US embassy cable - 05LIMA1361

C O N F I D E N T I A L SECTION 01 OF 02 LIMA 001361 
 
SIPDIS 
 
E.O. 12958: DECL: 03/21/2015 
TAGS: EFIN, ETRD, ECON, PGOV, PE 
SUBJECT: FINANCE MINISTER ON THE CURRENT SITUATION AND HIS 
POLITICAL PROSPECTS 
 
 
Classified By: Polcouns Alexander Margulies.  Reason:  1.4(b/d). 
 
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SUMMARY 
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1.  (C)  SUMMARY:  Finance Minister Pedro Pablo Kuczynski 
(PPK), during a 3/18 breakfast with the Ambassador, was 
uncertain whether the Toledo Administration would be able to 
hold the fiscal line as pressure mounts in an electoral 
climate to meet social demands and to show concrete progress 
on construction of a highway linking southern Peru with 
Brazil.  PPK noted the negative effect on GOP finances caused 
by the GOP's granting raises to doctors and teachers, and 
criticized tax agency SUNAT's handling of an investment 
dispute and the GOP's planned conditional cash transfer 
program to alleviate poverty.  He was confident, however, 
that the President will veto a bill that would reduce 
agricultural tax receipts by 180 million Soles (USD 55 
million).  PPK said that he could be "interested" in a 
presidential candidacy if a workable coalition could be 
formed; opined that time is running out on Prime Minister 
Carlos Ferrero, but did not speculate on who a successor 
would be.  END SUMMARY. 
 
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PPK ON THE ECONOMY 
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2.  (C)  The Ambassador opened the discussion by enquiring as 
to the seriousness of front-page reports in the day's press 
that PPK had threatened to resign if President Alejandro 
Toledo did not/not veto a bill passed by Congress that would 
exonerate agricultural producers from making advance VAT 
payments on their produce.  PPK said that there was no danger 
of his resigning over this issue, as he was confident the 
President would veto this "irresponsible" bill, which would 
facilitate tax evasion and cost the treasury some USD 55 
million in revenue. 
 
3.  (C)  The Ambassador then asked about PPK's strategy to 
deal with rising fiscal pressures in the runup to the 2006 
elections, observing that President Toledo seemed torn in two 
directions over the issue, wanting Peru's debt to reach 
investment grade status (which would require great fiscal 
restraint) but also seeking to leave a legacy of new roads 
and other infrastructure projects to benefit the country. 
PPK replied that Toledo has prioritized making progress 
before he leaves office on the planned southern road 
corridor, to link Peru with Brazil.  PPK said "things will 
happen shortly" on the road corridor, although he had doubts 
about the accuracy of cost projections.  (Note: this project, 
for which the GOP is expected to offer concessions in the 
next few months, will cost hundreds of millions of dollars to 
complete.  End note). 
 
4.  (C) The Minister also expressed concern over the fiscal 
effects of recent public sector raises on the budget.  He 
said raises for doctors, granted after a recent strike, would 
cost USD 50 million in 2005 and USD 80 million annually 
thereafter, while promised raises to teachers would cost USD 
250 million this year and USD 400 million/year thereafter. 
President Toledo, PPK complained, agreed to the spending 
increases because of his inability to stand up to social 
pressures from strikes and other activities.  The Minister 
commented that even with a better fiscal balance Peruvian 
debt will not reach investment grade ratings until these 
protests, and other types of social conflict (e.g. protests 
afflicting mining operations in Peru) diminish greatly.  He 
thought it would take a couple of years of improved social 
investments for that to happen. 
 
5.  (C) PPK expressed frustration with GOP tax agency SUNAT, 
which he said had &screwed up8 its handling of a major tax 
issue involving Canadian gold company Barrick.  (Note: 
SUNAT,s large tax assessment against Barrick was rejected by 
the tax court in January, but Congress has opened an 
investigation into whether the company is &evading8 taxes. 
End note).  He said SUNAT also never should have sent a 
letter to mining companies asking them how much they consider 
they owe in royalties, which set the agency up for conflict 
with the companies.  PPK said he called SUNAT head Nahil 
Hirsh on the carpet March 14 over her handling of the case. 
He reflected how President Toledo wants to fire Hirsh, but 
that he is reluctant to do so since she has raised tax 
collections consistently. 
 
6.  (C) PPK then frankly criticized the GOP's planning around 
its proposed conditional cash transfer program, which would 
provide targeted USD 30 monthly grants to certain poor 
families.  He emphasized that Mexico's program, a regional 
model for programs of this type, took seven years to properly 
design and execute.  In contrast, he said the Prime 
Minister's office, leading the development of Peru's program, 
is moving too fast.  PPK noted three particular problems with 
Peru's proposal: 1) it is a bad idea to focus this on cities, 
where Toledo wants to begin, rather than rural areas, because 
it is hard to get an accurate census of the poor; 2) the 
grant amount is too high for rural areas, and could provoke 
violent struggles within families over control of the cash; 
and 3) the government has no exit strategy, to prevent the 
program from becoming a permanent entitlement and drain on 
the Treasury.  He concluded that the program will start 
slowly and have only a minor fiscal impact this year. 
 
7.  (C)  The Ambassador also asked about GOP plans to name a 
new President of state oil company PetroPeru, after the 
recent resignation of Alejandro Narvaez.  PPK replied that 
Peru Posible co-Secretary General and Congressman Jesus 
Alvarado had nearly convinced President Toledo to place a 
&very bad name8 in the job, but said he and Energy Minister 
Sanchez were teaming up to block this person,s appointment. 
PPK said there remains a role for the state company, for 
example in providing rural areas with gas stations which 
would otherwise be underserved, but emphasized the need to 
privatize the Talara oil refinery.  Given the current 
government,s weakness, however, he concluded, this will have 
to wait until the next government takes office.  PPK added 
that Energy Minister Sanchez agreed on the need for private 
investment in the Talara refinery. 
 
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PPK on Politics and his Electoral Prospects 
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8.  (C)  PPK had nothing good to say about his new Cabinet 
colleagues, commenting that new Agriculture Minister Manuel 
Manrique is "a disaster" who is "outside the lane" on trade 
issues.  He also questioned Manrique's probity.  PPK termed 
new Production Minister David Lemor a "well-known 
protectionist."  He continued that "time is running out" on 
Prime Minister Ferrero, who he thought would not/not last 
until July, but had no information as to who might be the 
successor. 
 
9.  (C)  PPK admitted that he harbors presidential ambitions, 
though he tempered this by insisting that his interest is a 
"3" on a scale of 1-to-10.  The circumstances have to be 
right, he explained, if such a candidacy is to be pursued. 
He discounted the possiblility that he would run on the Peru 
Posible (PP) ticket (an idea launched recently as a trial 
balloon by PP Political Secretary and now Labor Minister Juan 
Sheput), but said could run on a centrist party's ticket with 
broad coalition backing.  One possibility as an electoral 
vehicle was the Justicia Nacional party, led by center-right 
politician Jaime Salinas, but PPK questioned whether a party 
with at most two percent support in the polls would be 
suitable, adding that a more established centrist party would 
be preferable. 
 
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COMMENT 
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10.  (C)  PPK's frank assessment of the current economic and 
political situation provides an inside view of the difficulty 
the GOP may have in maintaining fiscal discipline as the 2006 
election campaign heats up.  President Toledo is not 
following a coherent policy line on fiscal restraint, 
favoring political connections over policy considerations in 
his new Cabinet appointments, ceding on wage increases in 
response to protests, and pressing for expedited movement on 
an ill-thought-out poverty alleviation program and on the 
southern highway connection to Brazil.  With the replacement 
of Prime Minister Ferrero a question of when, not whether, 
the GOP is focusing on the short-term and has minimal 
capability to make tough decisions.  PPK's presidential 
prospects appear equally slight; Sheput's trial balloon 
generated little public enthusiasm and none of the parties 
other than Salinas' Justicia Nacional have indicated any 
support for a PPK run.  END COMMENT. 
STRUBLE