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Viewing cable 06LIMA3426, ASSISTANT USTR EISSENSTAT'S VISIT TO PERU - SCENESETTER

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Reference ID Created Released Classification Origin
06LIMA3426 2006-08-29 19:41 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0000
RR RUEHWEB

DE RUEHPE #3426/01 2411941
ZNR UUUUU ZZH
R 291941Z AUG 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 2067
INFO RUEHBO/AMEMBASSY BOGOTA 3834
RUEHBU/AMEMBASSY BUENOS AIRES 2561
RUEHCV/AMEMBASSY CARACAS 9749
RUEHQT/AMEMBASSY QUITO 0648
RUEHLP/AMEMBASSY LA PAZ AUG SANTIAGO 0816
RUEHGV/USMISSION GENEVA 0465
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
UNCLAS LIMA 003426 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/OMA, EB/TPP 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USTR FOR EEISSENSTAT, BHARMAN AND MCARRILLO 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EINV OTRA PE
SUBJECT: ASSISTANT USTR EISSENSTAT'S VISIT TO PERU - SCENESETTER 
 
Sensitive But Unclassified, please handle accordingly. 
 
1. (SBU) I welcome your August 30-September 1 visit to Peru to 
discuss the U.S.-Peru Trade Promotion Agreement (PTPA) with the 
Peruvian government, the local American and Peruvian business 
communities and members of civil society. The agreement is an 
important element of newly-elected President Alan Garcia's foreign 
and domestic policy priorities, and the government and the private 
sector are eager to secure passage by the U.S. Congress.  The new 
administration took office on July 28, and has pursued an active 
agenda which focuses on both commercial and political outreach to 
important partners and a desire to spread more evenly the benefits 
of Peru's impressive economic growth over past years.  These efforts 
include a plan for bringing commerce to the highlands ("Sierra 
Exportadora"), an expansion of Peru's trade agreement with Chile, 
interest in a trade agreement with Mexico, greater participation in 
APEC, and a vision to bring more small businesses into the formal 
economy so that they can also benefit from free trade.  President 
Garcia has named renowned development economist Hernando de Soto to 
both implement the more participatory vision of free trade and to 
lead the GOP's effort to obtain passage by the U.S. Congress of the 
PTPA.  Garcia, who speaks French but not English, is anxious to 
achieve early, positive results in order to help his APRA party fare 
well in the November regional and local elections.  Despite a strong 
economy, Peru suffers from a weak and fractured political system. 
Continued U.S. engagement will be critical to the Garcia 
government's efforts to overcome political, economic and social 
challenges. 
 
Free Trade to Reduce Poverty 
---------------------------- 
 
2. (U) President Garcia is committed to further trade liberalization 
and has prioritized passage of the PTPA by the U.S. Congress, 
expanding trade ties with Chile, and increasing commercial links 
with Asia.  In addition to naming university rector Felipe Ortiz de 
Zevallos as Peru's new Ambassador to Washington, Garcia asked 
renowned economist Hernando de Soto to be his personal 
representative for the PTPA.  De Soto will spend most of September 
in Washington promoting PTPA passage.  De Soto will also advise the 
GOP on reforms necessary to bring more Peruvians into the formal 
economy, thereby expanding the number of Peruvians that are able to 
access the opportunities created by the PTPA. 
 
3. (U) For both economic and political reasons, the GOP seeks to 
strengthen its ties with neighboring South American countries.  Peru 
and Chile signed an expansion of their 1998 Economic Complementation 
Agreement on August 22, 2006.  The GOP also shares the Chilean 
government's desire to deepen trade between the Andean countries and 
Asia, and Peru will host the APEC ministerial and summit in 2008. 
Now that Peru has concluded a trade agreement with Chile, the Trade 
Ministry's negotiators are focusing on a deal with Mexico. 
 
Strong Economic Growth and Macroeconomic Achievements 
--------------------------------------------- -------- 
 
4. (U) The Garcia Administration has inherited one of the strongest 
economies in Latin America, and the country is entering its 19th 
quarter of sustained economic growth.  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. 
 
5. (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. 
 
6. (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. 
 
7. (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 lowered the debt-to-GDP ratio from 50 
percent to 38 percent.  The federal government will likely 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 
--------------------------------------------- - 
 
8. (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. 
 
9. (SBU) Despite this record, the business community and the 
population as a whole continue to express cautious confidence in 
Garcia's ability to manage the country and the economy during this 
second presidency.  The President and his ministers understand that 
this confidence is tenuous, and some skeptics are concerned about 
Garcia's reliance on populist gestures.  He has sent some 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 net to bring in people from 
the center and center-right.  Amongst Garcia's challenges as 
President will be keeping this informal coalition intact. 
 
10. (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 were 
launched 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 
---------------- 
 
11. (SBU) The recent election results (52.6 percent for Garcia and 
47.4 percent for leftist/nationalist Ollanta 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 
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 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"). 
 
-- The naming of renowned development economist Hernando de Soto, 
well-known in Washington and other capitals, is a sign that Garcia 
is committed to engaging pragmatically with the U.S. Congress.  But 
is it also a sign that he is serious about expanding the "domestic 
FTA" agenda, i.e. expanding trade and export possibilities for a 
broader cross-section of the Peruvian economy. 
 
Issues That the GOP or Press May Raise 
-------------------------------------- 
 
12. (SBU) Your GOP and press interlocutors may raise with you: 
 
-- President Garcia's appreciation for President Bush's invitation 
to visit the White House on October 10, and topics for that visit. 
 
-- The GOP'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. 
 
-- The role that the U.S. can play in helping build and maintain 
investor confidence in the economy and in the Garcia 
administration. 
 
-- The need for a contingency plan if the U.S. Congress does not 
pass PTPA by year's end.  The GOP and the business community want to 
avoid a spike in U.S. tariffs if ATPDEA preferences expire before 
the PTPA enters into force, and will likely ask for an extension of 
ATPDEA to cover any gap.  Papers have already begun to note the drop 
off in the growth rate of textile exports to the US, ascribing this 
slow-down to uncertainty among US importers of ATPDEA renewal.  A 
key exporters association has the GOP propose a USD 100 million fund 
that would assist exporters and cover the costs of a temporary 
tariff spike.  Reportedly, Peruvian exporters have had to sign 
contracts guaranteeing that they would pay US duties if these were 
to be levied starting in January 2007. 
 
-- Peruvian media have also noted that Vietnam seems to have "moved 
up the list" in terms of US Congressional consideration of trade 
bills.  There may well be questions concerning the priority the USG 
places on the PTPA, and why other trade arrangements (e.g. Colombia) 
seem to be moving through the ratification process faster than 
Peru. 
 
Important Messages to Deliver 
----------------------------- 
 
13. (SBU) Your visit at this time is crucial to both reminding the 
Garcia Administration of its commitment to the agreement and 
encouraging the government to make a critical effort on 
implementation.  You and your team will also be able to consult and 
advise the private sector groups that are engaging with their U.S. 
counterparts and directly with Congress.  We believe you should: 
 
-- Remind the GOP that implementation is a key process that should 
be the focus of their activities; 
 
-- Remind the GOP that the labor commitments are essential to 
passage of the PTPA in the U.S. Congress; and 
 
-- Encourage the GOP to speak with one voice on the PTPA, and to 
coordinate, to the extent possible, its message in the U.S. with the 
private sector. 
 
STRUBLE