Peru crisis could delay vital foreign investment

By Marcel Deza

LIMA (Reuters): Foreign investment vital to Peru's economy will steer clear of the Andean country until its latest political crisis simmers down, threatening economic growth this year, analysts said.

The country has been in turmoil since Saturday, when President Alberto Fujimori said he would call new elections but not stand in them. His televised speech also indicated a split with a key advisor and powerbroker which may put at risk the nation's ability to be governed, commentators say.

"Investors are unsure of how the political crisis will be resolved, which means they'll take decisions only when things clear up," said Pablo Secada, an economist at Santander Investment in Lima.

The latest official proposal foresees general elections in March and a government changeover in July 2001, but the opposition has asked for a transitional government to hold elections in a matter of months.

Uncertainty over what lies ahead battered Peru's sol currency, tipped its stock market into its biggest plunge of the year and pushed down PDI Brady bonds 5.6 percent in New York on Monday.

On Tuesday, Standard & Poor's revised its outlook on Peru's long-term credit ratings to negative from stable, citing Fujimori's call for new general elections and a dismantling of the National Intelligence Service.

In addition, rating agency Moody's Investors Service downgraded Peruvian Brady bonds to B1 from Ba3, citing a legal dispute between the government and a U.S. creditor which led Peru to miss an US$80 million interest payment.

The ratings moves were another hit to a government reeling to steady investor fears of instability.

On Monday, a day before the ratings agencies' announcements, Economy Minister Carlos Bolona sought to reassure investors the government would not stray from promised economic reforms and key privatisations. "The idea is to show investors we're still at work," he said.

Peru is counting on some $650 million from privatisations this year, compared to $300 million in 1999.

Among the projects mentioned by Bolona were the auction of the Camisea natural gas field, which requires some $2.5 billion in investment. Peru also hopes to select a winner in an auction for the tender of Lima's Jorge Chavez airport by Nov. 15, and sell La Granja, one of the world's biggest copper deposits.

Santander's Secada said the prospect of elections would harm the investment climate in the short term.

However, in the mid-term, a change in governments could help shine Peru's tarnished image of instability.

The country has lived a particularly tumultuous year with elections in April and May that were widely condemned.

Carlos Adrianzen, an economist at San Ignacio Loyola University, said he's expecting the economy to expand 3 percent to 4 percent compared to the government's optimistic 5.5 percent forecast.

"Everything is going to go slower due to this political noise," he said, referring to the economy's recovery from a recession in 1998 and sluggish 1999.

Already, the rate of investment has decreased from past years. Including investments in the bourse, foreign investment rose 6.7 percent last year to $12.19 billion, according to the central bank. In the first half of the year, investment grew 7.2 percent compared to the prior period to $13.01 billion.

But that growth rate pales compared to the 20 percent to 60 percent that characterized the 1993-1997 period for Peru, when Fujimori's defeat of guerrillas and reforms stabilized the economy.

Analysts had faulted the leader for allowing needed reforms to taper off, but Fujimori announced last month another package of measures to reactivate the economy. Secada said investors will be closely watching the opposition's economic proposals as the election nears.