THE THREAT OF NATIONALIZATION IN PERU IS OVERBLOWN / THE FUNDAMENTAL VIEW ( VERY HIGHLY RECOMMENDED READING )

Wednesday, April 27, 2011


Peruvian Politics.

The Threat Of Nationalization In Peru Is Overblown
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There seems to be a panic in the air of late over the political events in Peru. Yes, that South American country that currently boasts such claims as the world’s second-largest miner of copper, 6th largest gold producer and the largest silver producer.

Minerals/Precious metals account for about two-thirds of the country’s exports. Investors are right to display some fear over the upcoming elections in Peru. I'm here to suggest to you though that most of those fears are overblown.


Lately there has been much discourse over the political climate in Peru. The upcoming elections have everyone a little rattled, not just those invested in my favourite silver junior exploration company (Tinka Resources TK.v). Recently, Peruvian stocks, bonds and currency fell. The country’s borrowing costs climbed to the highest since July. All this after former Peruvian military rebel Ollanta Humala opened a six-point lead in a presidential poll before a June 5 runoff vote. His closest rival is Keiko Fujimori. Both candidates have dark backgrounds. The markets can live with Fujimori however…they markets are afraid of Humala. You guessed it....Humala is the front runner.


The fear is centered on the speculation .. (I emphasize that word for a reason) that far left liberal Humala will nationalize the country’s national resources sending all of the multi-national corporations home. Yes..that is the speculation. Reality however is sometimes far removed from speculation and I will get into why in my own opinion, those fears are way overblown.


First and foremost, according to a recent Ipsos Apoyo poll, Humala had 44 percent support outside of the Lima metropolitan area, compared with Fujimori’s 33 percent. Within Lima’s city limits, Fujimori, 35, the daughter of jailed former president Alberto Fujimori, had 43 percent support, compared with 35 percent for Humala, Ipsos Apoyo said. Lima accounts for about a third of the Peruvian electorate.


Ipsos Apoyo said 22 percent of those surveyed are either undecided or would cast a blank vote. The researcher said 35 percent of those surveyed said they would never vote for Humala, compared with 38 percent for Fujimori. The researcher contacted 1,802 people in 23 of Peru’s 25 regions from April 16 to 21. The margin of error was 2.3 percentage points. (source Bloomberg)


The story is a long one. The jist of it is that Humala is thought to be financed by Venezuela's Hugo Chavez. It is thought that he wants to align himself with Chavez and possibly Bolivia's leader Evo Morales. Here is a man who years ago with 50 soldiers stormed the mining site of Phoenix based Southern Copper Corp.’s Peruvian mines for a week to protest corruption in Fujimori’s government. I am referring to the father of his current opponent. The father is currently in prison for corruption and human rights issues. His daughter has said during her campaign that she will not grant a pardon to her father and he will remain in jail. She is doing her part to sell her human rights side to the people of Peru.


All reports I have read have indicated that the Peruvian people have a choice between "Aids or Cancer". Neither candidate is really well liked but only Humala carries with him the fear of nationalizing resources.


I should note at this point that Humala ran in the nation's 2006 elections. Back then he also led after the first round of voting but failed to win after opposition campaigns started making strong connections between himself and Hugo Chavez. Seems that the people of Peru did not want a President so closely aligned with a "dictator" like Chavez. My question is why would they want such an allegiance now?


In my view, nothing has changed from 2006 in that the people really do not want to be backing a man aligned with Chavez. Humala knows this and this time around is trying to distance himself from ties to Chavez. Humala is a smart man. He has hired Brazilian campaign workers and has modeled his campaign after Brazil's former leader Luiz Inácio Lula da Silva going so far as to also hire some of his consultants to work his campaign. He is running on a promise to share revenue from Peru's mining boom and this campaign is resonating with with impoverished slum-dwellers and rural indigenous communities. He has not come out and said he will nationalize however.


From my reading it appears as though both Fujimori and Humala both have strong negative ratings which could see them try to move closer to the centre as the election draws closer so as to paint their opponent as the extremist.


In an opinion piece from the website "Living In Peru" we note that the Peruvian writer Aldo Mariátegui writing for Correo describes Humala as follows:


Humala has become more “redder” than ever before, mainly thanks to Nadine’s (his wife) influence. Only an idiot — well, you have to be one if you plan to vote for him — wouldn’t notice that Humala has taken off the red t-shirt and hidden Chávez (that lunatic that said yesterday "Capitalism may have ended life in Mars") because he knows that with that kind of speech he will not get anywhere.


The people of Peru are not stupid. They are however deeply divided. There is a wealth divide that can best be described as a wealthy middle class vs. a banana republic. While the former chooses to debate the real economic impacts of who will be their next leader the latter is more concerned with what is in it for them. The illusion being painted by Humala is that he will redistribute the wealth of the nation but as we have seen with leaders who ran similar campaigns, (Hugo Chavez in Venezuela for example), the poorer really don't benefit much if at all from the wealth of the nation in that type of nationalization system.

Peru has undergone a boom over the last 10 years or so and I doubt that those that gained wealth as a result of foreign investment will simply kiss it away. I think Humala is bright enough to see this too.


Its hard to get a real handle on what will happen because the Peruvian media is mainly operated out of Lima and the media will spin and massage who THEY want to win even going so far as to state that Humala is trailing in the polls when the information says otherwise. However if Humala truly is trying to mold himself after the former Brazilian leader then nationalizing the country goes against that model. I suggest you all read this piece HERE that best describes the politics being played in Peru over this election. One comment from that piece caught my attention:


Recently the right-wing newspaper El Comercio posted a front page with another baseless rumor: Humala will pursue a government of nationalizations, meanwhile newspaper Peru21 (owned by El Comercio) posted that Humala will shut down opposition media outlets “like Chavez”.


As for nationalization, these rumours are in my review, grossly exaggerated. From all accounts, Humala, if he wins, will most probably increase taxes on mining companies and use that money to help the impoverished. Of course this is contingent on his keeping his word to redistribute the wealth. This was a view shared by Miguel Cardozo CEO of Alturas Minerals, a gold and copper producer in Peru (source) who also led the Peruvian delegation at the recent Prospectors and Developers Conference in Toronto – the world’s largest mining show.


"My impression is that we are making a huge drama out of it...I think the other four candidates will favor the development of mining – Humala is the only one that makes any proposals to increase taxation to mining but he is not saying he will stop mining, or nationalize mining assets, he hasn’t proposed that -- it is just about getting more taxes..Humala generates fear among investors in the markets.

Even in a worst case scenario if Humala becomes President of the country – I don’t think it is the end of world, though many investors will have that perception”


It is noteworthy that the last Latin American government to mimic that of Chavez's regime was Noriega's regime in Nicaragua (2007). All other leftist regimes in the region have drifted to resemble Brazil and Chile. There is no reason to think that Humala will go the path of Chavez and from what I read, he will most likely follow the path of the latter two if he wins.


I will end with this tidbit. Just last week when the Peruvian stock market took a hit, Peru's largest pension fund swooped in a did a lot of buying. They see the propaganda for what it is. In a related Bloomberg article it was noted that Humala is not out to nationalize Peru but to make sure that proper royalties are put in place so as to not leave the poor out of the picture. He would, as the article mentions, be foolish to tamper with economic policies that have so far averaged 7% growth for Peru over the last 5 years.


Humala proposes raising royalty fees on mining and gas production and renegotiating contracts with foreign companies and trading partners including the U.S. After winning 32 percent in the first round of balloting April 10, Humala said he would consider a proposal drafted by former Finance Minister Pedro Pablo Kuczynski, who placed third, which urges respect for the constitution and the free-market system. Humala has abandoned the anti-capitalist rhetoric that limited his appeal to Peru’s growing middle class and says his policies won’t jeopardize investment that drove the economy to average growth of 7.2 percent over the past five years.


It is no coincidence that the shares in companies that are doing business in Peru started their slide after the most recent elections and it might be expected that there is some apprehension among investors about what the future may have in store for them in Peru. Hey, I for one am still holding stock in a Canadian junior silver explorer, Tinka Resources whose primary asset is in Peru.


However, I feel better after doing my own research into this situation and realizing that if Humala wins, we are unlikely to see any significant changes that will suddenly cause foreign companies to pack up and leave. I side with the camp that suggests that we might see royalties increase and we will see the left leaning Humala take a similar path that Brazil and Chile took. In fact, I am pretty confident he will not make the brutal mistake of following in the footsteps of Chavez's Venezuela as has been so often reported in the media.


Consumer demand and private investment in mines, power plants and infrastructure fueled 8.8 percent growth last year. Peru will post a region-beating 7.5 percent expansion this year according to the International Monetary Fund. Do you really think that Humala will mess with that?


Consider too that Reuters ran a story a couple weeks back in which Humala's chief economics adviser indicated that Humala would emphasize economic stability if elected in June and his proposals have "nothing to do" with left-wing models in Venezuela and Bolivia.


Economics adviser Felix Jimenez, a professor at Lima's Catholic University and a former director in the Finance Ministry's debt department, said Humala has categorically ruled out nationalizing or taking over any companies.


Jimenez did, however, say Humala favors voluntary renegotiating some contracts held by mining companies and natural gas firms, so they would pay more taxes to the government and, in the case of gas, give priority to domestic consumers instead of exporting the fuel.


Hardline left-wing leaders in Venezuela and Bolivia have taken over banks and oil firms in recent years.


But Humala, who nearly won the 2006 presidential race, has promised to keep key pillars of current economic policy intact.


Sure there is a lot of fear. This is normal when change of any kind is imminent. However to flee investments in Peru because you think that Humala will simply throw out all foreign corporations and nationalize the country is utter nonsense. I submit that he has much more to lose by playing such a card.


Given Peru's recent growth, he would be a fool indeed to mess with such an idea. I think he is wise to continually repeat that he is not intent on following the lead of his Venezuelan or Bolivian cohorts. It lost him the election in 2006 and he has been wise to distance himself from that nonsense. Will he keep his word? Based on what I have read I really think he will. As the article I linked to above, from a Peruvian national suggests, much of the rumours about his "evilness" are planted by the Lima based media outlets. Much of the other reporting however seems to suggest that he never said he was going to nationalize anything. He just wants to make sure that his nation, if he wins, is justly compensated for being stripped of its resources.