Peru minister: fiscal caution key to recovery

21/03/2010 | Lucien Chauvin

Finance minister Mercedes Araoz told Emerging Markets yesterday that fiscal prudence was central to Peru’s economic progress

Fiscal prudence is the key to Peru’s economic progress, Mercedes Araoz, economy and finance minister, has told Emerging Markets.

“We continue to maintain strong fiscal prudence, because we do not want the economy to overheat. We have to prevent inflationary pressure,” Araoz said.

Her remarks come against a background of warnings that too-rapid increases in fiscal spending could undermine recovery in several Latin American nations.

In Peru, the private sector is forecasting stronger growth – by at least one point – than more cautious government figures. Most economists believe growth will be greater than 6% in 2010.

Part of the reason for this is political: the government massively missed its growth target for 2009, expanding by 0.9% instead of the 5% originally forecast. But the other issue is the fear, expressed by Araoz, that the economy could grow too quickly, leading to inflation and other unwanted pressures.

Inflation in 2009 was 0.25%, the lowest in eight years, but it has crept up in the first two months of this year, even though low. Inflation was 0.62% through February. The target for the year is 2%.

The government is also paying close attention to resources flowing into the country, fearfully that strong growth could attract fly-by-night capital. Araoz said: “Peru is going to be an important destination for capital, and we want to orient this capital.

“We don’t want to introduce controls on capital, but we have to ensure that flows do not affect the macroeconomic management. We want long-term capital.”

President Alan Garcia’s administration believes that it will have no problem attracting this dedicated capital. In fact, while it is cautious with GDP numbers, the administration is expansive about investment, forecasting a minimum of $30 billion in private investment in the mining, hydrocarbon and energy sectors through 2015.

Araoz said investors recognize that Peru provides legal and fiscal stability for their investment and that the administration will continue improving the climate for doing business in the country.

Her office is working on new mechanisms to expand capital markets. In the second quarter of the year it is expected to a set of instruments and mechanisms to protect small-scale investors, as a way to stimulate both foreign and internal investment.

The administration is also confident that five free-trade agreements implemented over the past 14 months, and several more in the pipeline – as well as investment grade rankings from the three principal agencies – will contribute to a virtual cycle of growth for the coming five years and, hopefully, beyond.

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