Event

On 5 June, Pedro Pablo Kuczynski of the pro-business party Peruvians for Change (PPK) won the second round of the presidential election. Securing 50.1% of the run-off vote, he very narrowly defeated Keiko Fujimori of the right-wing Popular Force (FP) who had prevailed in the first round but subsequently failed to secure the support of the eliminated candidates. Notably, even Verónika Mendoza – the presidential candidate for the left-wing Broad Front (FA) who had finished third in the first round of the election – ended up endorsing Kuczynski as the 'lesser evil'  compared to Fujimori. The establishment of such an anti-Fujimori front mainly reflects widespread disapproval of the legacy of Keiko's father, Alberto Fujimori. He served as president throughout the 1990s and – despite currently serving a 25-year sentence for corruption and human rights violations – remains a divisive figure in Peruvian politics. While many view him as having undermined democracy, to many others he is the man who effectively dealt with violent left-wing insurgencies and strengthened the economy.

Impact on country risk

His campaign rhetoric and his previous terms as economy and finance minister (under president Toledo, from 2001 to 2002 and again from 2004 to 2005) signal that president-elect Kuczynski will broadly stick to the pro-business and investor-friendly policies that have seen Peru outperform many regional peers. Indeed, even though a sharp drop in commodity prices – Peru relying heavily on commodities both in terms of export earnings and government revenues – caused GDP growth to slow to 2.4% in 2014, a rebound ensued from 2015 as mining production boomed due to the completion of vast investments in the sector. As a result, economic activity expanded by 3.3% in 2015 and is expected to grow by 3.7% this year. Continued adherence to prudent monetary and fiscal policies is moreover expected to keep inflation (expectations) in check and public finances sustainable. Yet, while this benign economic outlook implies that Kuczynski's election victory was well-received by the Peruvian business community and international investors, his presidential term will not be without challenges. First and foremost, because Kuczynski's PPK did not perform well in the legislative election held simultaneously with the first round of the presidential election on 10 April. In fact, while the PPK only secured 18 of the 130 seats in Congress, Fujimori's FP gained an outright legislative majority of 73 seats. This will complicate effective policymaking, especially in the field of security, on which both parties' views differ most fundamentally. What is more, continued weakness of international commodity prices has caused a drop in new mining sector investments in Peru. This will present president Kuczynski with a dilemma regarding relevant regulatory enforcement. In particular, while reducing rules and regulations may urge international companies to invest more, it also has the potential to further stoke up discontent among rural populations over potential health effects and environmental damage.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com