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Viewing cable 06LIMA2839, SECRETARY GUTIERREZ'S VISIT TO PERU - SCENESETTER

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Reference ID Created Released Classification Origin
06LIMA2839 2006-07-21 17:00 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0000
PP RUEHWEB

DE RUEHPE #2839/01 2021700
ZNR UUUUU ZZH
P 211700Z JUL 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 1462
INFO RUEHBO/AMEMBASSY BOGOTA 3671
RUEHBR/AMEMBASSY BRASILIA 6892
RUEHBU/AMEMBASSY BUENOS AIRES 2521
RUEHCV/AMEMBASSY CARACAS 9675
RUEHLP/AMEMBASSY LA PAZ JUL QUITO 0548
RUEHSG/AMEMBASSY SANTIAGO 0736
UNCLAS LIMA 002839 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
COMMERCE FOR SECRETARY GUTIERREZ FROM AMBASSADOR STRUBLE 
 
E.O. 12958: N/A 
TAGS: PREL ECON PGOV ETRD PE
SUBJECT: SECRETARY GUTIERREZ'S VISIT TO PERU - SCENESETTER 
 
 
Sensitive But Unclassified, please handle accordingly. 
 
1. (SBU) Mr. Secretary, I welcome your July 27-28 visit to 
participate in the inauguration of President-elect Alan 
GARCIA Perez.  This presidential transition is historic--for 
the first time in modern Peruvian history one elected leader 
will transfer authority to another without the backdrop of an 
economic or political crisis.  That notwithstanding, the 
close presidential election on June 4 showed a deep 
geographic fault line in Peru between the more prosperous 
coast and more backward mountain and jungle regions.  Despite 
a strong economy, Peru suffers from a weak and fractured 
political system.  U.S. engagement will be critical to the 
Garcia government's efforts to overcome political, economic 
and social challenges. 
 
 
Strong Economic Growth and Macroeconomic Achievements 
--------------------------------------------- -------- 
 
2. (U) The Garcia Administration will inherit one of the 
strongest economies in Latin America.  The current expansion 
began in 2001, following the political crisis that ended the 
Fujimori Administration, and has gained momentum over the 
last several years.  GDP growth in 2005, at 6.7 percent, was 
the fastest since 1997.  The economic expansion has continued 
into this year, despite the uncertainty created by the 
presidential elections.  Analysts recently began raising 
their estimates for growth in 2006 from 5 percent to 5.5-6 
percent.  The 12-month average growth ending in May was 6.5 
percent. 
 
3. (U) The strong growth has been propelled by increased 
private investment, an export boom (triggered initially by 
the Andean Drug Eradication and Trade Promotion Act (ATPDEA) 
and aided later by high mineral prices), prudent fiscal 
management, and, more recently, strong domestic consumption 
and construction.  Exports will have tripled by the end of 
this year compared to when President Toledo took office, 
rising from $7 billion in 2001 to an estimated $21 billion. 
Minerals make up just over half the exports, but 
non-traditional goods like textiles, apparel and agricultural 
products have grown significantly. 
 
4. (U) The sustained economic expansion and, in particular, 
the agricultural export boom, have led to a moderate but 
significant reduction in poverty.  The poverty rate - those 
living on less than $2 per day - declined from 54 percent in 
2001 to an estimated 48 percent today.  Extreme poverty - 
those living on less than $1 per day - declined more 
dramatically, from 24 percent to 18 percent, a 25 percent 
drop in four years.  The areas that have seen the greatest 
reductions in poverty have been those participating in the 
agricultural export boom, (such as Ica where companies are 
reporting a labor shortage), and those that have been areas 
of focus for USAID programs.  Analysts expect unemployment, 
underemployment and poverty to decline at a faster pace in 
the near-to-mid term as the expansion continues. 
 
5. (U) Inflation has been tame despite the economic 
expansion, 1.5 percent in 2005 and an annualized rate of 2.5 
percent in May 2006.  The Toledo Administration wisely 
allocated some of its current account surplus to pay down the 
public debt, lowering the debt-to-GDP ratio from 50 percent 
to 38 percent.  The federal government may have a small 
surplus in 2006, due to fiscal restraint, greater tax 
revenues generated by the economic expansion and increased 
efficiency in tax collection. 
 
 
Despite Past Record, the Country Is Optimistic 
--------------------------------------------- - 
 
6. (SBU) When Garcia was last elected President in 1985 at 
the age of 35, the government was weak, the terrorist war 
with the Shining Path was spreading, inflation was rampant, 
and the international debt burden was very high.  Garcia's 
policy decisions made matters worse - he restricted 
international debt payments to 10 percent of exports 
earnings, attempted to nationalize Peruvian banks and 
insurance companies and launched large public works projects 
without adequate financing.  By the end of his term, 
inflation had gone from 87 percent to 7,649 percent, per 
capita income had dropped to below the 1960 level, the GDP 
had fallen 20 percent, poverty had grown from 41 percent to 
55 percent, and the Shining Path was staging attacks in the 
capital. 
 
7. (SBU) Despite this record, the business community and the 
population as a whole continue to express confidence in 
Garcia's ability to manage the country and the economy during 
this second presidency.  The President-elect understands that 
this confidence is tenuous.  He has sent reassuring signals 
to the business community that he will respect contracts, 
show macroeconomic discipline, and welcome public-private 
partnerships for infrastructure needs.  His center-left APRA 
party has intentionally tried to cast a wide embrace to bring 
in people from the center and center-right.  Amongst Garcia's 
challenges as President will be keeping this informal 
coalition intact. 
 
8. (U) Garcia's near term priorities include promoting 
agricultural modernization in the Andes through his "Sierra 
Exportadora" program and improving water quality and 
delivery. These programs should begin shortly after the 
inauguration, and if seen as credible, will help APRA leaders 
in the upcoming November regional and municipal elections. 
In the medium term, Garcia is looking to maintain 
macroeconomic growth while encouraging new investment. 
 
 
Early Challenges 
---------------- 
 
9. (SBU) The election results (52.6 percent for Garcia and 
47.4 percent for leftist/nationalist Humala) show a clear 
fracturing of the vote between those areas that benefit from 
international commerce and those that have thus far been 
excluded from national and global markets.  In the coming 
months, President-elect Alan Garcia will face greater 
pressure to strike a careful balance: to reassure foreign 
investors that his policies can sustain the current 
macroeconomic boom and improve Peru's investment climate, 
while winning over the pro-Humala opposition with tangible 
results of his poverty reduction policies.  Specifically: 
 
--  Garcia must implement a credible program to attack the 
high levels of poverty. 
 
--  Given that the Peru Trade Promotion Agreement (PTPA) has 
not been approved by the U.S. Congress, Garcia must assume 
full responsibility for ratification of an agreement 
negotiated by the outgoing government.  The President-elect 
has tried to suggest that he could have gotten a better deal, 
but he realizes that PTPA is central to many of his proposed 
economic programs (e.g., "Sierra Exportadora.") 
 
 
Issues That Garcia May Raise 
---------------------------- 
 
10. (SBU) Garcia may raise with you: 
 
--  His appreciation for President Bush's invitation to visit 
the White House on October 10. 
 
--  His government's urgent focus on poverty and the desire 
for 1) increased U.S. assistance in linking sierra and jungle 
producers to international markets, and 2) increased 
assistance for priority initiatives like clean drinking water 
programs. 
 
--  Concern regarding U.S. counter-narcotics assistance 
levels.  Garcia believes there should be increased support 
from the U.S. and international donors. (Note: U.S. 
counter-narcotics aid in 2006 dipped slightly to $108 million 
but remains twice as high as the average level during the 
1990s. End Note.) 
 
--  The role that the U.S. can play in helping build and 
maintain investor confidence in his administration. 
 
 
Demographic/Political Overview 
------------------------------ 
11. (U) Peru is a country of 27.2 million people, of whom 30 
percent live in the Lima/Callao metropolitan area. Most 
Peruvians are either Amerindians (45 percent, largely 
Quechua-speaking but also many Amazon languages) or 
Spanish-speaking mestizos (37 percent, a mixture of 
indigenous and European roots). The remainder of the 
population includes persons of European (15 percent), 
African, Japanese, and Chinese ancestry. Peru's distinct 
geographical regions are mirrored in a socioeconomic divide 
between the coast's mestizo-Hispanic culture and the more 
diverse, traditional cultures of the highlands and jungle 
area. 
 
12. (SBU) Twenty-four candidates competed in the first round 
presidential elections on April 9, and the two top 
vote-getters, Garcia of the APRA party and Ollanta Humala of 
the Union for Peru (UPP) party, faced off in a June 4 runoff. 
 This runoff offered voters a clear choice between two quite 
different alternatives. Garcia stood for the continuation of 
policies that brought Peru nearly five years of five percent 
annual economic growth, respect for human rights, job 
creation and poverty reduction through market-based economic 
growth, and good relations with the U.S.  Humala, an ally of 
Venezuelan President Chavez and Bolivian President Morales, 
advanced policies that resemble theirs: a stronger executive 
promoting state intervention in the economy, suspicion of 
foreign trade and investment, and populist social programs. 
Garcia, who placed second in the first round, won the runoff 
election with a 5.2 percent spread. 
 
13. (SBU) The new 120-member Congress elected on April 9 
consists of seven parties.  Humala's UPP party currently 
controls over a third of the seats. (Note: The UPP 
congressional caucus has shown signs of fracturing into 
smaller groups. End Note.)  The APRA has the second largest 
block with just under a third of the seats.  The fragmented 
nature of the incoming Congress will be another challenge for 
the Garcia Administration. 
STRUBLE