June was a month of big changes for Peru’s business community. Amid ongoing worries over sluggish economic growth, the opposition Fujimorista-dominated congress passed a vote of no-confidence in Economy and Finance minister, Alfredo Thorne, forcing his resignation. President Pedro Pablo Kuczynski then asked Prime Minister Fernando Zavala to double-up and look after the economy portfolio, in addition to his existing responsibilities, apparently as an interim measure until a more permanent replacement is found. Despite a giant workload, Zavala has indicated he wants to tweak existing policies to try and inject some more stimuli into the economy.
The manner of Thorne’s departure was indicative of the rather toxic relations that have developed between President Kuczynski and the Fuerza Popular (FP) majority in congress, led by the narrowly-defeated 2016 presidential run-off candidate, Keiko Fujimori. FP deputies said that a secretly taped and subsequently-leaked recording of a meeting between Thorne and the comptroller-general, Edgar Alarcón, evidenced undue pressure by Thorne, who was interpreted by the FP as suggesting that funding for the comptroller-general’s office would be increased if Alarcón “accelerated” the approval of various public investment projects (some under audit)
These projects notably included the controversial US$520m Chinchero international airport project in Cusco, awarded under the previous government in 2014 but later stalled, and which Kuczynski had promised to get underway in his election campaign. Thorne denied any impropriety and said the audio had been maliciously edited to take his words out of context. But the FP congressional bench was unmoved and voted by 88-11 to express no confidence in the minister. Thorne had no choice but to resign. Those who believe that the FP is simply flexing its muscles (this is the fourth Kuczynski minister it has forced out) point to the fact that Alarcón, appointed by the previous, also FP-dominated congress, himself faces corruption charges.
The loss of Thorne, a long-standing and close confidant of Kuczynski, with similar international financial experience (including a role at JP Morgan etc) is clearly a big blow. But Kuczynski’s approach so far has been to replace ministers as they fall victim to an apparent Fujimorista onslaught, trying to maintain policy continuity. This seems to be the current plan for the economy & finance ministry (Ministerio de Economía y Finanzas, MEF), traditionally regarded as a kind of super-ministry at the heart of government. That said, Zavala has indicated that there are going to be some tweaks.
The problem is after nearly a year in office, the Kuczynski administration has a relatively poor economic situation on its hands, certainly when compared to Peru’s prior years of strong growth. To some extent, this is due to factors beyond the new government’s control. It inherited the Odebrecht corruption scandal, which has obliged a delay in the country’s largest infrastructure project, the US$7bn Gasoducto del Sur Peruano (GSP). And it is also dealing with the economic losses caused by an extreme coastal El Niño, starting in late December and lasting until April, which resulted in months of torrential rains, severe flooding and mudslides, devastating northern regions in particular but also reaching down as far as the economically-dominant capital province of Lima.
The latest data is indeed disappointing. Real annual GDP growth slowed to 2.1% in the first quarter, down from 3.0% in Q416. The weakness continued into the second quarter. The monthly economic activity indicator compiled by the national statistics institute (INEI) came in at just +0.2% y-o-y in April, a deceleration on the +0.7% rate registered in March. In the three months to May, according to the INEI, 55,400 jobs were lost in metropolitan Lima. Activity levels looked particularly weak in the construction and manufacturing sectors, but most sectors looked to suffering from the ongoing after-effects of the floods. Before Thorne’s departure, the government had already announced extra spending on reconstruction. The central bank (BCRP) cut interest rates by 25bps to 4.0% in May. While it held rates steady in June, it is widely expected to ease monetary policy a little further in coming months.
The business community remains impatient. In an interview with the daily El Comercio, Gianfranco Castagnola of Apoyo Consultoría said the economy had worsened over the last year, with GDP growth decelerating to around 2%. Retail sales had contracted by 1%, he noted, while employment and real wages had also dropped. “Attributing 100% of this to Thorne would be excessive, but there have been mistakes”, he said. His main criticism was that Thorne had cut back public investment by a “brutal” 30% in the last quarter 2016. A rebound had failed to materialise in 2017. In fact, there had been a further 9% contraction in investment, on Apoyo estimates. Castagnola insisted that in the second half of 2017 public sector investment needed to grow by “10%, 15% or 20%”. He was also worried that congressional populism would overrule the MEF’s longstanding fiscal responsibility, pointing among other things to draft legislation to bring army and police pensions up to the salary levels of those in active service.
Kuczynski's economic problem
Year-on-year % changes in quarterly GDP, real terms

Source: INEI
Zavala, who was head of the MEF in 2005-2006, during the presidency of Alejandro Toledo, has said that his objectives while in office will be economic recovery, employment and public sector investment. Pablo Nano, an economist at Scotiabank Perú, says that Zavala’s key challenge will be to unlock stalled investment projects (a problem that also faced Thorne). Zavala seems ready to take that on. He told the Panorama TV programme, “I will make some adjustments, there are things we can do, private investment has not grown in 14 quarters, that is three and a half years, the problem goes back to before this government, but we have to turn it around quickly.”
In his first media interviews as head of the MEF, Zavala also said that the national investment agency Proinversión had projects on its books which required spending of US$4bn in the second half of this year, targeted on waterways, roads, sanitation and other disaster reconstruction work. The potential project total for the year as a whole was put at US$9bn, excluding the stalled GSP pipeline.
Zavala also noted June new legislation took effect in June allowing for more flexible environmental standards on extractive projects. The Kuczynski government and business lobbies had argued that previous permits and processes had been too restrictive and onerous (a problem known as ‘permisolgía’) and were holding back investment projects.
Zavala was also keen to highlight the potential of rising inward tourism to help revive demand. He said he expected the number of foreign visitors to Peru to push past the 4m mark this year.
Elsewhere, a new housing subsidy programme, Bono del Buen Pagador (BBP), will be targeted on low income groups. The government is seeking the construction of 100,000 housing units in an attempt to stimulate the construction sector. Other plans include expanding the Obras por Impuestos scheme, which encourages companies to make tax-deductible infrastructure investments in local communities. Coordination with local and regional governments, in the past patchy, is to be stepped up, an important move, since a lot of the public-sector investment spend has been decentralised.
Latest poverty data
In the 12 years between 2004 and 2016, the proportion of the Peruvian population living in poverty fell from 58% to 20.7%, according to data published by the ministry of development and social inclusion (Midis). Deputy Midis Minister María Eugenia Mujica reported that malnutrition in children under the age of five had also fallen, while 75% of the population now have form of insurance cover. Officials acknowledge, however, that the pace of poverty reduction has slowed down as the commodities-driven economic boom has subsided. In 2014-2016, poverty levels fell by only two percentage points. Mujica said there was still a lot of work to be done. She noted that 17% of Peruvian young people aged 15-24 are ‘ni-nis’ (‘neither-nors’), meaning that they are neither in work nor education. And strikingly, a full 46% of the population is still living in makeshift settlements, underling the country’s major problem with inadequate housing.