Living in Peru : your everyday companion

We have had a Minister of Finances which told jokes without ever laughing and another which rarely made them. Luis Valdivieso goes from a furrowed brow to a smile every time he manages a “touché”. In this interview he responds to several of his critics and explains his plans for the year which has just begun.

In 2008 your work focused on elaborating a budget and making investment in social spending more efficient. What are the tasks you have set for yourself in 2009?

Basically to be very vigilant in regard to the effect the international financial crisis will have and to be able to respond to that impact accordingly. In order to achieve that we have chosen investment instead of consumption, this has two points of impact instead of only one.  Many people say we are forgetting measures such as tax cuts which increase disposable income. However if the general equilibrium is analyzed it is evident that even though consumption does have a quantifiable impact, public investment also acts as an accelerant because it always has private investment as its outcome.

However, the scheduling of these development projects is still an issue.

What we have to look at is how much there is within each investment and what state the each project is in (design, approval, and execution). It is questionable to say there have been projects thirty years in the making but there are some projects which take more time than others. It is very much like a production line: what is important is to put into practice things which can be finalized the quickest. In regard to public investment, what we want to avoid is that the drop in the first semester of 2009 be as drastic as always.

How can the time it takes to evaluate a private initiative be reduced so that the process does not take between 4 to 6 years? 

You are talking of the public-private association for which a decree has been emitted which reduces many deadlines and simplifies the processes. Our concern now is to see who the big investors who have not entered the licitation processes are, find them and find out what made matters difficult for them. In Spain, for example, we found that some wanted to join in but that financing was expensive or funding was limited. Then we said: let’s speak with the Spanish Government, they want their enterprises to work; in Peru there is work and what they are missing is for Spanish banks, which are broke right now, to loan them the money. We also want there to be investment from small business and micro enterprises in Peru.

They not only face high interest rates but also problems in obtaining guarantees.

We are trying to channel our resources to those sectors with reasonable rates which will work in the long term. In relation to the guarantees we have thought of a fund which we can assume some of the financial risks with during a reasonable period of time within which we think the economy can recover. Eighteen months? Twenty-four months? We are not sure, it depends on each sector.

Let’s move on to the subject of taxation. For a while now we have been hearing that it is not a good idea to apply takes to the profit surpluses or to capital rent. On the other hand it is never a good enough moment to reduce the public tax burden. Isn’t that a contradiction?

Like I said at Congress, first of all there are technical reasons as to why taxes on capital profit should be delayed. The software needed to apply them is not ready. On the other hand there is economic order to consider because the law had inequities which could be deterrent to saving. By the way today would not be a good moment either because not many people profited from the stock exchange but many did lose.

2010 is a good moment to introduce the tax?

We will have enough time to introduce it efficiently. What do we want, a legislature which will cause more problems than it will solve at a time when the cost of opportunity is too low? Politically it is a sign which may be confused with favoring one group over the others, but it is not that. The tax on capital profit is a very reasonable one but it must be introduced correctly so as to not discourage saving. This is of vital importance because what is central in an economy is to be able to save to then invest and grow at a steady and sustainable pace and so reduce poverty.

You are worried about giving the message of order and clarity to potential investors. But what is the message of the MEF which will elect a new government in 2011?

The function which I have been asked to carry out is that of contributing to guaranty that the countries economy will remain stable. I am not a politician, I am a technocrat. But one thing is to be a technocrat and quite another is to ignore the considerations of the political economy. The political analysis of the measures in an economic program is a consideration of the Ministers Council. There, together with the President we do a social and political analysis of the measures considered. It is not up to me to make that decision but rather illustrate the consequences and alternatives. 
 
In respect to poverty what are the goals set for this year? It is known that the increase in food prices will make us lose the five point reduction we had achieved in the impoverished population in 2007.

As long as we keep growing above the 4% mark we will still be generating employment. If we keep creating employment, we keep improving people’s income and reducing poverty. In fact, a study done by the World Bank indicates that inflation would have decreased the five previously achieved in 2007 by three points, but that study did not take into account the 9% growth in 2008. What we want to do now is maintain growth and, let me tell you, everyone is talking of the S/. 10.000 million Anti-crisis plan, but no one remembers that the public budget for 2009 is for S/.73.000 million.   
 
Most is designated to current spending although more has been put aside for investment than in 2007.

It’s not about spending more; it’s about spending it appropriately. The best anti-cyclical policy is that of spending, but spending on things which will really counteract deceleration and that will widen our productive base. We must not confuse populism with anti-cyclical policies for well structured spending, with quality guaranties and a proper focus plan. 

Is it reasonable to ask business owners to sacrifice their profits so that they can be put into new investments?

For me the answer is yes, the reasonable incentives do exist so as to have entrepreneurs bet on the future of Peru, even in a situation where short term loans are becoming scarce and when demand for their products is becoming weaker. In 2008 in real term private investment has risen by 28% and public investment by 55%. An extraordinary amount of growth! If in 2009 we reach half of the investments we had in 2008 we should consider ourselves very fortunate. But, I’ll say it again, are the incentives in the right place? A discussion is necessary for that.

The president of the Confiep proposed that capital should be shared to thus increase financial liquidity in Banks. What do you think?

First of all banks are in a state of super liquidity at the moment and credit keeps rising by 2% each month. There is no need for more liquidity except for that offered by the Central Bank. On the other hand, when I came to live in Peru I did bring money. I made a statement, presented all the documents which said it was my life savings, I paid the ITF and I have had no problems. Why can’t other people do that? I really don’t understand. 

If this changes can bad money enter the country?

 I’m not saying that foreign money is bad money, what I am saying is that to bring it in an affidavit is necessary. All the financial organizations except for those in dark places must report transactions of certain amounts.

It is estimated that there are $5.000 million dollars owned by Peruvians kept in fiscal paradises.

Having money in a fiscal paradise is not an impediment unless someone has not reported the interests earned. In which case there will be a problem with the Sunat. But let’s be clear. What is being lost? Taxation amnesty? Amnesty when is comes to taxation only causes prejudice because it causes habits and no habit is good except that of the “El Señor de los Milagros”.

Finally, if petroleum were to become scarce would the Price Stabilization of Fuel Fund be applied? What is the policy?

The Government’s policy at the moment is to keep the fund in case any subsidiaries reappear in the magnitude they had before.  The market trend will be followed and every 10 days prices will change. Once the debt is paid and all the corrections have been made I feel we must change to a freer system. In consideration to the social and political implications we have opted for a gradual recuperation process. But I can guaranty that the cut in January will have a negative effect on inflation.

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