Peru - Economic Briefing August 2003

Toledo Reshuffles Again to Stem Erosion in Popular Support (continued)

Consumer prices drop again in July
In July, consumer prices dropped 0.15%. The decline represents the fourth consecutive month of declining consumer prices, but was unexpected, as the market had anticipated prices to rise by 0.10%. Declining prices for food and beverages constituted the only force behind the July price decline. All other sectors experienced price increases, most notably transport and communication, where prices rose by 8.0% over the previous month. Owing to the July price decline, the annual headline inflation rate dropped from 2.2% in June to 2.0% in July. Headline inflation is now well below the Central Bank’s year-end target of 2.5% with a 1% margin to either side of the mark. Moreover, the recent developments nourish concerns that the Peruvian economy may head back into deflation. Only last year, monetary authorities were battling the adverse effects of persistently falling consumer prices. The Consensus has reflected the latest developments in the inflationary outlook by further reducing the year-end forecast by 0.3 percentage points over last month to the current 2.0%.

Toledo reshuffles cabinet and replaces Central Bank president
On 25 July, barely a month after the whole cabinet resigned and was duly reshuffled by President Alejandro Toledo (details see July edition of the LatinFocus Consensus Forecast), the President opted for further changes to key administrative positions. The latest changes to the cabinet did not come unexpected, since last month’s reshuffle was not considered sufficient to restore Toldeo’s devastating approval ratings, which had been the key motive behind the original cabinet reorganisation. Despite the resilient state of the economy, Toledo’s approval rating has continued to drop and had reached a new low of 11% prior to the reshuffle, down from almost 60% when he took office in mid-2001. Support for the president has dropped due to a series of personal scandals and flailing public confidence in Toledo’s ability to deliver on ambitious election promises, especially the pledge for the poor to work aggressively on the implementation of job creation programmes. According to recent opinion polls, Toledo won approval from 71% of Peruvians for the appointment last month of Prime Minister Beatriz Merino, the first woman to hold the post and his overall approval rating rose to 13%. However, the confirmation of key policy positions, namely Javier Silva Ruete as Economy and Finance Minister and Alberto Sanabria Ortiz as Interior Minister, were criticised by political observers. These portfolios have now been changed in the second cabinet overhaul. The Interior Ministry went to Fernando Rospigliosi Capurro. Rospigliosi had held the post in Toledo’s first year as President but resigned in June last year in protest over Toledo’s decision to halt the privatization of electricity companies Egasa and Egesur after violent protests. Former Minister of Energy and Mines, Jaime Quijandría Salmón, has assumed the Economy and Finance portfolio in place of Javier Silva Ruete, who has been nominated to head the Central Bank.

Former Minister of Economy and Finance will assume Presidency of Central Bank
The Central Bank president position had become vacant when Richard Webb resigned shortly after the July Cabinet shake-up. The government gave no official reason for his resignation but Webb's differences with members of the Bank's board had been widely reported. While still Economy and Finance Minister, Javier Silva Ruete claimed that the differences were not over management of monetary and exchange rate policy but administrative issues, in particular the board's decision to fire two of the Bank's senior managers who were close to Webb. The resignation did not come as a complete surprise to investors and it is unlikely to cause any significant shifts in monetary or exchange rate policy.