SCENESETTER FOR CODEL LOWEY

UNCLAS LIMA 000164

SENSITIVE
SIPDIS

H FOR CODEL LOWEY

E.O. 12958: N/A
TAGS: PREL PGOV SNAR ECON OVIP PE
SUBJECT: SCENESETTER FOR CODEL LOWEY


1. (SBU) Summary: You will arrive in a Peru relatively
well-positioned to deal with the unfolding global economic
crisis but deeply concerned about its longer-term
implications. Thanks to several recent policy successes and
a tactical shift to the left, President Garcia's nation-wide
poll numbers have risen to nearly 30%. Peru's weak state
institutions limit the government's ability to deliver the
kinds of public services people expect and to address key
structural challenges such as drug trafficking and terrorism.
U.S.-Peru ties have rarely been better, anchored in free
trade, long-standing counter-narcotics cooperation, a good
security relationship and a broadly shared world view.
Welcome. End Summary.


2. (SBU) Peru finds itself facing the same heavy global
cross-winds that are buffeting the world. Many analysts
believe Peru is relatively well-positioned to weather the
storm -- with high liquidity, low debt and little exposure to
the core structural causes of the crisis -- and its
projection for growth this year (4-5%) remains the highest in
the region. But few argue Peru's relative economic stability
means the country is in the clear, and local confidence has
been further shaken with each successive wave of troubling
news. For example, the price of commodities, which still
make up over 60% of the country's export earnings, have
plummeted since the onset of the storm. Peru's small stock
market has dropped sharply also. Some large companies have
begun payroll cuts and lay-offs, and some multinationals are
rethinking their long-term investment strategies. Even
Peru's remittance earnings have fallen somewhat. In
responding to this challenge, the Garcia government has
designed a public stimulus plan whose launch will be
calibrated to the crisis's direct and likely increasing
impact on Peru.


3. (SBU) Thanks to several recent policy successes and a
greater focus on social priorities, President Garcia's
nation-wide poll numbers have risen from below 20% in October
to nearly 30% in January. The government's relatively
favorable economic positioning, its successful organization
of two major international meetings in 2008 (the European
Union-Latin American country summit in May, and the APEC
summit in September),and the entry into force of the
long-awaited U.S.-Peru Trade Promotion Agreement (PTPA) have
contributed to this rise. Some analysts believe the dip in
inflation -- one cause of his earlier lower numbers -- has
also played a role. Garcia's recent shift is reflected in
the choice as PM in his new cabinet of Yehude Simon (the
popular former regional president of Lambayeque who embodies
a left-of-center, social democratic political philosophy),in
events with a broader public, and in his periodically
announcing high-profile public-works projects -- water,
roads, energy -- in poorer areas throughout the country.


4. (SBU) Peru's weak state institutions limit the
government's ability to deliver the kinds of public services
people expect. This challenge is particularly worrying in
politically vulnerable regions where the state is largely
absent and the "anti-system" opposition is strong. The
government has sought to counter this problem with policies
relating to streamlining public service entities, increasing
spending on social services, and decentralizing key state
functions to regional and municipal governments. The results
of these policies have been mixed. In the case of
decentralization, for example, much has depended on the
quality of local leadership, the administrative capacity of
sub-national governments, and the resources available to the
region through royalties on mining and other natural
resources.


5. (SBU) Peru's governmental challenges have also
complicated Garcia's ability to confront Peru's profound
structural challenges - including drug-trafficking and the
remnants of the terrorist group Sendero Luminoso (Shining
Path). Nonetheless, Garcia's government has made a serious
effort to combat drug-trafficking in cooperation with the
United States and other countries. Internally, the
government places emphasis on interdiction and eradication,
the latter of which has been directly linked to alternative
development. While entrenched pockets of coca cultivation
persist, the strategy of closely linking eradication with
alternative development has had significant results in the
Upper Huallaga Valley. Externally, the GOP most recently
reached out to Mexico during the APEC leaders' meeting to
enhance counternarcotics cooperation, signed an agreement
with Thailand on alternative developement, and has been
working with Colombia on its shared responsibility
initiative. The involvement of Shining Path (SL) remnants in
drug trafficking, whether as facilitators or direct
participants, continues to present a particular challenge for
Peru's security forces. The Army launched a long-delayed
operation to challenge remnants of the (SL) terrorist group
on their home turf in the emergency VRAE region, but the
longer-term results of this operation remain unclear.


6. (SBU) U.S.-Peru ties have rarely been better, and even
Peruvian government officials have publicly stated they are
the best in living memory. According to opinion surveys, the
U.S. has a broadly positive image and enjoys considerable
reserves of public sympathy in Peru. The comprehensive and
intensive bilateral relationship is anchored in free trade --
the PTPA went into force February 1, to the great relief of
Peruvian officials and general satisfaction of the informed
public. In addition to the solid counternarcotics
cooperation noted above, we have expanded our
political-military relationship, with bilateral humanitarian
exercises, support for Peru's expanding Peace Keeping
Operations capabilities and, potentially, demining work along
the Ecuadorian border. Most importantly perhaps, positive
relations are rooted in intensive people-to-people ties --
close to one million Peruvian nationals live in the U.S. --
and a broadly shared world view in which regional and global
opportunities and threats match closely.


7. (U) We look forward to your visit.
MCKINLEY