Peru Elections: A Case Study in Emerging Market Volitility

I have been living in Peru for the past two years and have been able to learn so much about the country, culture and economy - there is so much more to Peru than Machu Picchu.

Unbeknownst to me, and probalby most for that matter, is that Peru has had a white hot economy for the past decade. Its had an average growth of about 8% for the past eight years, and still maintaining the thunder despite the global economics collapse. It has the fastest growing economy in Latin America and is diversified in its industries, minerals, oil/gas, fishing, agro, tourism, manufacturing, etc. - although the primary driver has been mining. While a country such as Peru often gets overshadowed by the much larger BRICs it has definitely represented what open markets can do to a developing nation. Also, while not a huge country, its by no means small with a population hovering around 30 million.

However, despite tremendous economic growth the country still has a ~35% poverty rate, much of the country is poor and a ruling class definitely has had the upper hand forever.

Which brings me to the point of my post. Yesterday was the Peruvian presidential runoff elections, and after the 3 moderates cannibalized themselves in the first round, two candidates emerged. Both populists, one the conservative daughter of one of the most corrupt presidents in the history of peru who is currently in jail for human rights violations and the other a leftist that has been previously linked to Hugo Chavez (although he has recently distanced himself) that talks of nationalize and wealth redistribution.

Well, it appears as though the leftist won. Today the markets opened and dropped 8.7% before being suspended. The multinational mining companies saw there stocks drop over 10%. The Nuevo Sole, the currency, has fallen. Investors, domestic and foreign alike are very nervous. It will be interesting to see how everything plays out, maybe the new president will govern well maybe not. The problem is that no one knows.

The thing that I find most interesting about the situation in Peru, and it relates to almost every emerging economy, is that they are so fragile. One day, a country is a rising economic power of a region with a decade of monumental growth the next day it is in hyperspace with the potential to have a significant downward spiral.

I think this serves as a good lesson. Many people, think of emerging markets as the new force that can't be stopped. But the fact is they are so fragile, poor and potentially politically unstable that something as unforeseeable and unpreventable such as elections has the potential to change everything overnight.

It will definitely to see how this plays out and recommend anyone that is interested in emerging markets to not only read up on Peru's growth but track what happens over the next couple of years.