Kuczynski confirms deficit will exceed targets but pledges to control spending.(Finance Minister of Peru Pedro Pablo Kuczynski)(

LIMA -- Peruvian Finance Minister Pedro Pablo Kuczynski confirmed this week that this year's fiscal deficit of 2.2% of GDP will exceed the IMF target, but pledged that the government would try to control the budget and seek to reduce the shortfall to 1.9% of GDP in 2002 and 1.4% in 2003.

The higher than anticipated deficit this year is partly due to new spending commitments by the incoming admininstration of President Alejandro Toledo, such as a promise to increase public sector wages and lower indirect taxation, but the bulk of the rise is due to slower-than-anticipated economic growth. Indeed, the original 1.5% deficit target, set by the IME was dependent on growth of 1.5%, which analysts say, is now unachievable.

The pledge to manage the budget sensibly should reassure investors that Toledo's government will pursue a prudent economic policy. However, the targets set for 2002 and 2003 rely on growth accelerating sharply to 5%, which in light of domestic weakness, current regional turmoil and downward GDP revisions across the continent, could prove to be somewhat optimistic. The government is also factoring in higher privatization proceeds, which Kuczynski expects to come in well above the $500 million cited thus far, although he stressed such windfalls would be used to boost reserves to help insulate the country from external pressures, rather than fund new social programs. This too could be optimistic as investors reevaluate regional assets, undermining the administration's valuations.

IMF to support Toledo

However, it is not all caution. Successful negotiations with the IMF, which investors are now keen to see concluded, look all the more likely to progress, especially given the regional environment, with the fund more likely to support countries moving in the right direction, rather than risk upsetting financial markets.

An IMF technical mission arrived in Lima this week to negotiate a stand by agreement for 2002 and 2003.

With growing signs that the country's economy is turning the corner, provided the government can put in place its reform plans, growth targets should be achievable, which can only be good for Peruvian assets.

[C] 2001 Business Monitor International

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