TOLEDO ADMINISTRATION TOUTS LONGEST ECONOMIC BOOM

UNCLAS LIMA 002736 SIPDIS DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OFD TREASURY FOR OASIA/INL COMMERCE FOR 4331/MAC/WH SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ETRD ECON EINV EFIN PGOV PE SUBJECT: TOLEDO ADMINISTRATION TOUTS LONGEST ECONOMIC BOOM ¶1. (U) Summary. Outgoing Finance Minister Fernando Zavala announced that Peru is currently experiencing its longest economic boom, enjoying one of the highest growth rates in South America. During a July 11 presentation, Zavala highlighted Peru's 60 consecutive months of macroeconomic growth and stability, which he attributed to the increase in private investments and the value of mineral exports, more effective tax collection, and to the structural reforms enacted by the Toledo Administration since 2001 to liberalize Peru's financial system. Zavala provided a positive forecast of Peru's economy from 2006-2009 while emphasizing the need for the incoming Garcia administration to maintain Peru's 'virtuous cycle' of growth through greater fiscal discipline, more effective social investments, and a more open trade policy to improve Peru's competitiveness in the global market. End Summary. Sustainable Economic Boom -------------- ¶2. (U) At a July 11 presentation on the current state of Peru's economy, outgoing Minister of Finance Fernando Zavala reported that Peru is experiencing its longest period --nearly 60 consecutive months -- of economic growth, enjoying one of the highest growth rates in South America. According to national statistics, average real GDP growth increased from 4 percent in 2003 to 4.8 percent in 2004 to 6.7 percent in 2005. ¶3. (U) Zavala highlighted the country's positive macroeconomic indicators -- lower inflation, higher investment levels, and job creation -- and attributed Peru's overall growth and stability to the structural reforms implemented by the Toledo administration. Zavala argued that the next Administration should be able to sustain this boom because the growth is supported by long-term structural reforms, including more effective tax collection, greater private investments, an increase in traditional mineral and non-traditional agricultural exports, and by the liberalization of Peru's financial system. Recent economic growth, according to Zavala is due to the Toledo Administration's more market-oriented policy reforms and fiscal discipline, given the recessionary economy it inherited in ¶2001. 2006-2009 Economic Forecast and Recommendations -------------- -- ¶4. (U) According to Zavala, future prospects for maintaining Peru's overall macroeconomic growth and stability appear positive, particularly with the country's steady increase in traditional and non-traditional exports and the June 28 approval by the Peruvian Congress of the U.S.-Peru Trade Promotion Agreement (PTPA). Zavala underscored the need for Peru to become further integrated in the world economy and to improve its overall productivity and competitiveness with its largest trading partners -- the U.S., Chile, China, and Mexico. Minister Zavala cautioned the incoming Garcia Administration to exercise fiscal discipline to maintain the current 'virtuous cycle' of economic growth while at the same time improve social services to disadvantaged communities through more effective public investments. Comment: A Hard Act to Follow? -------------- ¶5. (SBU) Despite the outgoing Administration's optimistic assessment of Peru's current macroeconomic situation, many Peruvians feel that the current government has not focused on issues such as poverty, job creation, inequality and the country's economic vulnerabilities to the PTPA -- issues that became key during the recent presidential elections. In the coming months, President-elect Alan Garcia will face greater pressure to strike a careful balance: to reassure foreign investors that his policies can sustain the current macroeconomic boom and improve Peru's investment climate, while winning over the pro-Humala opposition with tangible results of his pro-poor policies before the November regional elections. STRUBLE