Peru's President Ollanta Humala speaks during a nationwide address at the government palace in Lima, June 23, 2012.© Handout . / Reuters/Reuters
Peruvian President Ollanta Humala's looming cabinet reshuffle is the right way to protect the smarter decisions of his surprising administration. A year after taking office, a severe crackdown on the country's protesting miners is overshadowing his sensible economic policies. Replacing hard-nosed prime minister and former army man Oscar Valdes with a human rights lawyer should help save face – and may even restore some of Mr. Humala's dwindling popularity.
Many initially regarded Mr. Humala as just another left-leaning Latin American populist. He certainly once had a checkered reputation. His past as the leader of a military uprising made him look like Venezuela's Hugo Chavez, who led a failed coup before eventually winning office. And his populist rhetoric laced with ethnic nationalism during his unsuccessful 2006 presidential bid made investors nervous.
So when he won last year's election, the Lima equity index promptly lost 12 per cent of its value, its worst day ever. Peru's risk measured by five-year credit default swaps jumped to its highest level in two years. But he quickly won investors around. Early on he reappointed Peru's respected central bank president, Julio Velarde. And he put Luis Miguel Castilla in charge of the nation's purse strings – he was deputy finance minister for Mr. Humala's predecessor Alan Garcia.
Mr. Humala's steady economic hand has pushed Peru's MSCI index up nearly 4 per cent this year, compared with the 1.5 per cent drop for the region as a whole. CDS spreads are back below the level of last year's election. And GDP grew 5 per cent year-on-year in May. Mr. Humala's 2012 budget upped social spending while leaving a surplus equivalent to 1 per cent of GDP, a move reminiscent of the early fiscal successes of Brazil's leftist former president Luiz Inacio Lula da Silva. And he's planning a $750-million (U.S.) stimulus favouring infrastructure projects instead of populist spending.
Siding with overseas investors against the miners makes some economic sense. After all, the industry accounts for three-fifths of Peru's economy. But the ensuing heavy-handed tactics against protesters have cost him – his popularity is down to 40 per cent this month, based on an Ipsos poll. Removing Mr. Valdes should help get him back on track to looking more like a Lula than a Chavez.