Peru’s general elections are scheduled for this Sunday, April 10. Constitutional term limits prevent incumbent president, Ollanta Humala, from seeking a second term and will be replaced as president in July. In recent weeks, half of the candidates have abandoned or been banned from the elections and more contenders may follow, raising questions about the legitimacy of the electoral process. With a possible second-round scheduled for June 5, these presidential elections are shaping up to be one of the most contentious elections in recent history of Peruvian politics.
The race to choose Peru’s next president turned controversial in mid-February, when Peru’s National Elections Board disqualified two of the leading presidential candidates from running. The Board declared Julio Guzmán’s candidacy void on technical grounds, and unanimously found that candidate Cesar Acuña’s political party, Alianza Por El Progreso, illegally handed out payments to voters, a violation of the election process rules. Just before the Board’s final ruling, opinion polls had shown Guzmán in second place with 16% of support and Acuña, a successful businessman, in third or fourth place.
In March, the landscape has changed regularly as voters have shown a willingness to shift allegiances, and Guzmán’s and Acuña’s supporters have scattered among the remaining candidates. Amid the disorder, however, one candidate has notoriously held the number one spot in the race since she announced her candidacy: Keiko Fujimori. According to all the major election polls, Keiko Fujimori, the daughter of imprisoned former President Alberto Fujimori, on average has 15% higher approval than her competitors and the support of roughly 30% of Peruvians.
Two candidates who have reaped benefits of the Guzmán and Acuña disqualifications have been Verónika Mendoza, the leftist Broad Front (Frente Amplio) candidate, and Pedro Pablo Kuczynski (also know as PPK), a 77-year-old Oxford-educated economist and politician. Yet, PPK is still at risk of being disqualified as he is accused of distributing beer at a rally in March, an act that is illegal under the new electoral law.
Who will win in the first round?
Presidential elections in Peru are notoriously unpredictable; several previous ballots have seen challengers come from behind in the final weeks of campaigning to secure victory. However, with less than a week to go before Sunday’s general elections, Keiko Fujimori is virtually guaranteed to prevail in the first round, as polls place her in first place with 35%.
In second place with 16% is PPK, who is popular with the business community but struggles to achieve broader popular appeal. Close to PKK, with about 15% of support and potential to gain further ground, is leftist candidate Verónika Mendoza. In forth place is Alfredo Barnechea, the Harvard-trained centrist, while Alan García, a two-time president, has 3% support. About 10% of voters are still undecided in Peru, where casting a ballot is mandatory.
Polls also show that Keiko will not be able to obtain the necessary 51% to avoid a runoff election. Based on recent trends, we believe that the two most likely scenarios in the June 5th run-off election are: i) Keiko vs. PPK and ii) Keiko vs. Mendoza. Whoever passes to the next round with Keiko will likely receive a significant amount of votes that would have gone to the other candidates, making the second round a match between “Fujimorist” and “anti-Fujimorist” factions.
Scenarios for a run-off vote
The outcome a run-off vote is unpredictable, and possible Keiko, PPK, or Mendoza victories all cannot be discounted. If Keiko and PPK face each other in a second round, recent polls indicate that PPK would narrowly defeat frontrunner Keiko with 42% to 40% as the anti-Fujimori vote among the undecided begins to materialize. PPK is considered a capable administrator and technocrat with strong support among the urban elite, but struggles to appeal to voters in rural areas.
On the other hand, Keiko is expected to win against Mendoza in a potential second-round vote. Polls currently place Keiko ahead of Mendoza by ten percentage points, with 18% of undecided voters. This scenario would likely spook financial markets as Mendoza’s leftist stance could increase the likelihood of market-unfriendly policies and Keiko tries to walk a fine line between taking credit for her father’s achievements and distancing herself from his abuses.
Given that 18% of Peruvian voters still have not made up their mind for a potential run-off vote, we must also consider the possibility of Verónika Mendoza making a late run and winning the presidential election. Verónika Mendoza has surged in the polls in recent weeks unlike any other candidate; the real test, however, will come if and when she passes to the second round, and has to make a convincing argument for moderates to flip their support to her. So far, we have seen that repeated political attacks on the leftist candidate have actually helped the candidate to advance in the polls.
What comes next for Peru’s new president?
Peru’s next president will face declining copper prices and financial turmoil as key risks to maintaining economic growth momentum. The needed diversification of the economy and structural reforms require much stronger political support than what Humala has enjoyed in recent years (15% as of March 2016). At the moment, however, the fragmented presidential race represents a challenge to produce a president with enough political capital to ensure Peru’s economy remains on track amid the commodities downturn, wrestle with environmental conflicts, and battle US hedge fund Gramercy.
- PPK’s victory: A PPK presidency, in particular, would mean good news for MNCs, as he is well-disposed towards foreign investment and advocates broad continuity in the country’s mining and economic policies. The former World Bank economist and mining minister has proposed to eliminate procedures that hinder investment and development, providing tax incentives for small and medium enterprises and reducing the country’s General Sales Tax (also known as IGV) from 18% to 15%. PPK also plans to raise the amendment of the Strengthening Fiscal Responsibility and Transparency Law, in order to increase the budget for infrastructure projects, including a train system on the Pacific coast.
- Keiko Fujimori’s victory: A potential Keiko Fujimori’s presidency would emphasize security and rural development, increasing expenditures on police and military forces. Keiko also plans to use the country’s Fiscal Stabilization Fund to close the infrastructure gap and revive the Peruvian economy. We do not expect that a Keiko administration would repeat the worst abuses of her father. We actually believe that her government would not stray too far from the recipe of the last: free market-led growth, weak institutions, and a president who, by and large, does not abuse her position.
- Verónika Mendoza’s victory: Verónika Mendoza’s rise has brought a new source of uncertainty to the Peruvian presidential election, and we are already seeing Peruvian equities and currency markets responding negatively as investors weigh the risk of her potential win. Mendoza has promised to tighten environmental supervision of mining companies and would halt a scheduled lowering of the corporate tax rate. She has also proposed ditching Peru’s constitution for one that enshrines access to water as a right, protects the environment, and weakens a “corrupt” business elite. However, if Mendoza defeats Keiko in a run-off vote, she would have a hard time pushing her populist reforms through a Congress that will likely be dominated by members of Fujimori’s party.
Overall, FSG expects the Peruvian business environment to remain favorable after the next president takes office in July, maintaining the current government’s pro-business policies and macroeconomic orthodoxy. Peru’s next president will need to develop coalitions within Congress to pass key reforms, as no single political party is expected to attain a two-thirds majority. Plus, Peru has numerous trade agreements with regional and non-regional partners, which reduces the ability of the next government to implement sudden policy changes without damaging economic or diplomatic relations with their counterparts; this is particularly true for free trade agreements with the US, China, and EU.
Actions to take
Multinationals should continue to closely monitor the election campaign and the coverage of the campaign in the media as new developments surface daily. The Peruvian presidential election is unlikely to deliver any major surprises or lead to seismic policy shifts, but will nevertheless be important in terms of determining where the country is headed over the next five years. FSG recommends its clients consider the following actions:
- Engage in scenario planning: Considering the significant uncertainty surrounding the ongoing political dynamics in Peru, companies should implement scenario planning based on the various potential outcomes outlined above.
- Maintain good relationships with partners and customers: Executives should ensure that their teams are maintaining and improving good relationships with partners and customers in Peru. This can help to preserve sales even as broader political and economic conditions become more volatile in the weeks before and after the election.
- Temper expectations: The uncertainty generated by the presidential elections in Peru will hinder business planning and investment decisions, reducing economic growth in the 2Q of 2016. Executives should manage expectations for economic and sales growth targets in Peru, which would otherwise outperform Latin America.
This post was written by FSG Latin America Research intern, Alejandro Alfaro.
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