When Peru’s new president, Ollanta Humala, was elected by a slim margin in June, opponents of the former radical leftist leader claimed he would preside over a sweeping populist agenda that would wreak havoc on the economy and put an end to the country’s long economic expansion.
Humala, 49, a retired army officer who had never before held office, had for years styled himself as an anti-capitalist champion of the poor, but campaigned for his new job as a moderate.
Since his July 28 inauguration, he has done much of what he promised. His administration in August launched four new social programmes, announced the creation of two new cabinet ministries, raised the minimum wage by 20%, negotiated a new tax on mining companies, and his party passed legislation in Congress requiring the state to consult indigenous communities before extractive projects are approved.
But Humala has also confounded many of his detractors, not least by promising that change will not be disruptive while acknowledging that continuity is needed for the economy to grow. This was reflected in several appointments, including that of Luis Miguel Castilla, a deputy finance minister in the previous government, to head up the economy and finance ministry, and the retention of central bank governor Julio Velarde for another five-year term.
Prime Minister Salomón Lerner told Congress in late August that gradual, sustained change, with a big jump in spending social programmes, would be accompanied by solid macroeconomic performance. The 2012 budget, presented on August 30, includes forecasts for GDP growth at 6%, inflation at 2% and a trade surplus of $5.3 billion. It is a modest 5% increase over last year’s budget.
A majority of Peruvians like what they have seen so far – 56% in a recent poll say they expect the economy to be better in 12 months’ time – and many who had preached doom have quietened down.
Local and international analysts say Humala is off to an auspicious start. “The administration has reaffirmed the direction of economic policy. The macroeconomic indicators are robust, and we believe that Peru will continue on its high growth trend,” says Sebastián Briozzo, director of sovereign ratings for Standard & Poor’s, which raised Peru’s credit rating in late August to BBB, putting it in the same category as Mexico.
Briozzo and local analysts caution that adding social programmes and increasing spending will not be enough. “The challenge is not new programmes, but how they are implemented and run,” says Cynthia Sanborn, a professor at Lima’s Universidad del Pacífico.
Castilla agrees. He says the government budget has doubled since 2005, increasing from $16.3 billion in 2005 to $35.1 billion for 2012, but the state has not improved its capacity to deliver services at the same rate.
“The state must become more efficient. It is not about a bigger state, but a more effective state. We have ambitious goals, and we have to ensure that they are measured against results,” he says.
He says there are five key areas underway to improve efficiency, including a results-based budget, a focus on programmes to eliminate waste, better control over payrolls (20% of the budget goes to salaries), better systems for public purchases and acquisitions, and decentralization of his ministry.
The way the government handles the major changes announced in August, including social programmes and the management of extractive industries – the mining and oil/gas sectors accounted for 76% of exports in July – could either make or break the administration, depending on how they are used.
The government is creating a new social inclusion and development ministry that will oversee 26 existing social programmes and four new ones created by the government, including a free day-care programme, pensions for people over 65 with no other coverage, a scholarship programme for students from poor districts and a job training and job creation scheme.
These will follow a vastly expanded conditioned-cash transfer programme, Juntos, which will be extended to the country’s poorest 800 districts.
BRAZILIAN INSPIRATION
The new social programmes are similar to those initiated in Brazil during former president Luiz Inácio Lula da Silva’s eight years in office (2002–10). Lula has been a role model for Humala, and advisers from his Workers’ Party helped the Peruvian leader craft his government plan and run his campaign on a platform of social justice.
The administration maintains that the new ministry and targeted programmes will improve state management and, far from creating new bureaucracy, will help the government eliminate duplicate programmes and graft. The Comptroller General’s office reported in late August that an audit of social programmes and public works projects between January 2009 and July 2011 found that nearly $100 million had been misused or stolen.
“There are many social programmes today that have serious problems with leaks. While good steps have been taken to create rolls of recipients in the poorest areas, there needs to be a much greater effort to focus assistance to improve programme management,” says Castilla.
Critics, however, argue that the addition of new ministries and social programmes is moving the state in the opposite direction to efficiency. “Peru does not need new ministries, but a more effective state: creating more bureaucracy to administer programmes instead of consolidating programmes is not efficiency,” says Juan Carlos Eguren, a congressman of the opposition Alianza por el Gran Cambio coalition.
He says the government is moving ahead with new spending at a time of global uncertainty, with the possibility of another world recession stemming from the problems in the US and the eurozone.
Central bank governor Julio Velarde tells Emerging Markets that, while there is great uncertainty in international markets, calls for the government to cut spending are unwarranted. “If the US and Europe grow, even at an anaemic 0.5% to 1%, we will still be able to maintain growth and continue to open markets for Peruvian exports,” he says.
The bank, nevertheless, is keeping a keen eye on world markets, maintaining the prime interest rates at 4.25% since midway through the second quarter, and buying dollars so Peru’s currency does not appreciate too quickly against major currencies. The currency has gained on the US dollar more slowly than any other in the region.
While annualized inflation in August stood at 3.3% – slightly above the 3% target – Velarde says it will subside in the final quarter and should be at or below the target by year’s end. Inflation in August was 0.27%, well below the 0.79% in July.
Analysts are also watching government steps regarding the mining and oil/gas sectors, warning that new policies could have a serious impact on revenue from taxes and royalties if changes are not adequately implemented.
DIGGING DEEP
In late August the government negotiated a new charge on mining companies that will generate an estimated $1 billion annually over the next five years. Castilla says the revenue will be used for projects, including infrastructure development, in the poorest districts, primarily those that receive little income from extractive projects. He says the new social programmes, which will require around $400 million in the first year, will be covered by adjustments to the way money is spent.
The National Mining, Petroleum and Energy Society (SNMPE), the umbrella organization of companies in the sector, is supportive of the move. Its president, Pedro Martínez, says the charge will not affect Peru’s competitiveness to attract new investment in mining, which the administration estimates conservatively at $30 billion over the coming five years.
The major concern is that the new revenue will not be managed properly and could be used for pet political projects instead of actual development. There are also doubts about the reaction from local and regional governments, which are used to development projects carried out by mining companies through a so-called ‘voluntary contribution’ system used by the past government.
While the voluntary contribution system generated annually only about a quarter of the amount planned under the new charge, the money went directly to projects in areas hit by mining activities.
At the same time, Humala’s party, Gana Perú, ushered through Congress legislation requiring the state to carry out prior consultation of indigenous and peasant communities before extractive projects are approved.
The legislation, which brings Peru in line with an International Labour Organization convention on indigenous peoples ratified by the country nearly two decades ago, could easily put the brakes on mining and oil/gas investment if the government does not quickly sort out how it will be applied.
Consultations will be coordinated by the culture ministry, created a year ago by the previous administration. The office in charge remains unstructured, and it is unclear – even to the heads of other agencies in the government – how the process will work.
The primary goal of the new tax on mining and the prior consultation legislation is to lower what are known as ‘social conflicts’ involving extractive projects. There were 214 social conflicts recorded by the state ombudsman’s office in July, 118 of which involved disputes between extractive companies and communities.
The conflict management unit in Prime Minister Lerner’s office reported that 191 people, including 38 police officers were killed in social conflicts during the previous government.
Sanborn says the legislation could create a high level of expectation that the government might not be able to meet. “The government will need to be careful deciding how the consultation process is implemented,” she says. While the consultation is obligatory, the results are non-binding, with the decision ultimately in the state’s hands.
Santiago Pedraglio, a Peruvian political scientist, says the administration’s initial moves have been positive, but Humala will be walking a fine line during his five-year term, balancing demands for change with maintaining the broad macroeconomic lines that have allowed Peru’s GDP to grow at an average of 7.2% annually since 2006, according to the UN Economic Commission for Latin America and the Caribbean (ECLAC) – the best performance in the region.
“Humala’s base wants action, while economic sectors are afraid that change could interrupt growth and stability,” he says. “This has been achieved so far, quieting critics, but the administration is only getting started.”