits thanks to high global commodities prices. He told Reuters in an interview that he plans to consult mining firms about the tax rate, taking into account their profit margins.

Orthodox economic policies have been in place in Peru for nearly two decades, helping the nation achieve investment-grade ratings. All three major ratings agencies have said Humala’s victory did not put Peru’s credit rating at risk.

But a weak state and ineffective social programs have left a third of Peruvians mired in poverty, especially in the Andes mountains and Amazon basin.

What to watch for:

— Humala’s appointments to key cabinet positions.

— Government pushes for windfall profit tax on miners.

— Policy debates split along ethnic and class lines.

SOCIAL CONFLICT

Peru’s human rights agency says there are some 200 social conflicts over natural resources in the country, mostly in poor rural areas bypassed by an economic boom driven by surging commodity prices.

Hundreds of millions of dollars in capital spending have faced delays that could also hold up some $40 billion in mostly foreign investment lined up for projects over the next decade.

Outgoing President Alan Garcia’s push to draw foreign investors to open new mines has angered environmental and indigenous groups, which are becoming increasingly assertive. There is little evidence tensions are easing and clashes often turn deadly.

Some 5,000 protesters have descended on the southeastern city of Puno to demand concessions be revoked for mining companies demonstrators say will contaminate their ancestral lands. The protesters paused their demonstrations so voting could take place in the remote region some 1,385 kilometers (860 miles) from Lima, but have since resumed.

Humala supports a law that requires companies to win the consent of indigenous groups before projects are developed on their lands, which human rights groups say could help mitigate such conflicts. Garcia vetoed a version of the law.

What to watch for:

— Strikes that could halt mineral or natural gas exports.

— Next Congress debates or passes the consultation law.

DRUGS TRADE, SHINING PATH REBELS

Garcia’s government has struggled to capture a remnant band of left-wing Shining Path rebels who smuggle drugs in a violent region rife with cocaine known as the VRAE, the most densely planted coca region in the world.

At least 50 soldiers or anti-drug police have been killed in the VRAE and other jungle areas controlled by Shining Path in the last two years. The group’s Maoist leaders were captured in the early 1990s after waging a brutal war against the state.

Corruption in Peru’s army and political system could be hindering drug enforcement efforts, according to a U.S. diplomatic cable released by WikiLeaks. Peruvian officials have denied the claims.

Garcia has said the United States must boost anti-drug aid to Peru, which receives far less than Colombia.

More deaths or clashes could prompt the next president to overhaul anti-drug policies in Peru, the world’s No. 1 coca producer.

Humala has said he hopes to cooperate with the United States to curb drug trafficking, but some members of his Nationalist Party were voted into seats in Congress on slates that defend coca growers — potentially limiting his political options. Coca growers say they grow the leaf for traditional uses in food and teas, but drug experts say 90 percent is processed into cocaine.

What to watch for:

— Arrests of key leaders of the insurgency.

— Any serious attacks against the army that undermine its ability to win control of the region.

— Details on Humala’s anti-drug trafficking strategy. (Editing by Kieran Murray)

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