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The economy should continue to do relatively well compared to others in Latin America, if the newly elected President follows up on his campaign pledges. This is clearly his intention, but he will not have smooth sailing since he lacks political clout and will have to bargain his way to success.
The run-off in the presidential elections was not about free-market principles and investment-friendly policies – both rivals vowed that they are committed to them. Rather than about economic strategies it was about the fears of some (almost certainly unfounded) that Keiko Fujimori, the 41-year old daughter of jailed former leader Alberto Fujimori, might repeat the mistakes her dad made. He earned kudos, in his time, for vanquishing the brutal Shining Path terrorist group and for defeating hyper-inflation. But his legacy includes an “auto-coup,” when he dissolved Congress and the judiciary and sent in tanks and soldiers. He ruled as an autocrat and eventually his regime collapsed in a whirl of systemic corruption and electoral fraud.
The victor in this month’s runoff, Pedro Pablo Kuczynski, popularly known as PKK or El Gringo because of his European ancestry, says he wants to strengthen the country’s institutions, particularly the judiciary. He hopes to rein in corruption and crime, and diversify the mining-oriented economy while he lowers taxes. At 77-years old he is eminently qualified for the job as a man who was educated at Oxford and Princeton, speaks perfect English, was just 22 when he was hired by the World Bank, worked on Wall Street and in the African mining industry, did stints as an official at the International Monetary Fund and in Peru’s Central Bank, and has already served his country as Mining Minister, Finance Minister and Prime Minister.
He says he wants to lower sales taxes gradually, support agriculture and tourism, offer tax incentives to large investors to persuade them to reinvest profits, and cut the tax rate for small business. His main problem will be his lack of a solid political base, given that his Center-Right Peruvians For Change party has only 18 of the 130 seats in Congress while Ms. Fujimori’s Right-wing Popular Force has 73, commanding the first majority that any party has held in a couple of decades. At least Ms. Fujimori, upon wishing Mr. Kuczynski luck, said that her party would be a “responsible opposition.” The second-largest group in the legislature, the Left-leaning Broad Front, should not be expected to support Mr. Kuczynski’s economic agenda.
How well the incoming President will do passing laws in Congress under these circumstances remains to be seen. Much of the state administration is notoriously corrupt. An overbearing government has pushed much economic activity underground, where it has only very limited access to credit. There has been a sharp increase in violent crime, particularly in the working class districts around Lima, and Mr. Kuczynski will have his hands full strengthening law enforcement, as his campaign platform promised he will do. Working against him will also be the extent to which world market prices for commodities have dropped, with little prospect of a major and lasting rebound in the near future.
On the positive side, though, Peru, uniquely in South America, has saved some of the gains from the commodity boom. Moreover, after early mistakes, the government of Ollanta Humala did begin to try and fix some of the economy’s weak spots. This included efforts at diversification with a weeding out of unneeded regulations, the establishment of industrial parks, and the development of technology centers. Thanks to this, the Peruvian economy racked up some of the Hemisphere’s best GDP growth rates over the past decade, with an average annual advance of about 6% while inflation averaged just 2.9% a year, according to the World Bank. The institution reports that poverty was reduced to roughly 22% last year from close to 56% in 2005.
Once heavily dependent on metals and other mining products for its exports, Peru is today a global competitor in the export of fishmeal, fish oil, coffee and – as even a cursory glance at US supermarket shelves will show -- non-traditional agricultural products such as grapes, artichokes and asparagus. The imprint “Made in Peru” appears on shoes, textiles, ceramics and chemicals. The country is also exporting liquefied natural gas and a recently concluded trade pact with Colombia, Mexico and Chile is helping to open additional markets.
The upshot will likely be that Peru this year will not slide into a painful recession, as some of the larger countries in the region are doing (Brazil and Venezuela come to mind), but will continue to show appreciable, if reduced growth of 3.5%-4.0%, with moderate inflation. A Kuczynski administration will not abandon fiscal responsibility. The country will remain a relatively good credit risk as the current-account balance-of-payments deficit will stay manageable, with lower receipts from exports of minerals being offset by reduced imports. Inflows of foreign direct investment will continue to fund the shortfall to a considerable extent, if not altogether. Official international monetary reserves will remain adequate. But Pres. Kuczynski’s program will at least in part be financed by raising debt. In the campaign he stressed that any new borrowing will be kept cautious, but, he said, “I have enough of a reputation to let go the brake a little.” (6/14/16)