President Ollanta Humala, who took office in July, is trying to ramp up social spending to fight poverty without scaring away investors in Peru, one of the world's fastest-growing economies.

By forming a center-left coalition government, scoring key legislative victories early on and luring in billions in new investment, the former military officer has distinguished himself from his predecessors and enjoyed a long political honeymoon.

But his image as an anti-corruption crusader has been threatened by investigations into one of his two vice presidents. The scandal, the first of his presidency, could dent a high 62 percent approval rating.

Meanwhile, anti-mining protests are spreading as local populations demand a greater share of profits, challenging Humala's resolve to quell social conflicts in the top metals producer.

The Andean country also faces a growing illegal cocaine trade and officials are trying to overhaul its anti-drugs program to focus on development rather than eradication without losing the United States as a key partner.


Humala took office on July 28 vowing to ensure that Peru's poor share in the benefits of an economic boom and fight endemic corruption while leaving free market reforms in tact.

    Orthodox economic policies have been in place in Peru for nearly two decades, helping it achieve investment-grade ratings and years of brisk growth. But inadequate social programs and weak state administration have done little to help the one in three Peruvians who live in poverty.

    Humala has promised a minimum pension for all Peruvians over age 65, plans to raise the minimum wage a second time and vows to expand a program of cash transfers to poor families.

Finance Minister Luis Castilla, a conservative economist whose appointment reassured investors, has said new social spending won't jeopardize Peru's healthy fiscal surplus.

Major mining firms have agreed to pay the government some $1 billion per year under a new tax and royalty program, though revenue for the new social programs will depend on metals prices and profit margins.

The government also wants to exert greater control over strategic oil and natural gas resources, saying they should be steered toward domestic consumers instead of exports.

But Humala has vowed not to copy the nationalizations carried out by his one-time political mentor, Venezuela's socialist President Hugo Chavez.

Instead he has tried to emulate the soft-left style of Brazil's former President Luiz Inacio Lula da Silva and promote economic growth with what he calls social inclusion.

Since Humala took office, foreign firms have pledged about $15 billion in investments in Peru, equivalent to 10 percent of gross domestic product. In another sign Humala has won trust abroad, the World Bank has pledged a $3 billion line of credit to help fund his anti-poverty agenda.

Despite many early successes, Humala's anti-corruption credibility is at risk as the attorney general and Congress investigate Vice President Omar Chehade for corruption.

Chehade, one of Peru's two vice presidents, allegedly asked a police general to help his brother evict workers from a cooperative farm to benefit a private company.

Humala kept silent for nearly a week as the scandal exploded in local media and then said he would wait for results of the inquiries before deciding Chehade's fate.

What to watch for:

-- Humala fires Chehade and preserves his own reputation as a corruption fighter or he waits for public prosecutors to finish investigations.

-- More radical members of Humala's party become frustrated by his moderate policies.

-- Humala struggles to hold together a diverse cabinet or reshuffles it to reflect a more progressive streak.
-- Statist reforms or public-private partnerships in the energy sector.


Peru's human rights agency says there are some 200 social conflicts over natural resources in the country, mostly in poor rural areas that have failed to see the benefits of a prolonged commodities bonanza. About 100 people have been killed in over the last three and a half years in protests that pit isolated towns against big mining and oil companies.

The lingering conflicts could hold up some $50 billion in mostly foreign investment planned for oil and mining projects over the next decade.

Townspeople in northern Peru have asked U.S.-based mining company Newmont to stop work on Peru's most expensive mine ever, the $4.8 billion Minas Conga, for fear it will affect scarce water supplies.

Humala got Congress to pass the consultation law requiring firms and the state to try to reach a consensus with tribes and rural towns before building mines, drilling for oil or enacting legislation that affects their lands.

But the law does not apply to projects that have already been approved and therefore will not resolve existing conflicts when it goes into effect in January.

High metals prices in the top producer have also prompted workers to demand a greater share of mining profits.

Humala has signaled he may take a pro-labor stance in wage disputes and, for the first time in 40 years, the government declared a strike legal at Freeport McMoRan's giant copper mine Cerro Verde. The ruling allows workers to stay on the picket line without fear of losing their jobs.

What to watch for:

-- Implementation of consultation law in rural towns.

--Dashed hopes in towns where the consultation law won't be applied retroactively.

-- More workers encouraged by government's changing views on organized labor and go on strike.


Peru has struggled to capture remnants of left-wing Shining Path rebels who smuggle drugs in a violent region rife with cocaine known as the VRAE, the world's most densely planted coca region. The country is the world's No. 1 coca producer and the second-biggest cocaine producer, according to the United Nations, while the United States has said Peru may now be a bigger cocaine producer than Colombia.

At least 50 soldiers or anti-drug police have been killed in the VRAE and other jungle areas controlled by the Shining Path in the last two years. The group's Maoist leaders were captured in the early 1990s after waging a brutal war against the state but there are still small rebel units active.

Shortly after Humala took office in August, Peru surprised Washington by suspending all coca eradication for a week to evaluate anti-drug programs that are still being reworked.

Peru's new anti-drug czar Ricardo Soberon says eradication has since resumed and that Peru has had some success persuading U.S. officials to accommodate Humala's emphasis on alternative development for coca farmers instead of pulling up plants.

What to watch for:

-- Arrests of key leaders of the insurgency.

-- Any serious attacks against the army that undermine its ability to win control of the VRAE region.

-- Humala's government in a delicate dance with the United States as it tries to rework its anti-drug strategy without losing funding.