COUNTRY FOCUS: Peru's Kuczynski battles protests, corruption in first 100 days

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Friday, November 25, 2016

Peruvian President Pedro Pablo Kuczynski rode a wave of optimism when the affable, 77-year-old Princeton-trained banker and former cabinet chief was sworn in on July 28.

Now, with both fatal environmental protests and drought-sparked forest fires raging across the country, reality has set in.

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Demonstrators have halted operations over the past month at mines of China MinmetalsHudbay Minerals and Consorcio Minero Horizonte in addition to blocking crude shipments from Pluspetrol's northern oilfields and closing off access to the Inca citadel of Machu Picchu, the country's premier tourist attraction.

The number of social conflicts rose to 212 in October from 207 the previous month, according to Peru's ombudsman.

Commodities led by metals account for 70% of export revenue. Peru is the world's third largest copper, zinc and tin exporter.

"The population is mobilizing due to historical levels of dissatisfaction. But more protests aren't going to solve things faster," said Carlos Gálvez, head of the national society of mining, petroleum and energy (SNMPE). "I don't believe we can fix the problems in 100 days."

Corruption and escalating crime are also a rising concern, according to polling firms. Kuczynski was forced to sack one of his senior advisors and pledge legislation to bar corrupt government officials from holding office following a leak of audios revealing obscure business dealings at state hospitals.

Additionally, the government came under fire for allowing former first lady Nadine Heredia to leave the country despite facing multiple judicial investigations into allegations of bribe-taking, while education minister Jaime Saavedra is up against a possible no-confidence vote in congress this month over the government's lack of progress in infrastructure for the 2019 Pan American Games.

Major fires blazing at northern national parks, a shopping mall, a health ministry warehouse and a Lima shantytown home to vulnerable indigenous groups, which have claimed a total of seven lives, also helped create the sensation of government inaction, according to analysts.

"Things have been going very badly for Kuczynski in recent weeks. This isn't a coincidence, but rather the result of his own mistakes and those of his government," said political analyst and former interior minister Fernando Rospigliosi. "Kuczynski was probably the victim of the usual post-victory giddiness and believed he won thanks to his political skills and not due to circumstances beyond his own performance."

POLLS

On paper, it looked like Kuzcynski was doing all the right things. He appointed market-friendly cabinet ministers and central bank officials, met with opposition leaders and traveled to the US, China and Colombia to drum up investment.

Kuzcynski, whose party secured just 18 seats in the 130-seat congress compared to election rival Keiko Fujimori's Fuerza Popular with 73, was granted extraordinary legislative powers for 90 days by congress last month to push through laws to simplify investment procedures.

The Asia-Pacific Economic Cooperation (APEC) summit in Lima, which gathered together leaders from 21 member states in the Pacific Rim on November 18-19, meanwhile, was supposed to showcase Peru's economic achievements.

"The visit of leading world personalities, the issue of legislation and investment announcements for next year are opportunities the government will surely make the most of to boost its image," Alfredo Torres, head of polling firm Ipsos Apoyo, wrote in a report. "They need to do this well to get off to a good start in 2017, a crucial year as congress turns more critical and it becomes more difficult for the executive to achieve its objectives."

And yet, in a November nationwide Ipsos poll, Kuczynski's approval ratings sagged to 51% from 63% in September, citing a perceived lack of progress on job creation, managing social conflicts and fighting crime, corruption and poverty.

RECOVERY

Kuczynski also took office amid signs of economic recovery. Metals prices have rebounded, boosting Peru's total exports by 3% to US$25.717bn through the first three quarters, while the economy expanded a robust 4.4% in the third quarter and international reserves climbed to US$62.103bn, equivalent to 33% of GDP.

New mining projects such as Las BambasCerro Verde and Shahuindo are expected to ramp up output this year, while Israel's IC Power inaugurated the US$900mn Cerro del Aguila hydroelectric plant and China's CNPC is expected to outline a US$500mn development plan for its block 58 natural gas field in Cusco region.

However, a growing fiscal deficit equivalent to 3% of GDP may constrain the government's public spending plans, according to banks such as Scotiabank. The international economic outlook has also been overshadowed this year by unexpected events such as Brexit and Donald Trump's election win.

"Expectations regarding the effectiveness of the new government to tackle this less robust situation are high. But so is the uncertainty," Scotiabank Perú analyst Pablo Nano wrote in a report. "It's possible the new government will increase public spending to stimulate growth, but it's not clear whether it has much room to do so."

PROGRESS

While Kuczynski's pledge to accelerate US$25bn in delayed infrastructure projects may have seemed ambitious, some concrete achievements are beginning to be felt.

The government has eliminated bureaucratic obstacles to a dozen projects representing US$18.800bn, including 1,450km of highways, line No. 2 of the Lima metro, the Jorge ChávezPisco and Chinchero airports and the port of Pisco, Kuczynski told reporters. Another 170 potable water and sewerage projects are also underway, he said.

The finance ministry also lowered sovereign debt financing costs through a 10.250bn-sol (US$3bn) swap in September, while the government set up a US$100mn industrial innovation fund and began reorganizing investment promotion agency ProInversión and tax collection agency Sunat.

"Peru's economic growth is poised to accelerate in 2017 following a sharp slowdown in recent quarters, supported by improving business confidence and rising investment," Moody's analysts wrote in a report. Kuczynski "has outlined an ambitious reform agenda which includes measures designed to reinvigorate large-scale infrastructure projects that stalled in the latter half of the previous government's term, streamline public spending, and improve governance at state-owned companies."