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Economy once again at the brink
of deflation
Peru is once again steering towards deflation after a brief episode of
rising consumer prices. In June, consumer prices fell 0.23%. Price drops
in food and beverages led the decline along with lower prices for
transport and communications. As a result, the annual inflation rate
dropped from 0.17% in May to nil in June. Thus, headline inflation is once
again hovering close to deflationary territory after only two months of
positive inflation rates. In part, the result is influenced by lower fuel
prices. Nevertheless, the persistent inability of businesses to mark up
their prices also reflects sluggish private consumption. Panellists expect
inflation to pick up again towards the end of the year but have again
lowered their forecast a notch since last month.
Rough
times for President Toledo
President Alejandro Toledo faces an increasingly difficult political
environment as his administration will conclude the first year in power on
28 July with only little of the ambitious campaign promises fulfilled. In
mid-June, the government decided to delay a planned state asset sale and
to give in to demands of violent protesters and rioters in Peru’s second
largest city, Arequipa. The protests were staged against the sale for US$
167 million of two electricity generators Egasa and Egesur, based in the
southern departments of Arequipa and Tacna, to Belgian company Tractebel,
a unit of French utility Suez. Residents feared higher tariffs and layoffs
and accused Toledo of backtracking on a written pledge made during last
year's election campaign not to sell the assets. They also charge that the
president ignored a court ruling against the auction.
Interior
Minister resigns in protest
The violent protests prompted the government to declare a 30-day state of
emergency in Arequipa, forced President Alejandro Toledo to cancel a trip
to the United States and triggered a cabinet crisis. In protest to the
government’s decision to give in to the protesters, Interior Minister
Fernando Rospigliosi resigned his position on 19 June. Rospigliosi was
replaced with former deputy interior minister Gino Costa, the first
cabinet change under Toledo.
Government decision makes privatisation process more uncertain
The government’s decision to yield to violent protests may jeopardise the
whole privatisation process. Most likely, there will be no privatisations
or concessions during the rest of the year, thus endangering the
investment recovery in the near-term and also increasing the necessity to
find other financing at times when bond spreads for Peru have spiked
notably. The government was counting on at least US$ 700 million from
auctions of state companies this year to finance its budget but so far has
brought in only US$ 358 million. Privatisation is a cornerstone in
Toledo’s economic policy but its adoption also represents a dilemma for
Toledo who during his campaign made promises to implement a “capitalism
with a human face” and even, as in Arequipa, explicitly ruled out the sale
of state assets. Political analysts claim that the crisis has seriously
damaged Toledo's political leadership by demonstrating a lack of resolve
and may further erode his popularity, which is already at record lows.
Ever since assuming the presidency last July, Toledo has grown
increasingly unpopular.
International
support for Toledo could wane
International support was strong when Toledo was at the helm of the
country’s protest movement that ousted President Fujimori. Hopes were high
that Toledo would crack down on human rights abuses. However, a recent
Amnesty International report evidences continued human rights violations
in the country. This may erode support at multilateral organisations,
which opened their coffers last year to support the democratisation
process in the country. In particular, support from the United States
could wane as the government cut programs to uproot coca fields and
encourage crop substitution. On 3 July, the Toledo administration
announced that it would suspend efforts to eradicate coca in the Huallaga
River valley in the eastern Amazon jungle region. With the decision, the
government is trying to appease thousands of coca farmers who protested
for a more gradual eradication. Representatives of the coca farmers allege
that the farmers hardly received any of the US$ 150 million in anti-drug
funding provided by the United States. Representatives from the United
States have expressed concern about the suspensions.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Peru. For more details please click here.
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