“No one is asking the Government to be pessimistic, but they are asking for realism”

– Do you agree that the MEF has been slow to recognize that the economy is in recession?

Yes, definitely. There has been a misreading of the data and projections that were available. Something that had already been warned by other analysts has ended up materializing and being accepted by the MEF. There has been an extemporaneous response to what was being seen. It may have been a bad reading or a bad projection.

– Could the error in the August projection have been one of the reasons?

That’s how it is. And September doesn’t look so good either. There is still very preliminary data and it is possibly close to zero. We will probably have a new negative quarter and the expectation to grow at what the MEF thought (1.1% in 2023) will not be met. In general, there is a ‘timing’ issue. All analysts have been lowering their projections. There has been a ‘timing’ of a few weeks that the MEF has delayed. If the MEF had not given that press conference in August and had been more cautious, perhaps the change in attitude would not have been felt as much. Above all, being the MEF. It should simply have been said that the figures came worse and that’s it. I think the problem was precisely that conference in August, where victory was declared ahead of time. That has raised the level of the discussion further.

– Beyond the recession announcement, what is your opinion of the way it was made? Without giving any further argument, just that the supplemental credit needs to be approved.

For me, that was a strategic error. It wasn’t very difficult to think that this was going to be the headline for several days in the press. For the minister to say that, he was obviously going to overshadow any other news. The truth is that I don’t understand why he said it and the way he said it. If it was to convince Congress, it seems like a terrible strategy to me. Even though the evidence is on the table, the way he said it and the place in which he said it does not show that it is a good strategy. He put the word “recession” in the forefront, and that negatively affects expectations, which is precisely what you need to change.

– And yesterday, at the end of the Council of Ministers, both Premier Otárola and the minister stressed that the recession is temporary, that it is “punctual and mitigatable.” Is it healthy to continue with that optimism?

It’s not healthy at all. To solve a problem, you must start with a good diagnosis. We have to see what he means by “punctual and mitigatable”, because all recessions are. There is almost no country that has been in recession for years. Now, how you go out and at what time, that is a matter of discussion. In the MEF there is a certain optimism that plays against credibility. One has to know how to maintain the balance between these two concepts. Nobody is asking you to be pessimistic and lower expectations, but the name of the ministry is at stake. So, one must be careful. Not being one dents credibility and you don’t want a ministry in which you don’t trust because it reduces the power of economic policy. This is in the MEF and in terms of macro projections, but the same is also noted in the Executive. Nobody is asking the Government to be pessimistic, but they are asking for realism.

– The MEF confirmed to El Comercio that the expected impact of the approved supplementary credit is 5 points between November and December. Are they enough to keep the economy afloat before the end of the year?

That is a complex topic. To a large extent, what this package will do is that there will be an injection of spending in November and December. That will make the figures for November and especially December show growth. Even more so taking into account that in December of last year there was a coup d’état and conflicts, so there will be a statistical effect. The possibility of December being “a good month” is quite high. The question is whether that was strictly necessary: ​​to disguise the result of the year or the month to give the impression that the recession was specific, as they are saying now. That’s not what the country needs. That extra boost that will be given to November and December is not the solution to the problems. The solution is a little more structural. It has to do with how you generate more confidence for private investment, how competitiveness is encouraged.

“The economic policy of the MEF must be focused on increasing potential GDP and this supplementary credit does not have it. It is just an injection of spending that will happen in November and December. “It is an injection that does not solve the underlying problems.”

-And how many tools does the MEF have to generate trust and reactivate private investment?

The MEF is a part of a gear. There are measures that can be implemented quickly and that can serve as a basis to begin to build trust. Because regaining trust is a process and does not depend exclusively on the MEF. He must lead it, but specific measures must be agreed upon and approved by the Cabinet. One of those measures is the elimination of Castillo’s Agenda 19. There are supreme decrees in that agenda that are harmful. Obviously, that depends on the Ministry of Labor and not the MEF. The MEF should place emphasis on PCM and the MTPE of the effects. And if no one wants to listen to you, make your position available.

– That being the case, beyond the Castillo government, is there also responsibility on this Government?

Castillo’s inheritance did a lot of damage. There are permanent things like Agenda 19, but 10 months have already passed. I believe that this Government must now assume responsibility for what can and cannot be done. They have had enough time to make a diagnosis and reverse the things that were done during the Castillo government and they do not do so. That is the responsibility of this government. Now after almost a year, you must take your own responsibility.

-With the current scenario -of a recession-, how complicated is 2024 and the support for the Public Budget?

Let’s hope that the Public Budget is well done. The one in 2023 was very poorly done. It has been the subject of countless changes, the latest occurring last week. They have taken S/500 million from the Ministry of Health and S/85 million from the National Institute of Health, which is money to build hospitals. In addition, there is an underlying issue, which is a criticism that I have always made of the MEF, which is changing the budget a lot during execution. There are too many transfers. It is very easy to blame regional and local governments for poor execution, but resources are always being passed on to them at the last minute. It would be different if the money were given to you at the beginning of the year and not wait until October. There is a serious problem that when I was minister we tried to change it and now we have returned to the same thing. The planning process must be improved.

– Up to that point we talked about execution, but in terms of fiscal cash, aren’t resources complicated by a poor macro diagnosis?

Yes. And this was warned by the Fiscal Council at the time. We hope the same does not happen this time. For next year the MEF estimates a growth of 3%, which is also optimistic. I don’t think there is anyone who is projecting 3% for next year right now. If the next El Niño phenomenon is strong and we do not grow at that level, income will fall again… and you have already committed spending. And, on top of everything, your base case is the top of the fiscal rule. All of this puts credibility at risk and the risk of not complying with the fiscal rule. There I do take the words of the Fiscal Council, which has been very clear in this dynamic and recommending that more conservative projections be made and that they give you room for maneuver.

– Does the approved supplemental credit aggravate the already existing risk of failing to comply with the fiscal rule?

I’m not sure there, because the MMM was already contemplating this injection of resources. It is a supplementary credit that, in theory, was already part of the MEF projections. What’s more, this credit was in Congress three months ago. It would have to be seen. That’s part of what we’re going to analyze. [en el Consejo Fiscal]: how much Congress has included. We have to see if what was approved is the same as what was planned. But if you take into account that this was planned, it is still possible to scratch the fiscal goal.

– Without overcoming it?

Yes. Let’s say, it is possible. Now, everything indicates that the probability that you will not comply is greater. The MEF has mechanisms to adjust spending if it had to. We could reach 2.4%, which is the projection. But personally it is not my base scenario. My scenario is that the goal will be exceeded a little.

-And when you exceed the goal, what consequences would it have?

The main one is credibility. It’s raining on wet.

– There are analysts who consider that, since there is a greater deficit sustained by the El Niño Phenomenon, it is justified to exceed the goal by a few tenths. Wouldn’t it be like that?

No, I don’t believe in that version. Simply because El Niño has been anticipated for a long time. It’s not that last week we all found out that El Niño is coming. We have known this since the beginning of the year and you have had the IAPM and the MMM to make all your calculations and projections about El Niño. And you have always maintained the deficit projection at 2.4%. El Niño is not a reason to break the fiscal rule this year. The other year, who knows. If a strong or very strong Niño happens, we talk about another scenario. But as we are now, prevention spending has had to be anticipated since March of this year.

“The main problem of failing to comply with the fiscal rule is credibility. It would be the first time that the fiscal rule has been violated since 2000. That year it was not complied with, but the fiscal rule had just come out. It would be the first time that it has not been fulfilled despite the warnings that everyone has made. That would be a bad sign because it makes you think that next year it would be 2% and eventually it would reach 1%. I see that risk, but it is not a risk of fiscal crisis or that we are going to go bankrupt. Furthermore, the debt is controlled”

-And would there be a movement in credit ratings?

Yes. In some way, it is putting a little more water in the glass so that it can eventually spill. I don’t think that passing a few tenths will give you a ‘downgrade’, but we are going in that direction. Something important must be taken into account: private companies, the good ones, are one step below the Government’s rating. So, if there is a ‘downgrade’ by the Government, all these private companies will automatically go below investment grade. And that puts them in the category of ‘junk bond’. There is a super important effect that could make financing more expensive. There is an effect that, in these circumstances, must be seen with a magnifying glass. We could be generating junk bond quality for private companies. In the situation we are in, a ‘downgrade’ would be doubly harmful.