On 3 June, Alejandro Toledo secured the presidency, in a narrow race against former President Alan García.  The elections put an end to a year of political turmoil and uncertainty that has hampered economic growth but a successful turnaround will be a key challenge to the new administration.  Toledo has announced economic incentives to jumpstart the economy.  However, his manoeuvring room is limited if he wants to avoid exceeding the fiscal deficit targets agreed to with IMF.

Toledo wins presidency.  According to preliminary results with 99.4% of the votes counted, Alejandro Toledo garnered 53.1% of the valid votes cast in the run-off presidential election on 3 June.  Opponent Alan García won 46.9% of the votes according to the local polling firm Apoyo.  The close result did not come as a surprise, since Toledo’s comfortable 13 percentage point lead one month prior to the elections had melted to just 5 percentage points on the eve of elections.  The only surprise was the relatively low number of blank and null votes, which remained below 14%.  Prior to the elections poll taking firms had presaged as much as one quarter of the voters to spoil their ballots in protest against the selection of candidates, which many perceived as untrustworthy and overshadowed by corruption or sleaze.  Participation was around 82%.  Unlike in the elections last year, which had been tainted by accusations of fraud and press intimidation, observers as well as the presidential candidates themselves described the elections as fair and peaceful.  Alan García conceded defeat only four hours after the polling stations closed, even before the official result was released.

Markets welcome Toledo’s victory.  The 3 June elections put an end to a year of political turmoil and uncertainty that has hampered economic growth.  The victory of Alejandro Toledo has been well received by the domestic business community and international investors alike.  While Toledo’s occasionally populist rhetoric has left observers wondering about his economic policy, markets firmed on the news that Toledo defeated leftist former president Alan Garcia, whose 1985-90 administration left the country in economic ruin.  As a result, Peruvian bond spreads tightened over 100 basis points to 660 basis points over comparable U.S. treasuries following the election, the biggest one-day gain in at least two years and dropped further to 635 basis points by 8 June.  The currency rallied 1.9% to 3.56 Soles to the US$, its biggest one-day surge since 19 March 1999.

Delivering on campaign promises challenging.  Toledo was swept to power largely by the poor, indigenous majority.  In his campaign the centre-left economist Toledo promised to create jobs, improve education, reduce poverty, better living conditions and to reactivate the stagnant economy.  Delivering on his campaign promises will not be an easy task.  In the first months of his government, Toledo has promised to implement an aggressive program to reactivate the productive capacity of the economy by cutting taxes and stimulating demand through an emergency package of economic incentives and plans to provide a social emergency program, which will act as a safety net until economic recovery arrives.  However, the new administration’s manoeuvring room will be limited by the fiscal restrictions agreed to with the International Monetary Fund (IMF).  Toledo's plan to cut taxes in the first hundred days of his administration could result impossible if he wishes to comply with the 1.5% of GDP IMF fiscal deficit target for this year.  In the long term, he hopes to stimulate growth by boosting exports and encouraging foreign investment. 

Economic policy likely to be vested in Kucynski.  Toledo first announced that he would appoint his Cabinet within two weeks but admits that it could take three to four weeks before the final cabinet takes shape.  The vice-president elect, Raul Diez Canseco, is one of Peru's leading businessmen.  The appointment of respected fund manager and former energy minister Pedro Pablo Kucynski as finance minister is almost certain but not yet confirmed.  Kucynski, who has also worked at the IMF, is seen as key to the government’s effort to regain confidence among the business leaders and international investors, where Toledo still commands only marginal support.

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