Country Report Peru Peru at a glance: 2003-04 OVERVIEW The president, Alejandro Toledo, completed two years in office on July 28th with another attempt to relaunch his government. He has a new business- oriented cabinet, headed by a new prime minister, Beatriz Merino, and has admitted to previous mistakes. The new cabinet will not be given a long honeymoon period, but initial public reaction has been cautiously positive. The cabinet is under tight fiscal restraints, and is unlikely to be able to meet the demands that brought people onto the streets in recent months; the Economist Intelligence Unit expects more protests. Opposition parties will take advantage of Mr Toledo’s weakness, but they have little interest in forcing him out of office. The government will continue to press for the extradition of the former president, Alberto Fujimori. It will keep economic policy broadly pro-market and focused on prudent fiscal management, but some policy dilution can be expected. Solid economic growth and continued improvements in the efficiency of the Superintendencia Nacional de Administración Tributaria (Sunat, the tax authority) will help the government to increase revenue collection in 2003-04. Nonetheless, the government will miss its fiscal deficit targets. We remain pessimistic about the prospects for the world economy this year, and cautious looking into 2004. Economic growth will reach 3.8% in 2003 and 2004. Inflation will remain low and the exchange rate stable, and the current-account deficit will stay at around 2% of GDP. Key changes from last month Political outlook • There are no major changes to our political forecast; the public reaction to the new cabinet has so far been cautiously positive. Economic policy outlook • The prime minister has signalled that the privatisation programme may be relaunched, but only in consultation with regional governments. Economic forecast • There are no changes to our economic forecast. August 2003 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 1356-4064 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Peru 1 Outlook for 2003-04 Political outlook Domestic politics The president, Alejandro Toledo, completed two years in office on July 28th with another attempt to relaunch his government. He has a new business- oriented cabinet, headed by a new prime minister, Beatriz Merino, and has admitted to mistakes in his first two years of government. The new cabinet will not be given a long honeymoon period, but initial public reaction has been cautiously positive. Mr Toledo’s popularity remains low, and protests have continued, although not at the level that led Mr Toledo to declare a month-long state of emergency in May. Ms Merino has a reputation as an honest and efficient administrator with a no-nonsense style, but the hostility of the main opposition party, the Partido Aprista Peruano (Apra), and some legislators within Mr Toledo’s party could be handicaps as she carves out a role for herself in the government. The fiscal position is tight and it is unlikely that the new cabinet is going to be able to meet the many demands that have brought people onto the streets in 2003. Additional targeted protests could emerge in the coming months. Ms Merino will look to position herself clearly at the helm of the day-to-day workings of government. Much will depend on her relationship with the president himself and his willingness to assume a lower profile in some areas of government. Although unpopular tax measures provided an immediate motive for the resignation of the cabinet of the former prime minister, Luis Solari, in June, the crisis that preceded the ministerial changes was caused more by Mr Toledo himself than by his ministers. Having proven himself to be a largely ineffective leader, Mr Toledo will have to rely heavily on, and delegate to, his second-in-command. Mr Toledo’s party, Perú Posible, is in a minority position in Congress and is plagued by infighting. The demands of the so-called hardline of the Perú Posible legislators could slacken to a degree after the failure to secure two key positions: the premiership (for which the party nominated Carlos Ferrero) and the president of Congress, for which David Waisman was the proposed candidate. Perú Posible’s alliance with the Frente Independiente Moralizador (FIM) will also remain tenuous in the coming months. Even with a new prime minister, any legislation sponsored by the executive, such as tax measures, will have a difficult passage through Congress. However, although opposition parties, particularly Apra, will take advantage of Mr Toledo’s weakness, they have little interest in forcing him out of office. The leader of Apra, Alan Garcia, is more concerned with convincing the Peruvian public of his ability to govern at a future date. Fiscal restraints will also make it difficult for Mr Toledo to fulfil another pledge to increase spending in order to combat a recent upsurge of activity by the Sendero Luminoso (Shining Path) guerrilla group. Additional actions by the rebels would shake investor confidence. The kidnapping of 71 gas pipeline workers in June has revealed serious inadequacies in Peru’s intelligence services. Country Report August 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 2 Peru International relations As Plan Colombia, a US-funded drug-eradication programme, intensifies, efforts by Colombian guerrilla groups and drug mafias to establish safe havens and drug production bases in Peru’s Amazon region will be the only serious threat to stability from neighbouring countries. Peru will reinforce its military presence along the Putumayo River to prevent border incursions, and will keep the Colombian authorities informed of these operations. The government will prioritise a bilateral trade agreement with the US over talks towards an eventual Free-Trade Area of the Americas (FTAA). The Peruvian government continues to seek the extradition of the former president, Alberto Fujimori, who resigned his post while abroad in 2000 and remains in exile in Japan. The Japanese government—on account of Mr Fujimori’s parentage—has granted Mr Fujimori residency in Japan, and has so far refused to hand him over. Peruvian prosecutors have filed a dozen charges against Mr Fujimori with Interpol, ranging from treason, corruption and abandoning office, to murder. Peruvian diplomats have held news conferences to publicise what they see as Japanese intransigence and to gain international support for their request to have Mr Fujimori stand trial. Economic policy outlook Policy trends The government will endeavour to keep economic policy broadly pro-market and focused on prudent fiscal management, but some policy dilution can be expected given the government’s weak congressional position and the likeli- hood of further protests. However, there is consensus on many important policy issues, such as the need to increase competitiveness to exploit tariff-free access to the US for a wide variety of exports from Andean countries under the Andean Trade Promotion and Drug Eradication Act (ATPDEA). In his annual address to the nation on July 28th Mr Toledo promised an overhaul of the tax system which would replace the temporary one-point increase in sales and value-added tax (VAT). No further details were made available, but an announcement was promised within 90 days. The appointment of the former mines and energy minister, Jaime Quijandría, as minister of finance, was seen as a positive sign by investors. Ms Merino has announced that the privatisation programme, which has been stalled since mid-2002, might be relaunched, but only in consultation with local governments, to avoid the problems of mid-2002, when the announcement of an electricity privatisation sparked riots.