ECONOMY-PERU: Tough Times Ahead

By IPS Correspondents Reprint | | Print |

Analysis - Abraham Lama

LIMA, Jan 6 1998 (IPS) - The Peruvian economy faces a testing time this year, even harder than in 1997, according to financial experts.

They predict the El Nino weather phenomenon and the Asian economic crisis will have a serious effect on the economy, while President Alberto Fujimori’s re-election ambitions are up against waning popularity among voters and a touchy situation with his main supporters, the military brass.

Although Peru is one of the Latin American countries that has felt the least impact from the financial crisis in Asia, experts predict trouble for this country when the Asian “tigers” begin their corrective trade measures.

Elmer Cuba, leading economist with the consultancy firm Macroconsult, says that the prices of Peru’s traditional export products can be expected to fall, and the devaluation of many of the Asian currencies should make that region’s exports even more aggressive.

Fujimori’s neo-liberal economic policy has reduced protective tariffs to an average level of 15 percent, and Peruvian industrialists will the choice of either cutting costs or disappearing under the onslaught of cheap imports.

Government figures show that Peru’s Gross Domestic Product (GDP) grew 7.5 percent in 1997 but this has not be translated into monetary gain for most Peruvians who continue to complain about low wages and high unemployment.

The El Nino weather phenomenon, expected to be particularly strong this year, causing crop losses and flooding in Peru, will make it difficult to achieve the government’s goal of six percent GDP growth, according to economic analysts.

The expected drop in production caused by El Nino, and the worsening of trade terms because of the measures to be adopted to stave off further financial turmoil in Asia, will push up the external deficit – equivalent to five percent of GDP in 1997 – the experts say.

Carlos Bolona, Fujimori’s former economy minister and architect of the government’s neoliberal economic policy, warns of another risk to the economy: the president’s ambitions to be elected for a third consecutive term could push him to adopt populist measures.

“During 1996 and 1997, the country paid with structural adjustments the bill for the higher budget expenses Fujimori decided on in order to win the 1995 elections,” Bolona says. “If he resorts to that same electoral tactic, in 1998 and 1999 there will be a relative social bonanza, but the next government will be left with a disaster.”

Economist Elmer Cuba agrees with Bolona. “The main macroeconomic risk in 1998 will be the fiscal sector. If Fujimori adopts a high spending budget and abandons fiscal discipline, he will be endangering the country’s economic stability.”

In early 1997, Fujimori enjoyed a 65 percent favourable rating in opinion polls, but his popularity had already started to wane. It continued to drop, temporarily rallying thanks to isolated incidents like the April rescue of the hostages from the Japanese Embassy, to the current level of around 35 percent.

Although still leading any other probable candidate in the polls, 35 percent support would not be enough to help Fujimori win the referendum necessary to allow him to run for a second consecutive re-election, prohibited by the constitution.

The president’s opponents say he will try to get around that hurdle through a “malicious interpretation” of the constitution by the ruling party’s majority in parliament. But to do that, he would need guarantees that the electoral authority and judiciary would not stand in the way.

Fujimori could not force the electoral authority and judiciary, which are “constitutionally autonomous, without the total and intimidating backing of the armed forces,” says opposition parliamentarian Fernando Olivera.

According to Cesar Zamalloa, professor of Political Analysis at the University of Lima, Fujimori has been able to govern comfortably based on two key support bases: the army and business.

“So in the next few weeks, he will have to work out his discrepancies with the chief of the armed forces, or find a way to replace him with a military chief who provides him the security and trust he found in General Nicolas Hermoza,” says Zamalloa.

But in a country like Peru, where the armed forces consider themselves virtually autonomous, that has become even more difficult since Fujimori was forced to strike up an association with Hermoza in 1992 to legally dissolve parliament and amend the constitution on the occasion of his “self-coup”, the analyst adds.

Alberto Verme, Salomon Smith Barney’s head of business affairs in Latin America, says that “Peru should concentrate its efforts on keeping its growth rate above five percent over the next five years, to dispel doubts over the stability and solidity of its reforms.”

Verme also recommends that the Fujimori administration recuperate the momentum it seemed to have lost in the process of privatisation of public enterprises.

“Although foreign investors were happy with the initial pace of Peru’s privatisations, they could interpret the current situation as a slowdown in that process, and redirect their investments towards countries like Brazil, Mexico and Venezuela, where similar privatisation processes are in progress,” he warns.