Pedro Pablo Kuczynski, 66, recently completed his first full year back at the helm of the economy and finance ministry in Peruvian President Alejandro Toledo's government. He headed the MEF during Toledo's first year in office, July 2001-June 2002, but left in a general cabinet shuffle. He returned to the job in February 2004.
While international factors, such as high mineral prices, have played a role in Peru's economic story since 2001, PPK, as Kuczynski is popularly known, is widely credited for setting the foundation for what has become Peru's longest economic expansion since the 1950s.
The economy has expanded by more than 4% annually, 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.
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 this year?
PPK: I very much hope so. I think it depends on maintaining good policies and having a favorable 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 do 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 [doctors were on strike demanding 100% wages increases when this interview was conducted in mid-March] with moderation so that we don't go overboard and have a big fiscal deficit.
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 with the privatization there were very inflated numbers that were not real investment so 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 United States 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 certainly are not going to let this 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 agreed to repurchase. If it is around $1 billion, than 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 on to 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.
EM. With bonds and loans Peru has incurred billions of dollars in new debt in the past three years. Is the country may be taking on more debt than it can repay?
PPK: No. The external public debt is about $24 billion. It was a little under $20 billion when we started in this administration in 2001. It has gone up more or less $4 billion, but more than half of the increase is due to the appreciation of the yen and the euro and not new debt. Overall, the real growth of the debt in four years has been only about 10%, which is very low.
The other thing to remember is that the debt as a percentage of GDP has gone down. We are now at about 44% and we should be below 40% in a year or so. Another important point is that our interest payments are very low, $1.2 billion in a GDP of $75 billion. It is about 1.5% of GDP, which is probably the lowest in Latin America today.
EM: One issue raised repeatedly has to do with taxes, including new taxes created and the number of tax breaks on the books. What is the government doing about taxes?
PPK: Tax collection as a percentage of GDP has been increasing. It is above 14%, which is still inadequate, but much better than a few years ago. We have to expand the tax base.
We have presented a number of legislative initiatives to Congress to repeal tax breaks, including the tax exemption for fuels Amazonian departments. This legislation should be repealed for all the jungle areas that have highway links to the rest of the country.
For those without highway, the measure should remain because they are very far away and fuel is very costly. Our proposal would eliminate the exemption but set aside the same amount (about $100 million) for infrastructure projects in the jungle departments.