Peru politics, economic laws frighten investors
By Marco Aquino
LIMA (Reuters): Peru's Congress has passed measures withdrawing key tax benefits for foreign investors, eliciting rebuke from businessmen and economists who fear the government may embark on a populist economic course.
With President Alberto Fujimori already facing widespread criticism over his highly questioned May reelection, analysts wonder why he has picked a fight with the one group -- foreign investors -- who largely hold the Peruvian leader in high esteem.
Fujimori's ruling party legislators, late last Thursday night, passed 11 bills affecting mostly the mining industry -- Peru's largest source of foreign investment and a key motor for this Andean nation's US$53 billion economy.
"No one has a convincing explanation for the sudden change in the government's economic values," wrote political analyst Mirko Lauer in the left-leaning La Republica newspaper.
The laws come just as Peru faces possible U.S. sanctions if it does not pass political reforms to restore credibility to its democracy, after the opposition boycotted the May run-off amid charges that the results were rigged.
"Has the government begun to move toward a social, economic policy as an antidote against pressures for political democracy?" Lauer added.
The bills abolish mining companies' rights to reinvest profits tax free and reduce the scope of guarantees to foreign firms, which previously could sign contracts saying there would be no change in tax policies during their operations.
At risk is $10 billion in new investments, miners say. Foreign mining investors have already ploughed $8 billion into Peru under Fujimori's 10-year rule.
Just about every sector -- from investors to the opposition -- has criticized Fujimori, who has enjoyed a cozy relationship with business since his 1990 election, which heralded radical market- friendly reforms and widespread privatization.
One of the laws, which economists say were sparked by a need to hike tax revenues to pay for a burgeoning budget gap, effectively halts privatization of the huge Mantaro power station in Peru, previously considered a key state sale.
Instead, the company's shares were transferred to a state pension fund. Another bill doubled the cost of holding mining rights.
Investors fear Fujimori may be inching toward greater state intervention, populism and even anti-U.S. rhetoric in the economy to try to boost incomes and voter support in this nation, one of the poorest in South America.
"Many decisions have been politicized. We have to say that it's best not to invest until the doubts have been resolved," said Arturo Porzecanski, emerging markets head for Dutch ABN Amro investment bank.
"This is a critical moment. We have no idea what is going to happen after Fujimori begins his third term on July 28," said Therese Feng, director of the risk rating agency, Fitch Inc.
Economists said a key motive for the government was to rein in its fiscal deficit after state spending rose heavily in the months before Fujimori's successful reelection bid in May.
The budget deficit jumped to 2.1 percent of gross domestic product (GDP) in the first quarter, up from 0.6 percent of GDP in the same period last year. The government has fixed a 1.9 percent of GDP target with the International Monetary Fund.
Aside from immediate financial needs, investors fear the laws could herald an about-turn by Fujimori toward investors.
In an unusual step this month, Fujimori criticized a U.S. lumber company, accusing it of illegal trade in timber. And some analysts have said that the new bills will affect mostly companies from the United States and Canada, two countries most critical of Fujimori's reelection.
Fujimori defended the bills, saying they were only modernizing laws that had been passed to encourage investments in the early 1990s, when Peru was a high-risk country for investors due to years of leftist rebel violence.
"We cannot talk about economic war, but economic policies with a social impact," Fujimori told reporters.
Peru has received a total of $9.2 billion in privatization receipts over the last nine years, as Fujimori sold off state assets such as fishing, mining and telecommunications companies.