FACTBOX-Key political risks to watch in Peru

By Terry Wade and Mitra Taj

LIMA, Oct 1 (Reuters) - More than a year into his five-year term, President Ollanta Humala is trying to lure more foreign investment to Peru without aggravating social conflicts in rural provinces and leftist movements disappointed with his turn to the right.

Tensions over the spoils of natural resources have threatened to derail some ${esc.dollar}53 billion in investments lined up for the next decade in Peru, South America's fastest-growing economy. Humala has twice reshuffled his Cabinet to try to calm a wave of protests against mining projects.

His government is also struggling to stifle the political revival of the Maoist Shining Path rebel group that led Peru's bloody civil war in the 1980s and 1990s, and is trying to rein in demonstrations in the capital by striking doctors and teachers who want better pay.

The government announced in August it would stop trying to overcome local opposition to Newmont Mining's ${esc.dollar}5 billion Conga gold mine project in the northern region of Cajamarca - essentially conceding defeat in a protracted and costly political battle.

Polls show that Humala's approval rating fell to 40 percent in July and August, the lowest since he took office, but it edged up to 41 percent in September.

Humala is now more popular among wealthy, urban Peruvians than among the poor, rural voters who elected him. He is trying to emphasize social programs and infrastructure projects, especially those that would help develop poor rural provinces. Peru is a major producer of copper, silver, zinc and gold.

Still, critics say he has abandoned his left-wing roots and drifted to the right. Many say the "great transformation" he once promised to lift up the one-third of Peruvians mired in poverty is not happening fast enough.

ECONOMIC STABILITY, PERSISTENT POVERTY

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 some 30 percent of Peruvians who live in poverty.

The central government says cash from mining income taxes transferred to local and regional governments often does not benefit local residents because they have weak bureaucracies or lack the capacity to spend money they receive.

Humala has promised greater equality, setting a goal of cutting the poverty rate to 15 percent by the end of his term. He has started to roll out a minimum pension for all Peruvians over age 65, plans to raise the minimum wage a second time and is expanding a program of cash transfers to poor families.

Finance Minister Luis Castilla, a conservative economist who reassures investors but is a target for leftists, says new social spending will not jeopardize a healthy fiscal surplus, which swelled to 7 percent of GDP in the first half of this year.

At the same time, the government has empowered the state oil firm to boost output and turn Peru into a net energy producer. Modeled after powerful state-run companies like Brazil's Petrobras, Petroperu is seeking private partners to help exploit oil resources in concessions returning to government hands by 2016.

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

Mineral sales, which generate 60 percent of overall export earnings, have fallen in recent months on weaker prices, and Peru's economic expansion is now being driven by strong domestic demand. The economy is expected to grow 6 percent in 2012.

What to watch for:

- Former Humala supporters organize to form new leftist political parties.

- Humala's party seeks opposition allies in Congress as radical members break ties over Humala's moderate policies.

- Statist reforms or public-private partnerships in the energy sector.

SOCIAL CONFLICT

Peru's human rights agency says there are about 250 social conflicts in the country, mostly over natural resources in poor rural areas where many people have failed to see the benefits of a prolonged commodities bonanza helped by sales to China.

So far under Humala's watch at least 19 people have died in social conflicts, the last resulting from clashes with police at a Barrick gold mine. The same day, Human Rights Watch wrote to Humala demanding he stop security forces from killing protesters.

The government says 195 people died in similar protests during the five-year term of his predecessor, Alan Garcia.

Some leftist lawmakers have abandoned Humala's Gana Peru party saying he has been too quick to use force instead of mediation to quell social conflicts. The government says crackdowns as unavoidable as extremists stir up unrest.

Protests against Newmont's proposed gold mine left five dead in July when the government gave the project a green light, after the company agreed to change its plans to respond to local concerns over water supplies.

Prime Minister Juan Jimenez, a human rights lawyer appointed in July to replace a former army officer, promised to lead a "cabinet of dialogue" and announced in August the government would stop pushing Newmont's proposed mine after a poll came out showing that 78 percent of locals opposed it.

Newmont is continuing to build water reservoirs for the community while holding off on new mining facilities. Opponents are protesting that effort and all work toward the new project.

Even as social conflicts simmer in some rural provinces, many other mining projects have progressed without problems.

The government had success brokering a deal between global miner Anglo American and locals initially opposed to its ${esc.dollar}3 billion Quellaveco copper project..

Freeport-McMoRan is going forward with a ${esc.dollar}4 billion expansion at its sprawling Cerro Verde copper pit and Canadian miner Hudbay has broken ground on its ${esc.dollar}1.5 billion copper project after winning the support of local communities while keeping a low-key profile nationally.

Humala has promised to foster a new relationship between extractive industries and local communities.

His administration recently proposed doubling maximum fines for polluting companies and moving the approval of environmental impact assessments from the mining and energy ministry to the environment ministry, decisions critics say are long overdue. .

Earlier this year, Humala got Congress to pass a so-called consultation law that requires the state to try to earn the support of indigenous towns before building mines, drilling for oil or enacting legislation that affects them.

Policy makers plan to broadly apply the law starting in early 2013 in communities across the Andes and Amazon, but the law does not allow communities to veto projects.

What to watch for:

- The conflict in Cajamarca heats up as protesters insist Newmont abandon the Conga project for good.

- Congress approves moving oversight of environmental impact statements from the mining to the environment ministry.

DRUG TRADE, SHINING PATH REBELS

Remnant groups of the Shining Path rebel army have mocked Humala's goal of stamping out the 30-year-old insurgency. In April, they captured 36 natural gas workers in their first large-scale kidnapping since 2003. They said they had taken and released hostages merely to lure soldiers into ambushes.

Humala's interior and defense ministers resigned after the rebels killed 10 soldiers and police, and shot down a helicopter.

Though Shining Path's Maoist founders were captured in the early 1990s, when Humala fought against them as an army officer in a conflict that killed 70,000 people, small rebel units that broke with the group's jailed leader remain active in ambushing security forces and overseeing drug smuggling in lawless jungle areas.

Taking control of remote valleys in southeastern Peru is crucial for Humala's economic plans as construction will soon start on a ${esc.dollar}3 billion natural gas pipeline that will feed a new petrochemical complex on the Pacific coast.

The threat from rebels has stalled the project's development since the kidnappings in April, according to employees who work for the pipeline's operating company.

Peru is virtually tied with Colombia as the world's No. 1 coca producer, according to U.S. and U.N. studies, and largely adheres to eradication policies favored by the United States.

Humala has appointed at least three defense ministers so far. His latest pick, Pedro Cateriano, is the first civilian. He pledged to improve intelligence, raise soldiers' salaries and reactivate the civilian "self-defense committees" that helped push the Shining Path out of jungle territories in the past.

The military boasted killing a man it said was the rebel group's fourth-in-command on Sept. 5, a victory that was overshadowed by a bungled operation in the VRAE weeks later that killed an 8-year old girl dead.

What to watch for:

- Criticism over bungled operation leads to reforms or resignations.

- Retaliatory attacks as the government attempts to eliminate the Shining Path's jungle factions.

- Threats continue to delay construction on natural gas pipeline and disrupt other natural gas developments in the jungle. (Editing by Kieran Murray and Stacey Joyce)