Peru - Economic Briefing March 2004

Toledo Reshuffles Cabinet to Stem Eroding Popularity (continued)

Current account deficit shrinks amid robust export growth
In the fourth quarter, the current account balance incurred a deficit of US$ 151 million.  The deficit was well below the US$ 208 million recorded in the third quarter and less than half the US$ 308 million registered in the fourth quarter the year before.  The decline in the fourth quarter current account deficit over the same period the year before was due to a higher surplus in the trade balance as exports increased at a quicker pace (+9.0% yoy) than imports (+6.0% yoy).  For the full year 2003, the current account deficit reached US$ 1.1 billion (1.8% of GDP) following on US$ 1.2 billion deficit (2.1% of GDP) in 2002.   

Capital account surplus increases due to increased public sector flows
The fourth quarter current account deficit was fully funded by the surplus in the financial account, which reached US$ 507 million compared to a US$ 31 million shortfall in the same period last year.  The improvement reflects positive public sector flows (US$ 592 million) whereas the private counterpart remained negative in US$ 14 million, as foreign direct investment flows (US$ 437 million) were exceeded by external remittances of financial institutions (US$ 380 million) and net amortizations of long-term loans (US$ 80 million).  As a result, the net international reserves of the Central Bank increased in US$ 438 million.  

President Toledo reshuffles cabinet to stem eroding popularity
Faced with record low approval ratings of 7%, President Alejandro Toledo, reshuffled his cabinet on 16 February.  The new cabinet is the sixth in the 32 months since Toledo has held power, as continuous corruption scandals in the Toledo administration have prompted ever louder calls for early elections from opposition leaders.  The much anticipated cabinet change was well received and represents a chance for Toledo to rebuild his credibility.  Following the announcement, Toledo’s approval ratings have recovered to 10%, according to the latest Apoyo opinion poll.  However, 62% of those polled believe that this should be Toledo’s last chance to remain at the helm until the end of his regular term in July 2006.   

Number of independent ministers rises and Kuczynski back at the Economy and Finance Ministry
Toledo’s last cabinet change in December, was criticized for filling the cabinet with party hacks.  Therefore, the change sought to increase the number of independent cabinet members in order to end influence-peddling scandals that have tainted previous cabinets.  In the new cabinet only three ministers belong to Toledo's political party, Perú Posible, including the Chief of Cabinet Carlos Ferrero, who remained in his post.  The most important change occurred at the Economy and Finance Ministry, which is now headed by Pedro Pablo Kuczynski who served in that post in Toledo's first cabinet between July 2001 and July 2002.  Toledo moved outgoing Economy Minister Jaime Quijandria, another independent figure, back to his previous job as energy and mines minister.  Toledo also brought in new ministers for the justice, education, health, employment, production and transport portfolios.  Seven ministers remained in their posts, including Foreign Minister Manuel Rodriguez, Defense Minister Roberto Chiabra and Interior Minister Fernando Rospigliosi, as will the ministers of foreign trade, agriculture, housing and women's affairs.