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After a 'wasted' 1st year, Peru's Kuczynski looks to revive economic agenda

Peruvian President Pedro Pablo Kuczynski still has a chance to revive his economic growth agenda following a disappointing first year, though industry experts say that it will require that the political leader finds consensus with the opposition-controlled Congress.

A former Wall Street veteran and economist at the World Bank, Kuczynski won Peru's presidential election in July 2016 on promises to spur growth through tax cuts and infrastructure development. But a year later, his approval ratings have plummeted, amid a flurry of setbacks.

Investment in the country was hit hard when a scandal involving Brazilian construction giant Odebrecht shut down big infrastructure projects; the El Niño weather phenomenon earlier in 2017, meanwhile, caused severe flooding in parts of the country and battered near-term economic growth prospects, effectively stalling the new president's plans. Meanwhile, on the political front, a political battle between Kuczynski and the opposition has ensued.

GDP is estimated to grow between 2.5% and 3.0% in 2017 according to the Banco Central de Reserva del Perú, down from around the 4% projected in the beginning of the year. The president himself on Aug. 12 said GDP will grow 2.5% in 2017, although he believes the economy will grow by a more robust 4.5% in 2018.

To be sure, more recent metrics have indicated that Peru is starting to recover from the unforeseen weather- and corruption-related setbacks. In June, Peru's economy grew 3.64% compared to the prior month, exceeding expectations for a 3.50% uptick.

Macroeconomic conditions are getting slowly better as the country recovers from the shocks, Jaime Reusche, analyst at Moody's, told S&P Global Market Intelligence. "Already in May we saw a significant rebound [in GDP growth]," he pointed out.

Private investment key

But while some economic indicators are improving, concerns remain on the return of private investment, which analysts say is pivotal for growth but has yet to take off.

"The favorable business sentiment hasn't really translated into real, physical investment on the private sector side. They seem to be waiting for something," Reusche said. "We think public investment spending will trigger those animal spirits," Reusche said.

The building of Lima Metro Line 2 and Jorge Chavez International Airport expansion are just some of the multibillion dollar public projects that have stalled due to scandals. However, the government recently said that it has resolved bureaucratic issues and that construction on the projects will resume.

"Large infrastructure projects ran into a lot of delays, but it seems that they are starting to surpass these hurdles," Reusche said.

"In the wake of the [Odebrecht] scandal, our analysts cut their projections for investment growth from 3.8% in January to only 0.3% in July," Nihad Ahmed analyst at FocusEconomics, noted in an email. The unblocking of the projects now, however, "offers a glimmer of optimism in renewing lost confidence," Ahmed said.

Despite those signs of incremental improvement, analysts noted that private investment spending will likely be slow to return, as will credit growth.

"One of the things we will definitely see is a decreased ratio of credit growth. You have a significant drop in economic activity. You have the emergency situation that prevents people from actually accessing credit," Reusche said, noting that some banks have taken a hit from the El Niño-related flooding.

Battle with the opposition

The situation hit fever pitch in late June when Finance Minister Alberto Thorne effectively was forced to resign by Congress after a recording captured Thorne apparently influencing Comptroller-General Edgar Alarcon to approve an airport contract in exchange for a bigger budget.The government's failure to deliver on its promises has made it more difficult to find consensus with the opposition party which controls Congress, Fuerza Popular, led by Kuczynski's former electoral rival, Keiko Fujimori.

Kuczynski has since made some effort to rebuild the bridge with the the opposition. In mid-July, he met with Fujimori in a bid to stabilize the situation. He has since apologized for not handling the economy better.

"It seems that they are finding consensus, the Congress and the executive. And that's quite positive as the executive branch is already getting its act together," Reusche said.

The president has also stepped back from some of his campaign promises, including abandoning plans to gradually lower Peru's value-added tax rate to 15% from the current 18% following criticism that such a reform would only worsen the country's revenue generation capabilities.

"At this particular juncture, [the tax reduction] would have been particularly damaging to the fiscal accounts. So in a way it was very positive that it wasn't adopted," Reusche said.

The government's lack of strategy to deal with the opposition is still cause for concern, though, as Pedro Tuesta, an analyst at 4Cast, warned.

"Part of the [government's] base clearly wants confrontation. But confrontation doesn't work in this context. Especially if you need support for reforms. And they wasted the first year," Tuesta said.

"There is no indication so far that the government has a clear strategy. So we believe it's going to be another lost year, from that point of view."

As of Aug. 21, US$1 was equivalent to 3.24 Peruvian soles.