By Lucien Chauvin
Despite its debt, the Peruvian economy continues its very healthy expansion
Pedro Pablo Kuczynski, 66, is enjoying his second stint as Peru’s finance minister and is widely credited with setting the foundation for what has become the country’s longest economic expansion since the 1950s. The GDP rate is at 4%, inflation has stayed low, exports have reached double digits for the first time, international reserves have surged by $4 billion, and tax collection is reaching historic levels. These rosy numbers have led some pundits to suggest that PPK should consider a presidential bid next year. He talks exclusively to Emerging Markets.
EM: Macroeconomic numbers have been positive for several years, and 2004 was one of the best years in decades for the economy. Will the trend continue?
PPK: I very much hope so. I think it depends on maintaining good policies and having a favourable international economy. The situation is very positive right now, because commodity prices are very high and interest rates remain low. If we don’t do anything foolish we should be able to continue growing at this rate [5%] and hopefully perform a little bit better.
EM: What are some of these good policies?
PPK: Well, there are many, but one thing is maintaining fiscal discipline. Our international rating has been upgraded, and the country risk has improved continuously for the past four years. These are indicators that the situation has improved and continues to improve.
EM: What are the big challenges facing the economy?
PPK: The big challenge is to be able to face all salary demands with moderation so that we don’t go overboard and have a big fiscal deficit. [Doctors were on strike demanding 100% wage increases when this interview was conducted in mid-March.]
EM: There has not been much foreign investment, despite the steady levels of growth in the past few years. Are you concerned about this, and what can Peru do to attract more foreign investment?
PPK: I think we are going to be in the $2 billion range, which is around 3% of GDP, for quite a while. That is not low in overall terms. The thing is that in the 1990s following the privatizations, there were very inflated numbers that did not represent real investment as much as a transfer of payments. Like I said earlier, as long as we do not do anything foolish, foreign investment will continue to come.
EM: Will the free trade deal with the US be an immediate boost to the economy and foreign investment?
PPK: Absolutely. Right now we have the ATPDEA [Andean Trade Promotion and Drug Eradication Act, passed by the US Congress in 2002], which has been extremely beneficial for Peru. The problem with it is that it is only short term and will expire in a few years. I think that investment will get a tremendous boost once we have a long-term treaty.
EM: The central bank acquired more than $2 billion last year and nearly $900 million in the first two months of this year to maintain the exchange rate. Are you concerned that the central bank is intervening too much in the economy?
PPK: We are preventing the exchange rate from appreciating too much, which I think is a good policy. Countries that produce commodities and that let their exchange rate appreciate too much end up killing their export growth, and we are certainly not going to let that happen.
Purchasing foreign currency obviously creates a primary expansion in the money supply, but since the counterpart is a significant increase in reserves, it does not have an inflationary effect. In short, I am not concerned at all.
EM: Is the economy and finance ministry planning to issue more bonds this year?
PPK: Internationally, I don’t think so. It would depend on our negotiations to prepay some of the Paris Club debt [to which Peru owes $8.6 billion] in the coming months and the amount we finally agree to repurchase. If it is around $1 billion, then we should be able to do it without issuing an international bond.
EM: How are the negotiations going with the Paris Club?
PPK: Quite well, I believe. There are some countries that do not want to sell Peruvian debt because they consider it to be a good credit. They would like to hold onto it, so they have tried to discourage us from repurchasing it by trying to put a premium on the repurchase. Of course, we are not going to pay a premium. This is the main stumbling block in the negotiations.