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Peru's poor need shield from Asian flu
The Washington Times / September 29, 1998

By Larry Luxner

LIMA -- Business leaders here are hoping President Alberto Fujimori's ironclad political rule and conservative fiscal policies will help Peru withstand the fallout from Asia's financial crisis that has so badly damaged the economies of neighboring Chile and other Latin American nations.

That's crucial for an impoverished country like Peru, 70% of whose 24 million people live below the poverty line.

During the first seven months of 1998, Peruvian exports came to $2.984 billion -- a 26.2% drop from the $4.044 billion recorded in the year-ago period. Particularly affected by El Niņo was the fisheries sector, which saw fishmeal exports to Japan and other Far East countries shrivel 79% to only $167 million. Mining exports, meanwhile, fell 14.8% to $1.793 billion, with the "Asian flu" contributing to the fall in prices of copper, iron, lead and tin.

Hans Flury, president of the Lima-based National Mining, Petroleum and Energy Society, says Peru -- Latin America's largest biggest producer of gold, zinc, lead and cadmium -- will see a 20% drop in revenue this year.

"Mineral prices are too low, and the industry is suffering from that," said Flury. "We blame the Asian crisis, because it's the only tangible thing to blame. Companies will have less income, meaning less income tax for the government. Exploration has been postponed because of reduced budgets, and most of the big mining projects are on hold."

Despite the difficulties, Peruvian Trade Minister Gustavo Caillaux predicts his country's $65 billion economy will grow 3% this year -- with investment pouring in from everyone from Bethesda-based Marriott International, which will manage a $50 million hotel now under construction in Lima's upscale Miraflores neighborhood, to Atlanta-based BellSouth, whose Tele2000 subsidiary has 220,000 cellular customers and has recently applied for a license to enter the Peruvian long-distance phone market.

"The whole world is under a lot of pressure, and at the end, countries with more political stability will be in a better shape to receive investments," said Caillaux. "We hope to be one of the few countries to benefit from all this turmoil."

Perhaps the biggest question mark is what'll happen with Peru's $3 billion Camisea gas project, which Fujimori once called "the contract of the century."

After sinking $250 million into their proposed gas development in the jungle 300 miles east of Lima, energy giants Shell and Mobil decided in July not to go forward with the venture to exploit 10.8 trillion cubic feet of natural gas and 725 million barrels of liquefied gas -- more than seven times Peru's previously known hydrocarbon reserves. Several U.S. firms are reportedly interested in taking over the project, among them Exxon Corp. Chevron Corp., Enron Oil & Gas, Coastal Corp. and Santa Fe Energy Resources.

"The investment climate isn't growing as fast as we'd like, but that's because of what's happening in Asia," says Jaime Garcia, general manager of the American Chamber of Commerce of Peru "It's not a reflection of Peruvian policy."

In fact, political and business leaders admit their country desperately needs investment to increase per-capita GDP, which in 1996 stood at $2,060. Unemployment is officially 8.5%, but Peru's main problem is underemployment, which comprises 42% of the urban labor force.

Jorge Gonzalez Izquierdo, labor minister and president of COPRI -- Fujimori's government's chief privatization agency -- claims "the government is implementing a strategy which has three main components: cut inflation, increase GDP by 5% a year, and microeconomic policy to promote labor-intensive industry, small enterprises, construction and non-traditional exports."

A mainstay of Fujimori's economic policy has been the privatization of state-owned companies -- a policy begun when privatization was still a dirty word in most of Latin America. Since 1991, COPRI has sold off 98% of Peru's state assets in telecommunications, 97% of its fisheries, 90% of its banks, 85% of its factories and 70% of its interests in mining and energy. Most of the state's remaining assets such as ports, airports, rail networks, highways and other infrastructure will be sold off via operating concession to the highest bidder.

According to COPRI statistics, Spain -- home of Telefonica de Espaņa, which bought out the Peruvian phone monopoly in 1994 -- accounts for $2.39 billion, or 32.6%, of the $7.34 billion invested by foreigners since 1991. Other leading investors are the United States, with $1.51 billion (20.6%) and Great Britain, with $1.01 billion (13.8%).

However, during the past two years, the U.S. has been responsible for 40% of all new foreign investment, and 75% of all foreign capital invested in the Lima Stock Exchange. Equally important, Peru's exports to the United States jumped 7% over the first five months of 1998, and today, the U.S. receives 29% (or $600 million) of the country's total exports, with textiles an area of particularly impressive and sustained growth.

Yet Peru's apparel and textile sector has lost up to 30% of its workforce as a consequence of Asia's financial meltdown, which has suddenly slashed the cost of garments from Indonesia, South Korea, Taiwan and other Far East countries. Two trade associations are demanding the immediate application of tariffs and other protectionist measures to fight the tide of Asian garments flooding the Peruvian market -- a move being resisted by the Fujimori government.

"Peru is one of the most open economies in all of South America, along with Chile," claims Caillaux. "In services such as banking, Peru is the most open. I think in some ways the U.S. is more protectionist than we are."

The trade minister said in an interview here that despite close political ties between Washington and Lima, the United States "is not so pro-free trade as they say. Tariffs on textiles, for example, are 25%. Some products like oranges must fulfill very strict sanitation norms. We would like to have a more open market in the United States."

In fact, while Peru's exports to the U.S. were growing, its exports to neighboring countries and the rest of the world fell by a dramatic 27%.

That has important implications for Peru's efforts to integrate its economy with those of the other four member nations of the Andean Community -- Bolivia, Colombia, Ecuador and Venezuela -- not to mention the four founding members of the much larger Mercosur trade pact -- Argentina, Brazil, Paraguay and Uruguay.

"Our policy is free commerce," said Caillaux, noting that Lima -- headquarters of the Andean Community -- has resolved the disputes that forced Peru to withdraw from the trade pact briefly last year. "We think our market is too small, so necessarily we must depend on exports to be competitive. We are in the middle of negotiations trying to create a bigger free trade area consisting of Mercosur and the Andean Community. We are not going to be an associate member of Mercosur. Instead, it'll be like a joint venture between the two trading blocs."

One bright spot is tourism. This year, Peru -- home to the world's most spectacular lost city, Machu Picchu, and its largest prehistoric puzzle, the Nazca Lines -- expects to receive 830,000 foreign visitors. It's aiming for one million tourists a year by 2000.

"We realize that our absolute numbers are very small, especially when we consider Peru's potential," says Jose Miguel Gamarra, the country's vice-minister of tourism. Nevertheless, he suggests, "Peru offers everything you can find in the rest of South America, except that it's all in one country."

Gamarra, a former investment banker, says he's encouraged by Japan's recent lifting of its travel warning on Peru, which had been in place ever since the Tupac Amaru's December 1996 guerrilla attack on the Japanese ambassador's residence in Lima and an ensuing four-month hostage crisis. The tourism boom has sparked a hotel building boom, with $450 million having been invested in new properties throughout Peru in the last three years -- 70% of it in Lima.

Carlos Zuniga Quiroz, president of Peru's National Tourism Chamber, says that "to be considered a real tourist destination in the world context, we need 2.2 million arrivals annually." He predicts Peruvian tourist income will hit $1.7 billion by 2002, up from $527 million in 1995, $632 million in 1996 and $850 million in 1997.

Meanwhile, the foreign investment community as a whole is cautiously optimistic.

"Peru is not viewed as favorably as Chile, but is more favorably viewed than Bolivia, Ecuador or Colombia," said Kevin Tynes, vice-president of Parsons Latin America, which is designing a $140 million water and wastewater treatment system for southern Lima and overseeing construction of the Lima Marriott. "Investors are happy with Fujimori."

Most Peruvians aren't, however. According to recent polls, 78% of the country's registered voters support a referendum to determine whether Fujimori is constitutionally entitled to run for a third consecutive term in 2000. Fujimori and his allies angrily opposed the idea when it came up in Congress last month, and have succeeded in killing it for the time being. Yet the issue is likely to come up again.

"Peru has always had a strong presidential system, in which the executive is a strong figure," said a U.S. official who asked not to be named. "A foreign investor wants to see strong institutions that don't allow a president to have so much latitutde. This is a very hands-on government. Fujimori turned Peru around by orders and mandates. That was a good thing at the time. Now, what's needed is continuity, some assurance that it won't go back to the old days. For long-term investments of 20 years or more, you need to have assurances that things will stay the same."

Says David Griffith, general manager of the 151-room Hotel Las Americas in Miraflores: "Foreigners don't want to invest heavily in a country where they can't guarantee their investment. In Argentina and Chile, there's a sense of continuity which is not based on a person who's running the country at the moment. Right now, there's a wait-and-see attitude."

Having Fujimori in power, says Griffith, "gives businessmen a sense of stability, but the question is what'll happen after 2000. "I believe there will be sort of a lull until the election theme is defined. Once that's taken care of, investors will have a clearer view. Obviously, anybody who doesn't know the market will be nervous, but the economy will grow after this period is passed, and this will probably happen within the next six months."

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