Peru:  Campaigns Heating Up (continued)

Current account deficit rising.  In the fourth quarter, the current account deficit reached US$ 565 million, or the equivalent to 4.2% of GDP.  This was well above the deficit reached in the same quarter in 1999 (US$ 28 million) but almost precisely in line with the latest Consensus Forecast estimate of US$ 568 million.  Net capital inflows of US$ 65 million were insufficient to cover the current account gap and thus triggered a US$ 564 million decline in international reserves.  For the whole year, the current account registered a deficit of US$ 1.64 billion (3.0% of GDP), which was below the US$ 1.8 billion gap in 1999, but also in line with expectations of US$ 1.64 billion.  

Toledo maintains frontrunner position.  The campaigns for the 8 April presidential and congressional elections are heating up.  A “non-aggression” pact to preclude a “dirty war” between the candidates has had little effect and personal accusations are becoming increasingly evident in the campaigns.  According to the most recent opinion polls, presidential hopefuls Alejandro Toledo and Lourdes Flores maintain a significant lead over other candidates, raising the likelihood of a second-round runoff election between the two candidates.  While Lourdes Flores remains firmly established in second position, she has lost some ground to Toledo since a 23/24 February poll, when her support peaked at 30.2%.  The latest poll, conducted between 1 and 5 March by Peruvian research institute CPI, does not factor in the potential fallout from accusations brought forward against Alejandro Toledo on 3 March of having an extra-marital child.  Even accounting for a potential downside effect of the allegations in terms of public support, Toledo currently maintains a comfortable lead with 34.1% over 26.1% for Flores.  However, if a second round were to be held between the two candidates, Toledo’s lead looks much less comfortable, shrinking to merely 1.5 percentage points (45.3% vs. 43.8%). 

The domestic business community and international investors generally prefer Lourdes over Toledo.  Lourdes is the presidential candidate for National Unity (UN, Unidad Nacional), which integrates Popular Christian Party (PPC, Partido Popular Cristiano) and Central Democratic Union (UCD, Unión de Centro Democrático).  While she is making increased reference to populist policies in order to gain support, her centre-right economic policies are largely based on the Chilean model with an emphasis on fiscal prudence, structural reforms and integration into the global economy.  Alejandro Toledo from Perú Posible adopts a more Populist rhetoric and his pledge for market-friendly policies seem somewhat inconsistent. His promises to redress social imbalances by increased public expenditures render excessive fiscal spending more likely in the case of a Toledo victory.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.