(above) Luis Carranza, Peru's finance minister, speaks during a news conference in Lima, Jan. 24, 2008. Photographer: Karel Navarro/Bloomberg News

Peru’s Carranza Returns to Finance Ministry as Economy Slumps

By Alex Emery

Jan. 20 (Bloomberg) -- Peru’s Finance Minister Luis Carranza, who began his second stint at the post yesterday, faces a much tougher economic outlook this time around as growth slows and inflation hovers at the fastest in more than a decade.

Carranza cut foreign debt, oversaw a 3 percent fiscal surplus and helped the country win investment grade ratings from Fitch Ratings and Standard & Poor’s Ratings Services during his previous tenure in the job, from July 2006 to July 2008.

He takes the helm again as Peru shows the effects of a worldwide slowdown that has reduced demand for exports and tempered economic growth from a 13-year high of 10.5 percent in the second quarter. He will be tasked with implementing a $3 billion stimulus package and advising the government how best to boost the economy with planned increases in spending.

“It’s going to be more difficult this time around, but Carranza returns with more experience,” said Jaime Caceres, chief executive officer of AFP Integra, Peru’s largest private pension fund, which manages $5 billion in assets. “He inspires confidence as he knows everyone in the markets, both here and abroad.”

Carranza, 42, is taking over from Luis Valdivieso, who resigned yesterday after six months in the post.

Peru’s economic growth will slow to 5 percent to 6 percent this year from an estimated 9.2 percent in 2008 as sales of copper, zinc and fishmeal exports decline, Valdivieso said in a Jan. 14 Bloomberg Television interview. Peru is the world’s third-largest copper and zinc producer and No. 1 in fishmeal.

Growth slowed in November to the lowest in more than two years on slumping prices for commodities and a drop in fish harvests. Exports declined for the second time in seven years in November, dropping 14 percent, while tax collection fell for the first time in almost five years.

Inflation

As the economy slumps, inflation was the highest since 1996 last year. Consumer prices rose 6.65 percent in 2008, above the central bank’s target of no more than 3 percent.

Carranza, former chief analyst at Spanish bank Banco Bilbao Vizcaya Argentaria SA, said he will focus on using the $3 billion economic stimulus to keep annual economic growth at 6 percent and create jobs. The plan will be funded by three years of fiscal surplus, he said at a press conference yesterday.

“The Peruvian economy is well prepared to face the crisis,” Carranza said. “If we have to spend more on infrastructure, we will.”

Stocks and bonds surged after Carranza was named to the post.

Stocks, Bonds

Lima’s General Stock Index rose 71 points, or 1 percent, to 7086.40. The extra yield investors demand to hold Peruvian bonds instead of Treasuries, or spread, narrowed 0.11 percentage point to 4.66 percentage points today, according to JPMorgan Chase & Co.’s benchmark emerging-market index.

“The market will take Carranza’s return positively,” said Roberto Flores, an analyst at Lima-based brokerage Centura SAB. “As minister, he acted with fiscal prudence.”

Peruvian President Alan Garcia, who has signed free trade agreements with the U.S. and Canada and lined up $35 billion in foreign investment commitments, said the ministerial change won’t involve a shift in economic policy.

“I wish to ratify the clear continuity of our policies,” he said at the swearing-in ceremony held in the Presidential Palace in Lima. “We will maintain economic and fiscal stability and meet the central bank’s inflation targets.”

Valdivieso, who said he may be named to a post representing Peru abroad, said the government needs to curb inflation and speed up infrastructure spending to drive growth.

“The government must continue with its anti-crisis policy,” Valdivieso said at a press conference yesterday. “We know there will be an economic slowdown.”

To contact the reporter on this story: Alex Emery in Lima at aemery1@bloomberg.net