Man of the year

Seize the moment

By Taimur Ahmad and Lucien Chauvin

Having confounded observers with his pragmatism, Ollanta Humala now has an historic opportunity as president to cement the gains of Perus economic boom and secure his nations future

he day after Ollanta Humala was elected Perus president in 2011, the local bourse suffered the worst single day in its history, plummeting 12.5% before trading was suspended. The left-wing ex-soldier had narrowly beaten Keiko Fujimori, a right-wing populist congresswoman and daughter of a jailed former president, to become Perus head of state. Peruvian Nobel laureate Mario Vargas Llosa famously likened the runoff to a choice between terminal cancer and AIDS. It wasnt just financial markets that reacted badly to Humalas election. Large swathes of the public took fright as did foreign and domestic companies, the lifeblood of Perus open economy. The fear was that a Humala presidency would hurl the country into the grips of the 21st century socialism model promoted by Venezuelan leader Hugo Chvez. He would roll back freemarket reforms, following his campaign pledge to fight poverty by redistributing the countrys newfound wealth. Industries would be expropriated, private schools shut down and the economy turned on its head. His first year was largely an awkward teething period, during which a series of missteps saw his approval ratings falter amid widespread public distrust. But Humala and his economic advisors insisted from the outset that they would preserve economic stability, attract

foreign investment and maintain rapid growth. Throughout a series of ups and downs since taking office, Humala has stuck to that promise on economic management. He has maintained the policy framework of previous administrations, while launching a number of programs to follow his campaign promise of social inclusion. He picked Luis Miguel Castilla, a deputy finance minister in the previous administration, as finance minister, and retained Julio Velarde for another fiveyear term at the helm of the central bank. Both appointments helped encourage a belief that the erstwhile leftist revolutionary may pose less of a threat to economic stability than many had feared. Since then, Perus rapid expansion has continued unabated, nudging 7% a year. Peru had the fastest growth, 6.3%, and lowest inflation, 2.6 %, of any country in South America last year. Today, foreign investment continues to pour into mining, hydrocarbons and infrastructure; business confidence is at record highs and the domestic market is booming. Investment reached 27% of GDP in 2012, up from 18% ten years ago, and is expected to rise. The result is that 18 months into his presidency, Humalas popularity is close to 60% a level unseen in Peru in many years. The public cites solid government management, economic stability and social programs as his biggest achievements. His support is strongest in

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Lima, the capital, where he was trounced in 2011, winning only one of 43 districts, and among the wealthiest sectors, where less than 30% voted for him. The president is also connecting with Perus 30 million people at a more basic level. He has an image Peruvians can relate to in their daily lives, says Luis Benavente, a political scientist at the University of Lima and head of consultancy Vox Populi. He comes across as hard working and a family man, something his two immediate predecessors could not claim.

Man of the year

Humala is LatinFinances Man of the Year in 2013. It is an award not only for what he has accomplished through his pragmatism in managing Perus prosperity, but also in recognition of the fact that, partly by virtue of his achievements so far, Humala has been afforded an historic opportunity to transform his nation. Todays conditions, which Humala has had a hand in creating and sustaining for the better part of two years, have granted him arguably the best shot of anyone yet to cement the gains of an unprecedented economic boom and to set the foundations for his nations longer-term future. So long as that chance is not squandered, he has the potential to go down as one of Latin Americas great leaders. In an exclusive interview with LatinFinance his most extensive with any foreign media since taking office in 2011 Humala says it is still too early to talk about what the landscape will look like when his five-year term ends. But he says he is mindful of the task at hand. This is like an oil painting that will be done in 2016, he says. I am still putting the outlines on the canvass to start filling in details. We are working in an orderly way and fulfilling goals we have set. The painting will show a much different Peru. LatinFinance chooses Humala as Man of the Year not only for what he has so far put on the canvass but also for what he is sketching out. A picture is already emerging of an administration that is far more pragmatic than anyone had anticipated. Should it continue in this vein, many now believe his government has the potential to change the country profoundly

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for the better. The presidents approach is winning praise from unexpected quarters. Hernando de Soto, Perus best-known economist, head of the Institute for Liberty and Democracy, and an advisor to Humalas opponent in 2011, says: Things are much better than I thought they would be. I always considered him a good man and thought his heart was in the right place, but his ideas were not pertinent to 21st century issues. This has

placed of any Latin American country to withstand another global economic shock. World Bank president Jim Yong Kim also recently heaped praise on Humala, saying that the Peruvian leader is managing a success story that goes beyond its own borders and is enjoying well-deserved international recognition.

Who is Humala?

Yet it is precisely his transformation from radical leftist to center-left pragmatist that

Humala and Castilla: staying the course changed and he is doing the right things with macroeconomic policy and antipoverty programs are working. Even Vargas Llosa recently applauded the man he had once so sharply dismissed. He has respected democratic institutions, freedom of press, freedom of criticism in a flawless manner, and has also respected the market economy, he said in a recent interview. Peru continues to grow and the middle classes continue to grow. Consistency in economic management is widely seen as one of Perus crowning achievements over the past two decades. It has allowed for an economic boom that is being increasingly cited for its endurance. The IMF, for example, noted in February that Peru today is the best has confounded Humalas detractors, his early backers and many observers, alike. The president refuses to accept that hes a different character to the one that campaigned for office. People say that there are two Ollantas: one the candidate, the other the president. But that is not true, he tells LatinFinance. I am the same person who wants to carry out my commitments. What I am doing is complying with my duty, which is to follow through on policies that are completely coherent with the campaign. I offer the Peruvian public social inclusion. The economic model cannot only be focused on growth. The commitment to inclusive growth is at the heart of Humalas economic philosophy. In that sense, it remains

fundamentally the same pledge as always. But while the end stays the same, the means have changed. Humalas administration has managed to boost business confidence and growth, which he now sees as prerequisites for improving social conditions. Today we have a stable macroeconomic policy, he says. We have concerned ourselves with consolidating a macroeconomic framework that allows us to redistribute economic growth in the country. It is a very different approach to 2006, when Humala ran on a left-wing nationalist platform, vowing to change the economic model in a manner similar to his peers in Venezuela, Ecuador and Bolivia. He railed against foreign companies exploiting Peruvian minerals and natural gas, and pledged to stop freetrade agreements in the works with the US, China and other countries. A campaign linking Humala to Chvez was a large factor in his loss in a runoff to Alan Garca, who capped a political rebirth after a disastrous five-year term in the 1980s. Despite the loss, Humala never stopped running, even though local pundits gave him little chance of winning the presidency in 2011. The safe bet until just weeks before the voting was on former president Alejandro Toledo or a list of other center-right candidates bunched together at the top. Humala ran decidedly to their left. The 198-page platform presented by his political party, Gana Per, talked about resource nationalization, state intervention and revision of the economic model. Looking back, De Soto says that what scared Peruvians in 2011 was not only the plan, but that the people who wrote it might run the government with proposals that no one could take seriously in a modern economy. But even before he faced the runoff election, Humala had jettisoned that plan, replacing it with a concise seven-point roadmap focused on the important themes for his administration. The roadmap won the backing of once-fierce critics, including Vargas Llosa and Toledo, who had previously equated Humala with fascism. After squeaking out a two-point

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victory against Keiko Fujimori, Humala went on to govern with his roadmap. The turning point came when Humala failed to offer cabinet posts to the original plans authors. He went on to sideline almost all his early allies, a large chunk of whom were booted out within six months in a shakeup that also saw 10 ministers leave government. The most conspicuous left-wing lawmakers brought in to run on Humalas ticket, including Social Party founder Javier Diez Canesco, split from the congressional caucus less than a year

assume as a government. The public needs to be at ease, the state cannot add tensions to peoples lives. I do not think that any government policy can be successful if we do not have a successful economy. Some argue that Humala had no choice but to adopt a pragmatic approach to leading the country and managing the economy, precisely to preserve the countrys high growth rates. Intervening against the machinery that was producing rapid growth would have cost him dearly. A large part of the credit for economic

undermined business confidence would have had a direct and substantial effect on growth momentum. I always felt that when Humala came to office, if he tried to do something radically different a la Chvez, it just wouldnt work, it would have been a recipe for disaster. And he knew that, says Michael Shifter, president of The Inter-American Dialogue, a think tank. Im not surprised that he just let these things happen.

Humala and Heredia: two for one into office. Still smarting from what they see as a betrayal, Humalas newfound opponents on the left, including his parents and three of his siblings, are harsh in their criticism. The presidents father, Isaac Humala, say that if his son does not tack leftward, he might fail.

No choice but pragmatism

Humala says ideologies cannot cloud state management and that the goal is a government that is predictable. I have to do what is necessary sometimes veering to the left, sometimes veering to the right looking for the best way to get to where we want to go, he says, likening his task to that of bus driver. There are risks, and these risks we

The Humala administration set to work quickly upon taking office. Almost immediately, it raised the minimum wage and ushered through Congress three bills that increased revenue from mining companies a central factor in creating the environment in which his government has evolved over the past 18 months. We created the mining tax, but unlike those who did not know me, who thought I was going to do it based on coercive methods, threats of nationalization, we did it through dialogue with the companies, explaining the countrys needs, says Humala. That is what this is about: complying with my duty. Erich Arispe, a director in Fitch Ratings sovereign group, says a major concern was striking a balance to win additional revenues from mining companies while not diminishing Peru as an investment destination. The private sector was a willing participant policy continuity goes to Humalas finance in reaching this agreement, he says. If you look at mining investment in the minister. Castilla was able to convince country, the agreement obviously did not the president that a change in the model undermine Perus attractiveness. would have been completely misguided, Boosting revenue through mining says Eduardo Morn, a former Peruvian levies, tax reform the tax take hit deputy finance minister and now head of the Bogota-based Fondo Latinoamericano 16% of GDP in 2012, the best in Perus modern history and other mechanisms, de Reservas (FLAR). has allowed Humala to expand social Humala as president today is seen as much closer in approach to Uruguays Jos programs. The principal component of the new approach was to set up a Ministry Mujica, a pragmatic, no-nonsense leftist, of Development and Social Inclusion than to Chvez. Humalas conversion if (MINDIS) to implement a host of new it can be called that to pragmatism also schemes, as well as to improve those reflects some basic truths about Perus already in place. economy. While growth in Peru today The president stresses that his holds up well in part thanks to strong domestic consumption, it is fundamentally government is not about new initiatives, but that it has instead created a social at the mercy of investment the main policy for the first time in Peru. We have driver of demand. Any move that

Keeping promises

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a social policy with second-generation social programs, productive programs. All of these things make me happy, but I cannot say that there is anything that has been concluded. Social spending in 2013 including education, health and inclusion increased the budget by 67% compared to the previous year. De Soto says Humalas push for social inclusion could be the defining characteristic of his tenure. We will find out what the man is made of when he has to do something new rather than just keep the trains running. This will be seen with social inclusion, not just social programs, he says. Tough decisions will be needed in the near future and we have to hope that he will take the bull by the horns and deal with them. Once a staunch opponent of globalization, the president has embraced free-trade agreements and a limited role for the state. But he cautions that while he believes in an open economy, he nevertheless has concerns about the free market. The economic model cannot only be focused on growth, Humala says. The famous trickle-down theory if you fill the pockets of the rich and it will spill over does not work because the pockets you are filling have holes. I promised social inclusion, which is development handin-hand with growth. We need to sustain growth. We cannot kill the goose that lays the golden egg, but create the conditions for it to lay more eggs.

comprehensive plan to propel Peru into the ranks of high-income countries is simply absent. Theres no sign that he has a very clear commitment to a reform agenda, says The Dialogues Shifter. Humala is obviously someone whos ambitious and can sense the mood. But I dont think hes somebody with a well thought-out vision of where he wants to take Peru. Hes someone who knows how to manage this upward trajectory, he says.

Tough decisions will be needed in the near future and we have to hope that [Humala] will take the bull by the horns and deal with them
Hernando de Soto, ILD
Shifter says this leads to the central issue facing Humalas presidency. We had Toledo, we had Garca and in both cases people talk of lost opportunity. Will people say the same after the Humala administration? As Perus middle class becomes stronger and more vocal, there is a growing demand for public services. The worry is that Perus inadequate infrastructure both physical and human capital and a poor educational system, even by regional standards, will hamper growth in the longer term. The risk may not be immediate, but it is no less profound. Ultimately, few countries sustain high growth for more than a generation and even fewer continue their high growth rates once they reach middle-income status. Reform has to happen now, says Rojas-Suarez. Twenty years from now is too late. By then, the growth of Peru will already have become unsustainable. In infrastructure alone, the country needs to invest close to $40 billion over

the coming five years to reach its target of 6% annual growth. The transportation ministry has said the state will invest $12 billion through 2016 building or improving the countrys road network. Working out how to allocate resources and how the public and private sectors should cooperate towards this end remains a central issue. Morn says not enough is being done in terms of creating a national plan for infrastructure. The idea was to bring projects that are badly needed to the regions, to make them change their priorities. But that has not happened yet, he says. You need strings to pull which you dont have right now. Thats a missing reform that you probably wont be seeing in the near future. Morn says that one of the main challenges is basic management of government departments. In Peru, you need a president to push every single minister all the way, he says. As a minister, you may wish to tackle fifty initiatives tomorrow but it doesnt depend on you, it depends on other ministries, Congress, the opposition, you name it. You need somebody at the top to coordinate efforts to make sure these things happen.

When the wind blows

Can the miracle last?

Perus growth is nevertheless today the envy of nations the world over. With 6.2% expansion forecast for 2013, it looks set to stay that way. Yet observers are increasingly asking how the Humala administration will safeguard the fruits of its economic boom over the longer term. The challenge facing Humala right now is precisely that he needs to answer the question of how sustainable this growth is going to be, says Liliana RojasSuarez, senior fellow at the Center for Global Development in Washington. We dont want to see a missed opportunity. Despite efforts to promote social inclusion, experts fear a more

Perus formidable output is a function of its mineral wealth and favorable winds over the past decade that have boosted the fortunes of many of Latin Americas commodity exporters. It is the worlds second largest copper producer after Chile and among the worlds top producer of silver and zinc. Production and exports are set to increase over the medium-term. Peru also exemplifies the positive impact of China, its largest trading partner, perhaps better than almost any other country. Rojas-Suarez says China remains central to Perus economic story. Perus growth is not a miracle, she says. It happened for a very particular reason: it has been the story of China to a very large extent China, combined with excellent macro management domestically. Its a complex story, but it is not a miracle. Fears that Chinas growth rate will fall sharply have eased in recent months, yet concerns still linger over the Asian

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nations structural transformation from an export-led economy to one that relies on domestic sources. Experts believe this rebalancing will ultimately mean a more permanent slowdown not only for China, but more generally for economies that have benefitted from a commodities boom over the past decade. Such a slowdown, when it comes, need not be cataclysmic. But a change in the external environment will inevitably pose new challenges for many countries, including Peru and could prove to be the litmus test of whoever is leading the country. Thats when wed see who Humala really is and how the political system

reacts, says Shifter. So far, its been a very nice ride, so you can have mediocre politics and weak institutions, [and] that doesnt put at risk the path the country is pursuing. But that wont last forever. Peru wants to diversify and industrialize its economy, strengthening other sources of revenue. The Humala administration is targeting agriculture and tourism. Agriculture is the second largest export category and the government expects tourism could rival its spot in the coming years. The government also needs to move on additional reforms to improve bureaucracy. The administration sent new civil service legislation to Congress in late

2012. It was flagged as a priority but has sat for three months with no movement. It is just one of a long list of bills that have been stuck in the legislature for months and, in some cases, years.

Paradox of Peru

In the world of Peruvian politics, Humala and his wife, first lady Nadine Heredia, are anomalies. They are the only politicians with approval ratings above 50% (the first lady is more popular, with 61% according to a recent poll). Former presidents Toledo and Garca, who are already slugging it out for a chance to return in 2016, have approval ratings below 30%. Keiko Fujimori is doing better, with support closer 40%.

Unite, dont divide: an interview with Ollanta Humala

LatinFinance sat down in February with Peruvian president Ollanta Humala at the presidential palace in Lima for a rare interview his most extensive to date with the foreign press. Humala offered insights into his plans for economic and social reform and how he hopes to safeguard the fruits of his countrys economic boom. The following are edited extracts of that interview.
LF: What is the essence of your economic philosophy? Humala: What I have tried to do is to comply with my duty. As President of the Republic, my duty is to go all out and not fail to meet the expectations the Peruvian people have of me. On the economic issue, I do not think that any government policy can be successful if we do not have a successful economy. It is like in a family: economic stability in a family allows for stability, peace of mind and development so that there can be a happy environment. When I took over the presidency there was a great deal of uncertainty. There were sectors that had power in the past, de facto power, that immediately wanted to pressure the administration, but we have not accepted any kind of pressure. but development is about quality of life. We need to solve this equation. LF: Some would say that today as president you are a changed man from the Ollanta Humala of 2006. Humala: I began by saying that I would comply with my duty. What I am doing is complying with my duty, which is to follow through on policies that are completely coherent with the campaign. I offer the Peruvian public social inclusion. The economic model cannot be focused only on growth. The famous trickle-down theory, if you fill the pockets of the rich and it will spill over, does not work because the pockets you are filling have holes. I promised social inclusion, which is development hand-in-hand with growth. We need to sustain growth. We cannot kill the goose that lays the golden egg, but create the conditions for it to lay more eggs. People say that there are two Ollantas, one the candidate, the other the president. But that is not true: I am the same person who wants to follow through on my commitment. I am a military man and something I learned about strategy is that the best battle to win is the one that is not fought.

We are following a new focus. We believe it is important to strengthen and foster the countrys economic growth, but if this growth is not distributed to everyone it serves no purpose. Economic growth is to have money in the treasury,

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But Humala could face the same dilemma in 2016 that Toledo and Garca encountered. Toledos party did not field a candidate in 2006, at the end of his term, and Garcas APRA did not have a candidate in 2011. Humalas Gana Per has no obvious candidate other than Heredia, and the constitution would have to be changed for her to run for president. Steven Levitsky, a Peru expert at Harvard University, says the lack of a political party system has led to the paradox of Peru namely, high growth accompanied by high levels of discontent. Growth over generations is not sustainable without a political system, he says.

Given that Gana Per does not yet appear to have anyone being groomed to step up in 2016, there is a good chance that the party will go dormant until 2021, Levitsky says. Experts agree that the Perus political system is essentially in a state of crisis one that, without reform, poses one of the biggest home-grown threats to long-term prosperity. It is a vicious circle, because there arent strong parties to stop a caudillo and the caudillo does not want strong party, because he wants to remain number one, says Cynthia McClintock, a Peru expert at George Washington University. Adds The Dialogues Shifter: You

need political parties to guarantee a degree of certainty and stability, though Peru is showing how long you can go on without this. A change in the external environment would put this to the test. For now, however, Humala says he is focused on the present, not on what happens in 2016. We need more infrastructure, more energy, more services. We need to reduce risks to guarantee a sound economy and public policies to ensure that growth is reaching the people who need it, he says. We will continue our oil painting through 2016 and it will reflect a Peru that is different, better. I only regret that the day has only 24 hours. It should be longer. LF

I do not fight battles that I dont think I will win. Besides, as president I prioritize what I need to do over what I want to do. Finally, when you assume the presidency, there are some obligations that are not written. One of these is to unite Peru, not divide it. LF: The confidence that Perus economic miracle has inspired is astounding. Do you see any risks amid the jubilation? Humala: Today, we have a stable macroeconomic policy. We have concerned ourselves with consolidating a macroeconomic framework that lets us act domestically in the country to redistribute this economic growth. We have pointed out that we maintain a state policy of following through on what we sign and we are trying to be a state that is predictable. You can know what is going to happen tomorrow. We are making the decisions we believe are necessary. Today, our level of debt is moderate, we have reserves of about $65 billion, we have tripled our GDP in the past 10 years and have had to invest in infrastructure to provide sustainability. We need more infrastructure, more energy, more services, a formula to lessen

risks. We need to guarantee a sound economy so that the state can be dynamic and invest in infrastructure so that there is even more growth. We also need public policies to ensure that growth is reaching the people who need it. Our public policy is to bring the state throughout the national territory. We are bringing the state to the interior of the country in such a way that we are combating two problems, poverty and inequality. The fight against poverty in Peru was only a partial fight, because it did not combat inequality at the same time. We have to remember that Latin America is not the poorest region in the world, but the most unequal region. Establishing a state presence is not only about collecting taxes, but delivering services and opportunities. Within this scheme, we believe that Peru has invested in many things, but never in education. Investing in education is the best instrument to protect us from risk in the future. LF: Peru is facing a surge in capital inflows. What is the best response? Humala: We face a financial crisis that is centered strongly in Europe right now. The US, which exported the crisis, is showing an

improvement, but it is still weak. It will take years to recover the rhythm of economic growth we were accustomed to seeing. Economic growth in China is better than anticipated. Peru is not exempt from this. Peru is basically a raw material exporter and our principal partners are the European Union and China. We are diversifying our economy to depend less on the sale of raw materials and more on non-traditional exports, which today have increased and now account for 30% for total exports. Twenty years ago, non-traditional exports accounted for 8% of total exports. We are a dynamic economy and we are concerned about the strengthening of the sol and the depreciation of the US dollar. Through the central bank we have adopted measures to intervene directly in the market to buy dollars to maintain a level of parity. We are also trying to create a capital market in soles in which the finance ministry will intervene and measures that avoid the arrival of short-term capital. These are some of the measures we have adopted.

Interview by Taimur Ahmad. To read the full interview with Ollanta Humala, go to www.latinfinance.com

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