LatinFinance - July/August 2016 - 18

ELMER CUBA
KEIKO FUJIMORI CAMPAIGN

"[LOWERING VAT] IS AN
IRRESPONSIBLE IDEA
AND I AM SURPRISED
THAT A SEASONED
ECONOMIST SUCH AS
PEDRO PABLO
KUCZYNSKI WOULD
EVEN CONSIDER IT"
ALFREDO THORNE, PERU

"WE ARE GOING TO
USE A DEFICIT CEILING
AND WE ARE GOING
TO COMMIT ONLY TO A
TRANSITORY DEFICIT"
PEDRO PABLO KUCZYNSKI, PERU

"THERE ARE GOING
TO BE A 100,000
OBSTACLES. BUT I
THINK WE WILL BE
ABLE TO GET THINGS
DONE"
MARTÍN VIZCARRA, PERU

"I BELIEVE THAT
THERE ARE COMMON
POINTS THAT WILL
ALLOW US TO BUILD
CONSENSUS TO
APPROVE REFORMS"

18 L ATINFINA NCE.COM - July/August 2016

to 26% in two stages by 2019.
VAT is the largest single amount collected by Sunat, representing more than
50% of revenues.
Investment motor
The Kuczynski team believes it can move
quickly to free up around $30 billion in
public and private investment blocked by
red tape or civil society opposition. This
includes more than $10 billion in projects
awarded by the outgoing Humala administration which are behind schedule, such as
the $6 billion Line Two of the Lima Metro,
the $4 billion Southern Gas Pipeline and
the $600 million new airport for Cusco, the
country's tourism hub.
In June, the Humala government announced that the second Metro line,
awarded to a consortium led by Italy's
Salini-Impregilo, would not be ready until
2021, three years later than originally
planned. While construction is advancing,
the government has run into problems
acquiring all of the properties required for
it to move forward on schedule.
Expropriations also delayed the start
of construction on the new airport in
Cusco's Chinchero district. The project is
also facing financing problems. In June,
the state's transport regulator, Ositran,
rejected the most recent financing plan
by the Argentine-led Kuntur Wasi concessionaire, claiming it included unauthorized
participants. The decision is under appeal,
but a 2020 date, instead of the original 2017
inauguration, now appears likely.
The new government, however, may
catch a break with the 660-mile pipeline,
which is in limbo because of a corruption
scandal hounding the lead partner, Brazil's
Odebrecht, at home. Odebrecht's problems have made it impossible to secure the
$4 billion loan for the project. The Brazilian
company said in the first quarter that it
would unload its 55% stake in the project.
Four bidders were heard to be in final talks
with Odebrecht in mid-June, with hopes
that a deal could be announced as soon as
early July.
The new government also plans to
retool existing state agencies to create a
decentralized infrastructure arm that will
identify, together with state and local governments, important projects that could be
financed through different mechanisms,
with an emphasis on public-private partnerships.
AFIN, the association of private companies that manage public services, estimates

that Peru needs $68.8 billion in infrastructure investment through 2020 to remain
competitive.
Kuczynski and his advisors have been
reviewing dozens of mining projects that
are idled. They are focusing on projects,
such as La Granja, held by Rio Tinto, and
Quellaveco, held by Anglo American, which
have met many of the permit requirements.
The two combined projects represent
investments north of $10 billion. The sticking point, however, for the projects and a
few others, like First Quantum's Haiquira
deposit, are the low global price of copper
and investment commitments elsewhere.
"We need to take an active role," says
Kuczynski. "We need to show them that
they can make money here."
Better off
Unlike his Cabinet stints, when Peru's economy was in tatters, Kuczynski takes over an
economy that is recovering, although at a
slow pace, with low debt, minimal inflation,
high foreign reserves and investment-grade
ratings.
The economy expanded by 3.9% in the
first four months of this year and 3.7% at an
annualized rate. The Central Bank, where
Governor Julio Velarde will remain for a
third term, forecasts growth this year at 4%.
The International Monetary Fund (IMF)
and World Bank have slightly lower projections, but forecast Peru will grow faster
than all the other large economies in Latin
America this year.
The IMF, in a review in mid-June, reported that Peru's economy was strong,
but offered a series of recommendations to
improve growth going forward. It pointed
to education reform, greater labor flexibility and cutting red tape, among others.
Kuczynski, a former IMF executive, will
likely pay attention to the suggestions.
The new administration will have to take
the same care in its handling of the economy as with its political strategy.
Fitch Ratings said Kuczynski "faces the
delicate task of balancing fiscal stimulus
with prudent maintenance of public finances," and Moody's said he needs to move
carefully as "the government's public debt
ratios will continue to deteriorate."
Thorne says that while Peru has a low
debt-to-GDP ratio, the government will be
watching the fiscal deficit carefully. The
fiscal deficit is 3.1% of GDP, which is above
the high end of the forecast by Humala's
administration. Thorne says trying to lower
it immediately would slow the recovery.
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