June 10, 2016 / 9:07 PM / 2 years ago

Peru's Kuczynski tightens proposed target for fiscal deficit

LIMA, June 10 (Reuters) - Incoming Peruvian President Pedro Pablo Kuczynski has scratched his proposal to widen the fiscal deficit to 3 percent of gross domestic product after credit rating agencies expressed concern, his pick for finance minister Alfredo Thorne said on Friday.

Thorne, who like Kuczynski is a former investment banker and World Bank economist, said the plan is now to run a 2.8-2.9 percent deficit in 2017 before leaving it at 1 percent in 2021.

Kuczynski had proposed a 3 percent deficit in 2017-2019, up from the 2.5 percent target for this year, to fund a stimulus spurt and a gradual lowering of sales taxes that his critics said threatened Peru’s long-term fiscal standing.

“We’d said it was going to be 3 percent. There were some problems with credit risk agencies that are worried,” Thorne said in an interview with local broadcaster RPP.

Peru, a leading global producer of copper, zinc and gold, is rated A3 by Moody’s and BBB+ by Standard & Poor’s, and Fitch.

The economy has been recovering on surging copper output from new mines since late last year, but domestic demand has remained relatively weak after a drop in private and public investments and growth is expected to slow in 2018.

Jaime Reusche, a senior analyst for Moody’s, said Kuczynski’s more conservative fiscal target was encouraging.

“We will have to discuss these measures in great detail, but the signal that they will limit the fiscal impulse is positive,” Reusche said in an email. “The new authorities deserve the benefit of the doubt.”

Thorne added that Kuczynski will reappoint central bank president Julio Velarde for a third five-year term after he takes office July 28.

“Julio Velarde is going to stay, we’ve already spoken with him informally,” Thorne said.

Kuczynski, 77, narrowly won Peru’s tightest presidential election in decades this week, but his defeated former rival Keiko Fujimori said on Friday that her populist rightwing party would be an opposition force during his five-year term.

Kuczynski will replace President Ollanta Humala, a former radical military officer who has continued the free-market economic policies of his predecessors. (Reporting By Marco Aquino and Mitra Taj; Editing by David Gregorio)

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