Identifier
Created
Classification
Origin
05LIMA1361
2005-03-21 22:19:00
CONFIDENTIAL
Embassy Lima
Cable title:  

FINANCE MINISTER ON THE CURRENT SITUATION AND HIS

Tags:  EFIN ETRD ECON PGOV PE 
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C O N F I D E N T I A L SECTION 01 OF 02 LIMA 001361 

SIPDIS

E.O. 12958: DECL: 03/21/2015
TAGS: EFIN ETRD ECON PGOV PE
SUBJECT: FINANCE MINISTER ON THE CURRENT SITUATION AND HIS
POLITICAL PROSPECTS


Classified By: Polcouns Alexander Margulies. Reason: 1.4(b/d).

----------
SUMMARY
----------

C O N F I D E N T I A L SECTION 01 OF 02 LIMA 001361

SIPDIS

E.O. 12958: DECL: 03/21/2015
TAGS: EFIN ETRD ECON PGOV PE
SUBJECT: FINANCE MINISTER ON THE CURRENT SITUATION AND HIS
POLITICAL PROSPECTS


Classified By: Polcouns Alexander Margulies. Reason: 1.4(b/d).

--------------
SUMMARY
--------------


1. (C) SUMMARY: Finance Minister Pedro Pablo Kuczynski
(PPK),during a 3/18 breakfast with the Ambassador, was
uncertain whether the Toledo Administration would be able to
hold the fiscal line as pressure mounts in an electoral
climate to meet social demands and to show concrete progress
on construction of a highway linking southern Peru with
Brazil. PPK noted the negative effect on GOP finances caused
by the GOP's granting raises to doctors and teachers, and
criticized tax agency SUNAT's handling of an investment
dispute and the GOP's planned conditional cash transfer
program to alleviate poverty. He was confident, however,
that the President will veto a bill that would reduce
agricultural tax receipts by 180 million Soles (USD 55
million). PPK said that he could be "interested" in a
presidential candidacy if a workable coalition could be
formed; opined that time is running out on Prime Minister
Carlos Ferrero, but did not speculate on who a successor
would be. END SUMMARY.

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PPK ON THE ECONOMY
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2. (C) The Ambassador opened the discussion by enquiring as
to the seriousness of front-page reports in the day's press
that PPK had threatened to resign if President Alejandro
Toledo did not/not veto a bill passed by Congress that would
exonerate agricultural producers from making advance VAT
payments on their produce. PPK said that there was no danger
of his resigning over this issue, as he was confident the
President would veto this "irresponsible" bill, which would
facilitate tax evasion and cost the treasury some USD 55
million in revenue.


3. (C) The Ambassador then asked about PPK's strategy to
deal with rising fiscal pressures in the runup to the 2006
elections, observing that President Toledo seemed torn in two
directions over the issue, wanting Peru's debt to reach
investment grade status (which would require great fiscal
restraint) but also seeking to leave a legacy of new roads

and other infrastructure projects to benefit the country.
PPK replied that Toledo has prioritized making progress
before he leaves office on the planned southern road
corridor, to link Peru with Brazil. PPK said "things will
happen shortly" on the road corridor, although he had doubts
about the accuracy of cost projections. (Note: this project,
for which the GOP is expected to offer concessions in the
next few months, will cost hundreds of millions of dollars to
complete. End note).


4. (C) The Minister also expressed concern over the fiscal
effects of recent public sector raises on the budget. He
said raises for doctors, granted after a recent strike, would
cost USD 50 million in 2005 and USD 80 million annually
thereafter, while promised raises to teachers would cost USD
250 million this year and USD 400 million/year thereafter.
President Toledo, PPK complained, agreed to the spending
increases because of his inability to stand up to social
pressures from strikes and other activities. The Minister
commented that even with a better fiscal balance Peruvian
debt will not reach investment grade ratings until these
protests, and other types of social conflict (e.g. protests
afflicting mining operations in Peru) diminish greatly. He
thought it would take a couple of years of improved social
investments for that to happen.


5. (C) PPK expressed frustration with GOP tax agency SUNAT,
which he said had &screwed up8 its handling of a major tax
issue involving Canadian gold company Barrick. (Note:
SUNAT,s large tax assessment against Barrick was rejected by
the tax court in January, but Congress has opened an
investigation into whether the company is &evading8 taxes.
End note). He said SUNAT also never should have sent a
letter to mining companies asking them how much they consider
they owe in royalties, which set the agency up for conflict
with the companies. PPK said he called SUNAT head Nahil
Hirsh on the carpet March 14 over her handling of the case.
He reflected how President Toledo wants to fire Hirsh, but
that he is reluctant to do so since she has raised tax
collections consistently.


6. (C) PPK then frankly criticized the GOP's planning around
its proposed conditional cash transfer program, which would
provide targeted USD 30 monthly grants to certain poor
families. He emphasized that Mexico's program, a regional
model for programs of this type, took seven years to properly
design and execute. In contrast, he said the Prime
Minister's office, leading the development of Peru's program,
is moving too fast. PPK noted three particular problems with
Peru's proposal: 1) it is a bad idea to focus this on cities,
where Toledo wants to begin, rather than rural areas, because
it is hard to get an accurate census of the poor; 2) the
grant amount is too high for rural areas, and could provoke
violent struggles within families over control of the cash;
and 3) the government has no exit strategy, to prevent the
program from becoming a permanent entitlement and drain on
the Treasury. He concluded that the program will start
slowly and have only a minor fiscal impact this year.


7. (C) The Ambassador also asked about GOP plans to name a
new President of state oil company PetroPeru, after the
recent resignation of Alejandro Narvaez. PPK replied that
Peru Posible co-Secretary General and Congressman Jesus
Alvarado had nearly convinced President Toledo to place a
&very bad name8 in the job, but said he and Energy Minister
Sanchez were teaming up to block this person,s appointment.
PPK said there remains a role for the state company, for
example in providing rural areas with gas stations which
would otherwise be underserved, but emphasized the need to
privatize the Talara oil refinery. Given the current
government,s weakness, however, he concluded, this will have
to wait until the next government takes office. PPK added
that Energy Minister Sanchez agreed on the need for private
investment in the Talara refinery.

--------------
PPK on Politics and his Electoral Prospects
--------------


8. (C) PPK had nothing good to say about his new Cabinet
colleagues, commenting that new Agriculture Minister Manuel
Manrique is "a disaster" who is "outside the lane" on trade
issues. He also questioned Manrique's probity. PPK termed
new Production Minister David Lemor a "well-known
protectionist." He continued that "time is running out" on
Prime Minister Ferrero, who he thought would not/not last
until July, but had no information as to who might be the
successor.


9. (C) PPK admitted that he harbors presidential ambitions,
though he tempered this by insisting that his interest is a
"3" on a scale of 1-to-10. The circumstances have to be
right, he explained, if such a candidacy is to be pursued.
He discounted the possiblility that he would run on the Peru
Posible (PP) ticket (an idea launched recently as a trial
balloon by PP Political Secretary and now Labor Minister Juan
Sheput),but said could run on a centrist party's ticket with
broad coalition backing. One possibility as an electoral
vehicle was the Justicia Nacional party, led by center-right
politician Jaime Salinas, but PPK questioned whether a party
with at most two percent support in the polls would be
suitable, adding that a more established centrist party would
be preferable.

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COMMENT
--------------


10. (C) PPK's frank assessment of the current economic and
political situation provides an inside view of the difficulty
the GOP may have in maintaining fiscal discipline as the 2006
election campaign heats up. President Toledo is not
following a coherent policy line on fiscal restraint,
favoring political connections over policy considerations in
his new Cabinet appointments, ceding on wage increases in
response to protests, and pressing for expedited movement on
an ill-thought-out poverty alleviation program and on the
southern highway connection to Brazil. With the replacement
of Prime Minister Ferrero a question of when, not whether,
the GOP is focusing on the short-term and has minimal
capability to make tough decisions. PPK's presidential
prospects appear equally slight; Sheput's trial balloon
generated little public enthusiasm and none of the parties
other than Salinas' Justicia Nacional have indicated any
support for a PPK run. END COMMENT.
STRUBLE

=======================CABLE ENDS============================