Country Report 2Nd Quarter 2000 © the Economist Intelligence Unit Limited 2000

COUNTRY REPORT

Peru

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2nd quarter 2000

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ISSN 1356-4064

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Contents

3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2000-01

11 The political scene

15 Economic policy

18 The domestic economy 18 Economic trends 22 Oil and gas 22 Mining 23 Manufacturing 24 Agriculture 26 Infrastructure 28 Financial and other services

29 Foreign trade and payments

List of tables

8 Forecast summary 10 Global assumptions summary 15 Opinion poll results, 2000 18 Central government operations 20 Gross domestic product growth by demand, 1999 21 Gross domestic product growth by sector 22 Consumer prices 23 Fuel production 24 Mining production 26 Agricultural output 27 Fisheries output 28 Merchandise trade 29 Current account 29 Balance of payments

List of figures

11 Gross domestic product 11 Nuevo sol real exchange rates 19 GDP, domestic demand and fixed investment 24 GDP, primary and non-primary production

EIU Country Report 2nd quarter 2000 © The Economist Intelligence Unit Limited 2000 . Peru 3

March 17th 2000 Summary

2nd quarter 2000

Outlook for 2000-01 A victory for Alberto Fujimori remains the most likely outcome of the presidential election, but it no longer appears assured, with Francisco Toledo surging up the polls and the government tainted by allegations of forging signatures. Economic policy will change little, no matter which candidate wins the election, despite some pre-electoral populist measures. Fiscal adjustment will follow in the second half of 2000, and with growth rising as investor confidence returns, prices will remain stable and the currency will appreciate slightly. As domestic demand returns the current-account deficit will widen slightly.

The political scene Mr Fujimori’s popularity has waned amid accusations of foul play, which have been taken up by international observers, who are also concerned about the justice system. The opposition challenge has become fragmented, but Mr Toledo has seen his support surge. Upheaval in Ecuador has not damaged bilateral relations, and the border settlement with Chile has been consolidated.

Economic policy The Perú 2000 manifesto suggests pragmatism and populism; the opposition manifestos are almost indistinguishable. The fiscal position worsened in 1999 and the deterioration has continued into early 2000. A new letter of intent has been signed and cautiously received. Some privatisations and concessions have been delayed again, but the sale of concessions for Camisea has provided welcome news for investors.

The domestic economy • Official growth figures have been contested, but there are signs of a real recovery. Manufacturing drove growth in the last quarter of 1999. Inflation fell to 3.7% at year-end. The nuevo sol appreciated between January and March.

• The first stage of Camisea has been sold and the second delayed. Oil and gas output has fallen. Gold and copper have driven growth in mining output.

• Manufacturing growth figures have been questioned, but some companies have performed well. Agricultural and fisheries output grew in 1999, but the sectors still face substantial financial problems.

• Investment in telecoms continues. Concessions on mobile telephony have been agreed. The first railway concession is still being evaluated.

• Bad debt levels remain high and telecoms have boosted the stockmarket.

Foreign trade and Export growth in 1999 was led by traditional products. With non-traditional payments exports beginning to recover and the import bill falling, the current-account deficit narrowed in 1999. FDI inflows fell in 1999.

Editor: Martin Pickering All queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 Next report: Full schedule on www.eiu.com/schedule

EIU Country Report 2nd quarter 2000 © The Economist Intelligence Unit Limited 2000 4 Peru

Political structure

Official name Republic of Peru

Form of state Presidential democracy

The executive The president is directly elected for a five-year term and may be re-elected to a second term under the new constitution approved by referendum in October 1993; the president appoints a Council of Ministers

Head of state Elected president

National legislature Congress consists of a 120-member single chamber, which can be dissolved only once during a presidential term

Legal system Courts of first instance are in provincial capitals; the Supreme Court sits in Lima

National elections April 9th 1995 (presidential and congressional) and October 11th 1998 (municipal); next elections due on April 9th 2000 (presidential and congressional)

National government Alberto Fujimori became president on July 28th 1990 and was re-elected on April 9th 1995

Main political organisations Government: Cambio 90-Nueva Mayoría (C-90/NM) Opposition: Acción Popular (AP), Alianza Popular Revolucionaria Americana (APRA), Code País Posible, Partido Popular Cristiano (PPC), Renovación, Solidaridad Nacional, Somos Perú, Unión por el Perú (UPP)

President Alberto Fujimori President of the Council of Ministers (prime minister) Alberto Bustamante Belaúnde

Key ministers Agriculture Belisario de las Casas Piedra Defence José Villanueva Ruesta Economy Efraín Goldenberg Education Felipe Ignacio García Escuerdo Energy and mining Jorge Chamot Sarmiento Fisheries César Luna Victoria León Foreign affairs Fernando de Trazegnies Granda Health Alejandro Aguinaga Recuenco Human development & promotion of women Luisa María Cuculiza Torres Industry, commerce, tourism, integration & international trading negotiations Juan Carlos Hurtado Miller Interior César Saucedo Sánchez Justice Alberto Bustamante Belaúnde Labour & social promotion Pedro Flores Polo Presidency Edgardo Mosqueira Medina Transport, communications, housing & construction Alberto Pandolfi Arbulú

Central Bank president German Suárez

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Economic structure

Annual indicators 1995 1996 1997 1998 1999 GDP at market prices (Ns m) 133,258 149,504 173,689 183,842 193,344 GDP ($ bn) 59.2 60.8 65.1 62.4 56.9 Real GDP growth (%) 7.3 2.4 6.9 0.3 3.8 Consumer price inflation (av; %) 11.1 11.5 8.5 7.3 3.5 Population (m) 23.5 23.9 24.4 24.8 25.2a Merchandise exports fob ($ m) 5,588 5,899 6,832 5,735 6,114 Merchandise imports cif ($ m) 9,224 9,473 10,264 9,840 8,057 Current-account balance ($ m) –4,314 –3,643 –3,282 –3,800 –2,033 Reserves excl gold ($ m) 8,222 10,578 10,982 9,566 8,731 Total external debt ($ bn) 30.9 29.3 30.5 32.4a 30.6a Debt-service ratio, paid (%) 16.1 35.2 30.5 28.8a 35.3a Exchange rate (av; Ns:$) 2.25 2.46 2.67 2.94 3.40 March 17th 2000 Ns3.44:$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1998 % of total Agriculture 13.6 Private consumption 58.3 Fisheries 0.9 Government consumption 7.7 Mining 11.7 Fixed investmentc 26.0 Construction 8.2 Exports of goods & services 29.6 Manufacturing 21.9 Imports of goods & services –21.6 Services 43.7 GDP at current market prices 100.0 Total 100.0

Principal merchandise exports fob 1999 $ m Principal imports fob 1999 $ m Gold 1,193 Intermediate goods 3,003 Copper 776 Capital goods 2,140 Fish & fish products 791 Consumer goods 1,438 Textiles 575 Total incl others 6,714 Zinc 462 Agricultural products excl coffee 420 Coffee 268 Crude oil & derivatives 247 Lead 177 Total incl others 6,114

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total US 32.0 US 26.2 China 4.1 Chile 4.5 Germany 4.0 Brazil 3.4 Japan 3.8 Venezuela 2.7 Brazil 3.1 Colombia 2.6 a EIU estimate.

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Quarterly indicators

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Government finance (Ns m) Revenue 6,419 6,822 6,750 6,242 6,103 6,167 6,153 n/a Expenditure 6,259 6,440 6,928 8,372 6,590 7,322 8,107 n/a Balance 160 382 –178 –2,130 –487 –1,155 –1,954 n/a Output GDP at constant 1979 prices (Ns m) 1,139 1,307 1,209 1,187 1,152 1,376 1,214 1,286 % change, year on year 2.8 –2.9 2.4 –0.6 1.2 5.2 0.4 8.4 Employment, wages and prices Unemployment rate (% of the labour force) n/a 8.0 7.7 7.9 9.8 8.2 7.7 n/a Average nominal wages (Ns) 797 803 803 806 797 812 n/a n/a % change, year on year 5.3 5.9 4.7 4.3 –0.1 1.1 n/a n/a Consumer prices (1995=100) 126.9 130.0 131.5 131.0 132.1 134.1 135.2 136.0 % change, year on year 7.7 8.2 7.2 6.0 4.1 3.2 2.8 3.8 Wholesale prices (1995=100) 123.2 125.4 127.5 128.2 129.7 131.7 132.9 133.4 % change, year on year 7.0 7.4 7.8 7.0 5.2 5.0 4.3 5.5 Financial indicators Exchange rate Ns:$ (av) 2.79 2.86 2.98 3.10 3.34 3.34 3.37 3.48 Ns:$ (end-period) 2.81 2.93 3.04 3.16 3.34 3.34 3.46 3.51 Interest rates (av; %) Deposit 13.9 13.9 15.3 17.4 18.3 19.0 14.5 13.4 Lending 29.9 29.6 29.9 33.7 33.1 33.2 29.7 27.1 M1 (end-period; Ns m) 15,466 16,040 17,766 19,165 19,676 20,156 20,656 22,246 % change, year on year 23.3 23.4 28.5 26.3 27.2 25.7 16.3 16.1 M2 (end-period; Ns m) 46,363 48,081 49,957 52,517 55,537 55,925 58,250 60,193 % change, year on year 19.1 18.4 18.1 17.3 19.8 16.3 16.6 14.6 IGBVL stockmarket index (end-period, 30th Dec 1991=100) 1,706 1,642 1,247 1,336 1,470 1,670 1,855 1,836 % change in $ value, year on year –3.9 –30.8 –45.9 –35.6 –27.5 –10.7 30.7 23.7 Foreign trade ($ m) Exports fob 1,195 1,339 1,554 1,647 1,415 1,412 1,584 1,703 Imports fob –2,073 –2,158 –2,043 –1,926 –1,549 –1,606 –1,690 –1,869 Trade balance –878 –819 –488 –279 –134 –194 –106 –166 Foreign payments ($ m) Services balance –136 –121 –155 –127 –101 –120 –134 –109 Income balance –302 –350 –403 –429 –398 –388 –375 –473 Current-account balance –1,136 –1,117 –870 –668 –456 –530 –453 –591 Reserves excl gold (end-period) 10,935 11,119 10,795 9,566 9,234 9,134 8,933 8,731 Sources: IMF, International Financial Statistics; Banco Central de Reserva del Perú, Nota Semanal; Bolsa de Valores de Lima.

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Outlook for 2000-01

Forecast summary (% unless otherwise indicated) 1998a 1999a 2000b 2001b Real GDP growth 0.3 3.8 3.9 4.2 Industrial output growth –0.7 4.5 6.2 4.5 Agricultural output growth 3.6 12.1 3.0 4.0 Gross domestic investment growthd –1.7 –12.3 9.7 10.5 Unemployment rate (% of labour force) 7.6 7.8c 7.5 6.9 Consumer price inflation Average 7.3 3.5 4.3 4.4 Year-end 6.0 3.7 4.6 4.8 Lending rate (av) 30.8 30.8 26.0 22.9 General government balance (% of GDP) –0.7 –2.6 –1.9 –1.0 Merchandise exports fob ($ bn) 5.7 6.1 7.1 8.0 Merchandise imports fob ($ bn) 8.2 6.7 8.1 9.4 Current-account balance ($ bn) –3.8 –2.0 –2.6 –3.0 % of GDP –6.1 –3.6 –4.4 –4.7 Total foreign debt (Dec; $ bn) 32.4c 30.6c 31.3 32.4 Exchange rates (av) Ns:$ 2.94 3.40 3.52 3.54 Ns:¥100 2.25 2.98 3.24 3.47 Ns:¤ 3.30 3.63 3.66 4.10

a Actual. b EIU forecasts. c EIU estimate. d Includes change in stocks.

A victory for Mr Fujimori President Alberto Fujimori remains the favourite to win the presidential remains the most likely election on April 9th. Opposition candidates are suffering from low levels of outcome— press coverage and negative government campaigns, which will continue to count against them. International observer criticisms of the electoral process have been largely ignored by the ruling administration, as have attempts by the opposition to denounce Mr Fujimori’s candidacy.

—but it is not assured— Alejandro Toledo, the leader of Perú Posible, who has surged into second place in the opinion polls, appears to be the only opposition candidate with enough backing to be able to defeat Mr Fujimori in the presidential election. Provisional results from a nationwide opinion poll in March suggest that Mr Fujimori does not have the 50% majority needed to win outright in the first round. Support for Mr Toledo is now over 20%, up from less than 10% in December. While opinion poll results can be misleading, the groundswell of support for Mr Toledo is undeniable—and similar to that for Mr Fujimori when he first won the presidency in 1990. So far, Mr Toledo has risen in the polls at the expense of other opposition candidates—most notably Luis Castañeda Lossio and Alberto Andrade—and if there is a second round of votes, he may be able to garner enough support to defeat Mr Fujimori.

Perú 2000 is currently ahead in the opinion polls on the congressional election, but Mr Fujimori’s coalition is unlikely to regain the majority it now enjoys (Cambio 90-Nueva Mayoría received 52.1% of votes in 1995).

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Mr Fujimori is therefore likely to have to make a pact with another group to secure a working majority, most probably Federico Salas’s Avancemos. Mr Salas has notably not joined opposition attempts to denounce Mr Fujimori’s candidacy in the pre-electoral period. Volatility in Congress is normally high, with individuals changing alliance regularly, so Mr Fujimori should be able to achieve a new majority.

—providing temptation for Allegations of fraud made in El Comercio, a national newspaper, over the gerrymandering registration of the Frente Independiente Perú 2000 party—which forms part of Mr Fujimori’s Perú 2000 coalition (see The political scene)—raise fears that the president might also manipulate the elections to ensure a victory. A civil organisation, Transparencia, will place observers in as many polling stations as possible, but total coverage is impossible.

Economic policy will Despite increased electoral uncertainty, economic policy continuity remains change little— assured. The candidates have now outlined their manifestos, and differences are minor. There is no notable break from the current government’s policies, which consist of conservative macroeconomic management and generally liberal policies tempered by a degree of populism. Perú 2000’s programme is for more of the same: it is likely to continue with a liberal free-market economic policy and piecemeal social benefits, but it is not clear whether privatisations will pick up after the elections. A Perú 2000 candidate, Absalón Vásquez, has commented on the high level of interest rates in Peru, suggesting that the government is considering a law to reduce interest rates. While his comments have worried foreign investors, they probably amount merely to electioneering.

—despite some pre-electoral During the pre-election period, a degree of populism has become prominent in populism the government’s approach to economic policy. Recent examples of this include an 18.8% increase in the minimum wage announced in the second week of March and the awarding of small plots of land to over 800,000 poor households under a scheme launched in mid-February. In response to accusations that these moves and the generous pre-election public spending amounted to vote-buying, Mr Fujimori announced on February 12th that he would not inaugurate any more public works until after the elections. However, the signing of the long-awaited concession for the Camisea natural gas mega-project (see Economic policy) on February 16th has provided positive news concerning the government’s policies towards foreign investment.

Fiscal adjustment will A combination of increased expenditure and a fall in tax revenue in 1999 meant follow the elections that the government failed to meet the fiscal targets established with the IMF, with the overall non-financial public-sector (NFPS) deficit (excluding privatisation income) widening to 2.6% of GDP. The deterioration in the public accounts has continued into 2000, although tax revenue—on the back of increased customs duty and value-added tax (VAT) receipts—is now showing signs of positive growth. With a year-end target of an overall deficit of 1.9% of GDP—backed by the IMF agreement and a fiscal stabilisation law—the second half of 2000 will bring a sharp adjustment in public-sector accounts. The EIU believes that this target is attainable, assuming domestic demand recovers as forecast—raising tax receipts—and the government retrenches after the elections.

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Global assumptions summary 1998 1999 2000 2001 US GDP (% change) 4.3 4.1 3.9 2.4 Japan GDP (% change) –2.5 0.6 0.7 1.4 EU GDP (% change) 2.6 2.3 3.0 2.6 $ effective exchange rate (1990=100) 119.3 116.3 115.3 110.4 ¥:$ 130.9 113.9 110.0 106.0 $:¤ 1.1 1.1 1.0 1.1 $ 3-month commercial paper rate (%) 5.3 5.2 6.3 5.3 Gold ($/troy oz) 294.1 278.8 302.5 325.0 Copper (cents/lb) 75.2 71.1 83.5 92.5 Food, feedstuffs & beverages (% change in $ terms) –13.9 –18.4 –2.3 2.8 Oil: Brent (% change in $ terms) –33.3 40.3 11.7 –10.6

World GDP growth will pick up from 2.8% in 1999 to 3.2% in 2000 as a slight slowdown in the US economy from 4.1% to 3.9% is more than offset by faster growth in the EU. World GDP growth will fall to 2.9% in 2001 as the US economy slows to some 2.4%. Stronger demand and higher oil prices will feed through into inflation in the OECD countries, which will pick up to 2% in 2000 and 2.1% in 2001. To counteract these inflationary pressures, we expect the Federal Reserve Board to raise US interest rates by 1.1 percentage points in 2000, with the 3-month commercial paper rate reaching 6.3%. As demand slows, US interest rates are forecast to decline in 2001, to 5.3%.

The Peruvian economy will benefit from the strengthening of the world economy, including the recovery in Asia, an important export market. Stronger world demand will also help Peru by exerting upward pressure on the prices of its commodity exports, including copper, zinc and fishmeal. Only part of the benefit will be offset by the higher cost of oil, of which Peru is a net importer. The increase in US short-term interest rates will increase the cost of servicing Peru’s floating rate debt but declining risk aversion should improve access to the international capital markets for Peruvian borrowers.

Growth will rise as investor Official government statistics suggest that the economy grew by 3.8% in 1999, a confidence returns significantly higher rate than had been expected and well above the 3% target agreed with the IMF. Although the 1999 growth figure may be overstated (see The domestic economy), there is growing evidence that a recovery is under way. The surge in government spending is likely to last until the elections are over, but with retrenchment beginning in the second half of 2000, overall growth in real public spending is forecast at just 3%. Private investment demand, which began to pick up in the fourth quarter of 1999, will rise by over 10% in 2000, and long-term prospects for private investment have improved since the Camisea concession was signed. With consumer and manufacturer confidence also expected to return, import volumes will rebound strongly. Overall export volume growth will remain strong, but more subdued fisheries growth will be offset by faster growth in mining, traditional agriculture and manufacturing. The external sector will therefore provide a clear stimulus over the forecast period, and we expect overall economic growth to rise to around 4%. In 2001

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growth will continue to be driven by robust private investment and export expansion, with government spending rising only moderately. Import volumes will grow in line with the expansion in consumer and investment demand.

Prices will remain stable— In 1999 depressed domestic demand, relative currency stability and an increased supply of agricultural produce suppressed price pressures, bringing the year-end inflation rate down to just 3.7%. Faster demand growth and higher oil prices will contribute to a slight increase in price pressures in 2000, which is likely to be subdued by some tightening of policy in the post-election period. We expect an end-2000 inflation rate of 4.6%, close to the government’s 4% target. Underlying inflationary expectations have been all but eliminated, so although the currently slack labour market will tighten slightly towards the end of the forecast period, inflation will remain around present levels.

—and the currency will In the first two months of 2000 the currency began to recover some of the appreciate slightly value lost in 1999—when it depreciated by some 9% in real terms—with confidence boosted by progress on the sale of concessions on the huge Camisea natural gas project. After some nervousness around the election period, the currency should strengthen towards the end of 2000, leaving it slightly higher than its end-1999 value in real terms. Constraints on foreign- exchange supply will ease as export growth accelerates and foreign investment increases. This trend will continue in 2001, resulting in a year-end exchange rate of Ns3.56:$1, assuming there are no significant external shocks. If the US economy falters significantly, the economy’s dependence on private financial flows would leave the currency exposed.

With domestic demand A combination of depressed import spending and higher export earnings returning— narrowed the current-account deficit in 1999 to $2bn, equivalent to 3.6% of GDP, down from an average of 5.9% of GDP in 1994-98. Export volume growth in 2000 will come from capacity growth in mining and a recovery of manufacturing exports, rather than cyclical fluctuations in fishing and agriculture, as occurred in 1999. The strength of mining will continue in 2001 as new investments come on stream. Import spending will rebound quickly in 2000 as consumer and investment demand begin to recover. However, although import volume growth will outstrip that of export volumes, a rebound in world prices, particularly for gold and copper, will boost export earnings sufficiently to keep the trade deficit below its 1998 level. The terms of trade will continue to improve in 2001, although less strongly, to keep the trade gap under $1.5bn despite the fact that imports outstrip exports in terms of volume growth.

—the current-account The current-account deficit will widen to $2.6bn in 2000 and $3bn in 2001 deficit will widen (4.7% of GDP). Based on current global assumptions, this deficit should be comfortably financed. Net foreign direct investment (FDI) inflows will pick up in 2000 and 2001 thanks to substantial new privatisation (led by the Camisea project) and ongoing investment in other sectors, particularly mining and utilities.

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The political scene

Mr Fujimori’s popularity Popular support for the president, Alberto Fujimori, has slipped in the past has waned— quarter. By the beginning of March an opinion poll conducted by Apoyo, a market research company, showed that 42% of respondents in Lima intended to vote for Mr Fujimori, compared with 45% in January (in the first poll conducted after the registration of all candidates). If the March results were replicated in the elections on April 9th, Mr Fujimori would not have enough votes (50% plus one) to win outright in the first round. The president still has a large lead over his rivals, but if the opposition was able to unite around one candidate, Mr Fujimori could face the possibility of defeat in a second round of votes. Levels of undecided voters are high, at over 12%, making the outcome of the presidential election less certain now than Mr Fujimori’s campaign team would have hoped. The level of support for the government alliance in the congressional election, Perú 2000, is also worrying for the government. In February the alliance’s ratings stood at 32%, with support for Alberto Andrade’s Somos Perú at 14% and that for Perú Posible at 10%. In the 1995 congressional election, support for Mr Fujimori’s group fell between the last opinions polls and the elections, and this may be repeated. The support of independents would then need to be secured, as in 1995.

—amid cries of foul play— Perhaps because of weakening support, the government appears to have resorted to dubious tactics in the electoral battle. Media bias has been con- demned by the opposition, which cites its limited access to the current affairs media compared with that enjoyed by Mr Fujimori. The opposition has also claimed that the media have been under pressure from the government to disseminate hostile reports. A survey carried out by a civic association, Transparencia, in January found that although opposition candidates were receiving more coverage on television than in the previous survey (1st quarter 2000, page 12), much of their airtime was in the form of hostile reports. Recent examples include allegations against an opposition candidate, Alejandro Toledo (concerning the recovery of his deposits from a failed bank)—which

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coincided with opinion poll results showing a sharp increase in his electoral support—and accusations against two witnesses who presented evidence of electoral fraud by government supporters, which resulted in the accused being sent to Costa Rica for their own protection.

—including fraud— The electoral fraud case concerns a serious and uncontested allegation— published in a national newspaper, El Comercio, on February 29th—that 1.2m signatures were forged to register the Frente Independiente Perú 2000—which forms part of Mr Fujimori’s Perú 2000 coalition—on the congressional list. An investigation has been undertaken by Peru’s ombudsman, Jorge Santistevan. This type of electoral fraud is not unique in Peru’s political history, but it is curious as it appears to have been done gratuitously, without any strong electoral advantage to be gained. Three pro-Fujimori parties were already automatically registered for the 2000 elections—Cambio 90, Nueva Mayoría and Vamos Vecino—and there was therefore no great need to register another. It may be part of a struggle within the pro-Fujimori alliance, with different groups trying to gain favour with Mr Fujimori.

The information collected by Mr Santistevan was passed to the attorney- general for investigation, and the signatures will be subject to police tests to see if they are genuine. Given doubts over the independence of the attorney- general, Mr Fujimori is likely to avoid any direct blame for the crime even if the signatures are found to be false. Having previously denied the fraud allegations, Mr Fujimori stated on March 16th that he could not rule out the possibility that the allegations were true, and the pro-Fujimori Frente Independiente Perú 2000 withdrew from the congressional elections. The full implications are unclear, but if the Frente Independiente Perú 2000 has withdrawn then so, in theory, should all candidates registered on its list, including Francisco Tudela, Mr Fujimori’s running-mate. However, this appears unlikely, considering Mr Tudela’s importance to Mr Fujimori’s campaign.

The treatment of the witnesses in the case, along with a media campaign of vilification of El Comercio and the ombudsman, illustrates the increasing bitterness of the electoral campaign. The government hit back against El Comercio over the allegations through a pro-government television station (Channel 2), which reported that control of the newspaper might be handed over to its former general manager, Luis Garcia Miró, who is suing the newspaper, which, he claims, forced him to sign over his shareholding. There followed rumours that the government was planning to use its influence within the judiciary to intervene, and El Comercio, on the basis of this information, published a statement claiming that the government was attempting to put a group of pro-government minority shareholders in control of the newspaper. Following the handover of Channel 2 to minority shareholders in 1997—when its Israeli-born owner Baruch Ivcher was stripped of his Peruvian citizenship for running broadcasts criticising the intelligence service—control of the newspaper is at risk. Mr Santistevan has been accused of exceeding his powers. Congress suspended activities on March 7th until April 11th; if a constitutional case is brought against Mr Santistevan, it will not be presented until then.

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—which has been taken up Concerns about the democratic process have been echoed by international by international electoral observers. In early February two US human rights groups, the Carter observers— Center and the National Democratic Institute, reported a deterioration in the electoral process since the end of November. The groups criticised the unfair way in which television in Peru is treating opposition candidates and recommended that public funding be made available to allow all presidential candidates to buy airtime on privately owned television stations. Non-cable television stations in Peru—through which two-thirds of Peruvians obtain access to current affairs— are either in government hands or cannot afford to displease the government. The private stations’ reluctance to criticise arises both from dependence on government advertising and an awareness that rulings in any disputes will be resolved by Peru’s less than autonomous judiciary.

The US groups concluded that “the Peruvian electoral process does not yet fulfil the international standards to describe it as democratic”. A list of recommendations includes the cessation of all harassment and intimidation of opposition candidates; consent for television stations to air debates and news programmes on candidates and their programmes; and a restriction on the use of the state apparatus to promote the government’s candidacy. These recommendations were endorsed by the EU and the International Human Rights Federation (FIDH). Although the recommendations have been largely ignored, Alipio Montes de Oca, the president of the Jurado Nacional de Elecciones (JNE, the electoral board), announced that television stations would open up space for political advertising and grant 15 minutes of free airtime every day to each presidential candidate.

—who are also concerned Criticism from international electoral observers has not stopped at the lack of about the justice system— press freedom, with irregularities in the justice system and the JNE also highlighted. The Washington Office on Latin America (WOLA) published a detailed report in February which examined the state of democracy in Peru. According to the report, “since the elections for members of the JNE in mid-1998, the majority of those serving on the JNE are considered to be loyal to the Fujimori government, including the present head of the JNE, Alipio Montes de Oca.”

—and intelligence service The report also criticised the excessive influence of the Servicio Nacional de Inteligencia (SIN, the National Intelligence Service), and its routine tactics of surveillance, and harassment of opposition candidates and their supporters. Recent reports of harassment include the fire-bombing of the residence of Martín Pumar, a Somos Perú member and mayor of Villa El Salvador, the oldest shanty town in Lima. A congressional candidate for Solidaridad Nacional, Luis Castañeda Lossio’s party, has reported receiving a death threat from members of the armed forces while campaigning in the Andean town of Huanuco.

Vladimiro Montesinos, Mr Fujimori’s trusted intelligence chief, has been under the spotlight following allegations of illicit enrichment. Leaked bank account details revealed that Mr Montesinos received an income of over $2m in one year. Banking secrecy was lifted by the attorney-general, Miguel Aljovin, and the investigation was undertaken in private by the attorney-general. However, on January 24th, his last day in office as attorney-general, Mr Aljovin shelved the case, claiming there was not enough evidence to charge Mr Montesinos.

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The opposition challenge It is unclear to what extent the various scandals and questionable tactics will fragments— affect the outcome of the elections. The pro-government media coverage appears to have been effective, minimising the damage to Mr Fujimori’s popularity. According to preliminary data from an Apoyo survey, only half of the respondents knew about the fraud allegations and only half of these believed them to be true. The opposition has so far failed to build an effective campaign against Mr Fujimori, and opposition candidates have failed in their attempts to form a common platform. The Pact of Governability originally signed by 14 opposition candidates has been disbanded, and the attempt by the Somos Perú candidate, Alberto Andrade, at the end of February to unite eight opposition candidates to denounce Mr Fujimori’s candidacy as illegal was aborted, as only six turned up. Opposition candidates, headed by the leader of Unión Por Peru, Máximo San Roman, met again on March 6th to evaluate a possible denunciation of Mr Fujimori’s candidacy in light of the forged signatures, but once again no firm agreement was reached.

Opinion poll results, 2000

Jan Feb Mar Presidential election Alberto Fujimori 39 37 40 Alejandro Toledo 8 14 25 Alberto Andrade 17 14 10 Luis Castañeda Lossio 17 18 8 Federico Salas 1 4 4 Others 4 5 4 Don't know 14 8 9 Congressional election Perú 2000 33 31 28 Perú Posible 6 9 14 Somos Perú 17 15 11 Solidaridad Nacional 15 14 6 Partido Aprista 3 4 6 Avancemos 1 4 5 Others/don't know 25 21 17 Source: Datum International.

—but Mr Toledo sees a Although support for opposition leaders Mr Andrade and Mr Castañeda has surge in support fallen over the quarter, the outsiders Mr Toledo and Federico Salas have both moved up in the polls. By March Mr Toledo had moved into second place in the polls, with 25% of voter support, according to a survey by Datum International, pushing Mr Andrade into third place, with support from only 10% of respondents, compared with 17% in January. Results of an Apoyo poll suggest similar trends. This rise in popularity to some extent mirrors that of Mr Fujimori in 1990, when he rose from relative obscurity to win the presidency. Mr Toledo has so far managed both to avoid governmental attacks—keeping a low profile—and to distance himself from other opposition candidates who have struggled to convince the population of their electability.

Upheaval in Ecuador has Despite political and economic upheaval in neighbouring Ecuador, foreign not damaged bilateral relations between Peru and its northern neighbour have remained calm. Both relations— Mr Fujimori and Ecuador’s new president, Gustavo Noboa, confirmed that the

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overthrow of president Jamil Mahuad on January 21st would not threaten the peace accord signed by both countries in October 1998. Mr Fujimori has not, however, offered very positive words of support to the new Ecuadorian government, and the personal visit made to Peru by Mr Mahuad at the beginning of March confirms the impression that his ousting was not warmly welcomed by the Peruvian government.

—but Colombian Some remarks made by Mr Fujimori towards Colombia have caused minor sensitivities are upset by protests. The Colombian government lodged an official protest at the start of comments March after Mr Fujimori questioned the logic of a sharp increase in US aid to Colombia. Mr Fujimori suggested that as a major supplier of drugs with a poor human rights record, Colombia might be considered an unsuitable recipient for such support. The comments were probably intended as a criticism of inconsistencies in US policy rather than an attack on the record of the Colombian government, reflecting the strain in relations between the US and Mr Fujimori as a result of concern over the Peruvian electoral process rather than enmity between Peru and Colombia.

The border settlement with The Peruvian and Chilean foreign ministers, Fernando de Trazegnies and Juan Chile is consolidated Gabriel Valdes, have worked to consolidate the treaty signed between the two countries in 1929. On February 14th Chile officially handed over to Peru administrative and operational control of construction and public services at the border town of Arica, as agreed in the 1929 Treaty of Lima. On March 7th all outstanding installations changed hands and the foreign ministers travelled to Arica to witness the inauguration of the statue of Christ (Cristo de la Concordia), built to commemorate peace between the two countries. Peruvians can now enter Arica with only their national identification document.

Economic policy

The Perú 2000 manifesto All the presidential candidates have now announced their policy manifestos. suggests pragmatism and Perú 2000’s programme is not particularly clear—Mr Fujimori has spoken little populism— of specific economic or social policies—but it is likely to be similar to that of the current regime. If elected, Perú 2000 would continue with the orthodox fiscal and monetary policies that, mixed with pragmatism, have characterised Mr Fujimori’s second term, especially the pre-electoral period. The most recent example of this is the Profam housing project, launched on February 13th in response to a series of land invasions that had been taking place throughout Peru in previous weeks. In what was arguably a populist electioneering move, the government offered free 90- and 120-sq metre plots of state land to the poorest Peruvian families for the construction of housing. Registrations for the scheme started on February 15th and closed on March 7th with over 800,000 people signing up.

According to opposition candidates, the proposal is tantamount to buying votes. But even if Peruvians feel that by being offered free land so close to the elections they are being bribed by the government, they will not want to risk losing the opportunity, and the programme is likely to increase support for

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Mr Fujimori. It has left opposition candidates in a difficult position as they may now be obliged to pledge that they will respect the scheme if elected.

The decision to increase the minimum wage by 18.8% from the second week in March can also be construed as vote-seeking rather than sound economic policy. Mr Fujimori explained that there had been no increase since 1997 and that the move was “technical”. The president did, however, announce on February 12th that he would not inaugurate any more public works until after the elections.

—and opposition Opposition candidates’ governmental programmes, particularly their political manifestos are almost plans, are very similar to each other, and on economic policy the main oppo- indistinguishable sition candidates are unlikely to depart much from the current model. There is consensus on many issues, such as the elimination of the extraordinary solidarity tax, the reduction of value-added tax (VAT), the elimination or reduction of the selective consumer tax for certain goods, and the total or partial exemption of tax payments on reinvested profits. There is also consensus on maintaining macroeconomic stability and a low rate of inflation. The candidates differ in their policies on offsetting the above tax reductions to provide continued fiscal stability. Mr Andrade would seek improvements in public administration by unifying the customs administration and the tax authority, Sunat. Mr Castañeda and Mr Toledo have highlighted gains from reduced smuggling and tax evasion. All are in favour of improving democracy in Peru by increasing the autonomy of state institutions and reinstating press freedoms. Decentralisation is also a common pledge. All the candidates have talked about generating employment and improving education. In terms of sectoral economic polices, the opposition candidates have expressed the urgency of some legal norms for agriculture, such as the laws on land, water and forest areas, as well as promoting technology in agriculture and improving access to credit for the sector.

The fiscal position The government failed to meet the fiscal targets that were part of the extended worsened in 1999— fund facility (EFF) agreed with the IMF in June 1999 (3rd quarter 1999, pages 14-15). The EFF targeted a primary (i.e. excluding interest payments) non- financial public-sector (NFPS) surplus of 0.9% of GDP (before privatisation revenue), and at the end of 1999, the NFPS primary balance showed a deficit of 0.7% of GDP.

—owing to lower revenue— The deterioration was owing to both a fall in revenue and increased expenditure. Central government current revenue decreased by 4% year on year in 1999; depressed domestic demand meant that import tax revenue fell by 2.8%, VAT revenue increased by only a nominal 0.4% and taxes on company profits were down by 26.7%, contributing to an overall fall in income tax of 13.5%.

—and increased Meanwhile, expenditure increased owing to countercyclical and pre-electoral expenditure policies. The countercyclical policy appears to have backfired, as higher expenditure generated investor concerns over the financing of the fiscal deficit, contributing to a rise in the country’s risk premium. Interest rates remained high, further aggravating the fall in private investment.

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Central government operations (Ns m) Year Jan 1998 1999 % change 1999 2000 % change Current revenue 25,733.4 24,692.3 –4.0 2,124.0 2,318.0 9.1 Current expenditure 22,572.9 24,720.0 9.5 1,461.0 1,739.0 19.0 Primary expenditure 19,455.3 21,101.6 8.5 1,400.0 1,636.0 16.9 Interest charges 3,117.6 3,618.4 16.1 61.0 103.0 68.9 Current balance 3,161.0 –27.8 n/a 663.0 579.0 –12.7 Capital revenue 500.4 510.4 2.0 12.0 14.0 16.7 Capital expenditure 5,428.2 5,778.9 6.5 283.0 280.0 –1.1 Overall balance –1,766.8 –5,296.3 199.8 392.0 313.0 –20.2 Primary balance 936.1 –2,098.9 –324.2 453.0 416.0 –8.2 Source: Banco Central de Reserva del Perú.

—which has continued In January the central government surplus reached Ns313m ($90.8m), 20.2% into 2000 lower than in January 1999. Although current revenue rose (by 9.1%) compared with 1999, this increase was outstripped by a 19% increase in current expenditure. The revenue increase was principally owing to growth in tax collection, particularly of those taxes linked to domestic demand, such as VAT and customs taxes. However, higher public consumption—just three months before the election—pushed non-financial current expenditure up by 16.9% year on year. The deterioration in the public accounts does not appear to be sustainable, and an adjustment in the second half of 2000 is now inevitable, particularly as the overall balance cannot—according to the fiscal stabilisation law—exceed 2% of GDP in 2000.

A new letter of intent has Having failed to meet the fiscal targets, in late February the government signed been signed— a new draft letter of intent with the IMF, which establishes targets for the first half of 2000. Because of the possibility of a change of government, the agreement will only last until June. The targets include an overall fiscal deficit of 1.9% of GDP (excluding privatisation revenue), annualised inflation of 4%, a $300m increase in international reserves, GDP growth of 4.5% and privatisation income of $650m. The government plans to finance the deficit with privatisation income and foreign debt inflows, and will also endeavour to continue its efforts to strengthen the financial sector and foster the com- petitiveness of productive sectors. The IMF expects the government to continue structural reforms and fiscal restraint in 2001.

—and has been cautiously Although the draft letter of intent has been received positively by analysts and received— investors and appears to contain realistic targets, it fails to specify the mechanisms that will be used to achieve high and sustained growth rates. Many of the structural reform targets are vague, which may reflect the low priority given to such reforms by the government.

—as privatisations and While the fiscal targets are clear and attainable, negotiations with the IMF over concessions are privatisation and concessions targets proved more difficult. The privatisation delayed again target of $650m may be too ambitious, especially given the government’s recent record: in 1999 privatisations and concessions realised just $300m; the

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target agreed with the IMF had been $800m. The final contract for the concession of the Jorge Chávez international airport in Lima has been delayed, and is now expected to be awarded in the second quarter of 2000. The concession for the Red Vial No 5 has been delayed because the amount of state participation in financing the infrastructure has not yet been decided.

Other projects to have been postponed include the Olmos irrigation project and the sale of state shares in Edelnor (an electricity generating company) and Relapasa (a refinery). The concession to run five regional airports is now planned for later in 2000, as is the concession for Callao port. Regional ports are still not up for bidding, although the privatisation commission expects the process to get under way in the second quarter.

There is progress on some A Peruvian firm, Chancadora Centauro, has agreed to pay $4m for the Quicay projects— gold project, near Cerro de Pasco, double the base price laid down by the government. The concession to manage the Río Chillón water treatment project has been awarded to an Italo-Peruvian consortium, which will pay $80m for the first two years and will charge a monthly fee of Ns2.7m ($780,000) for treating the water and connecting it to the Sedapal network, which will then distribute it to the consumer. In January the state placed its remaining 17.5% shareholding in Edegel on the capital market, for $83m. AFPs (private pension funds) bought up 48% of the shares and Endesa (Edegel’s principal share holder) bought 42% of the shares. Generandes, a consortium led by Endesa, now accounts for 68% of Edegel’s shares.

—including Camisea The state has finally auctioned the natural gas exploitation stage of Camisea, after more than two years of delays and wrangles (see The domestic economy). One consequence is likely to be a reduction of electricity rates, because of a take- or-pay contract signed between the state and Electroperú to guarantee a domestic market for the gas. The gas will be channelled to electricity generating companies, which will use it instead of diesel, allowing them to reduce costs.

In 1999 monetary policy was loosened slightly as a countercyclical measure to advance recovery. Despite the increased liquidity, the parlous financial state of many companies meant that banks remained very cautious about extending new credit. The narrow money supply, as measured by M1, increased by 10.1% in 1999, while bank credits in local and foreign currency declined by 2.8% and 1% respectively year on year.

The domestic economy

Economic trends

Official growth figures Official government statistics suggest that the economy grew by 3.8% in 1999, have been contested— a significantly higher rate than had been expected and well above the 3% target agreed with the IMF. The figures given by the Instituto Nacional de Estadística e Informática (INEI, the National Statistics Institute) have been

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contested, partly because they rely on an outdated base year, 1979 (1st quarter 2000, page 20). The structure of the economy has changed enormously since 1979, with the weight given to primary sectors now overstated. Hyperinflation in the late 1980s further distorted the figures, and although the government accepts that it would be desirable to update the base year, it appears to be avoiding the change until after the presidential and congressional elections in April. As a result, the high growth figures reflect in part a post-El Niño (the global climatic phenomenon) recovery in primary sectors. However, even given the distortions that the 1979 figures produce, 3.8% still appears to be a surprisingly high rate of growth for 1999, which was characterised by depressed domestic demand, low investment, high unemployment and a perception of economic stagnation.

Gross domestic product growth by demand, 1999 (% real change, year on year) 4 Qtr Year Private consumption 5.3 0.9 Government consumption –4.1 3.2 Gross domestic investment 15.8 –12.3 Privatea 21.6 –15.7 Public –4.1 7.2 Domestic demand 7.1 –3.0 Exports of goods & services –0.3 7.5 Imports of goods & services –6.8 –17.1 GDP 8.4 3.8

a Includes change in stocks. Source: Banco Central de Reserva del Perú.

Official figures show that in the last quarter of 1999, GDP grew by 8.4%, driven by private consumption and a recovery in private investment. This contributed to a year-on-year increase of 7.1% in domestic demand in the quarter, compared with a 7.5% contraction in the last quarter of 1998, immediately following the Russian crisis of August 1998, when international credit lines were cut, the effects feeding into all sectors of the economy, forcing up interest

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rates and restricting domestic credit. Private consumption increased by 5.3% year on year in the last quarter of 1999, compared with contractions of 4.1% in both public consumption and investment, owing to a more austere fiscal policy (see Economic policy).

The fall in domestic demand in 1999, which contributed to a 17% decline in import volumes over the year, was made more severe by contradictory signals from the government in terms of investment policy. Privatisation projects and concessions including the Camisea natural gas mega-project, the sale of the state’s remaining assets in the electricity sector, and the Jorge Chávez airport (see Economic policy) were put on hold, contributing to the overall 12.3% fall in investment over the year.

—but there are signs of a Although the rate and breadth of the recovery are questionable, other real recovery indicators support the view that economic recovery has started. Value-added tax (VAT) collection and imports of raw materials—both indicators of increased consumer demand confidence—increased by 9.5% and 17% respectively in the fourth quarter of 1999. The higher consumption levels towards the end of 1999 benefited most industries. Output of food, beverages and textiles was up by 19%, 28% and 20% respectively in the fourth quarter, but industries linked to investment, such as capital goods, have yet to show signs of recovery.

Manufacturing drove On the supply side, economic growth over the year was driven by primary growth in the last quarter sector activities, which had suffered the effects of a severe El Niño in 1998. In of 1999 the fourth quarter a recovery of sectors linked with domestic demand contributed most to the 8.4% year-on-year growth. This growth owed much to an expansion in non-primary sectors (8% year on year), mainly in manufacturing, which saw output increase by 20.7%. However, this sharp growth rate owes much to a statistical rebound, since non-primary sector output contracted by 5.7% in the fourth quarter of 1998, related to effects of the Russian crisis.

Gross domestic product growth by sector (% change, year on year) 1998 1999 Dec Dec 4 Qtr Year Agriculture & livestock 17.8 –8.4 0.6 12.1 Fishing 176.6 91.4 64.2 66.5 Mining & fuel 10.4 0.8 5.8 10.0 Manufacturing –6.7 29.7 20.7 7.6 Construction –11.4 1.3 0.8 –12.4 Commerce –9.2 10.1 9.1 –0.5 Other services 0.0 3.5 4.0 1.4 GDP –0.6 9.2 8.4 3.8 Sources: Banco Central de Reserva del Perú, Instituto Nacional de Estadística e Informática.

Inflation falls to 3.7% at Depressed domestic demand helped to keep price pressures down in 1999. The year-end— consumer price index grew by 3.7% year on year, the lowest year-end level in 39 years. Food and beverage prices, which fell by 0.98% in the year owing to supply gains, kept the rate of inflation down. The currency depreciated by

almost 9% over the year, which would normally be expected to lead to upward pressure on prices. However, as a result of the depressed level of domestic demand, importers were reluctant to pass on the increased cost of imports to consumers. The low inflation figure was also remarkable because of the rise in international fuel prices: the Brent oil price more than doubled during the course of the year.

Consumer prices (% change) 1998 1999 2000 Monthly Annual Monthly Annual Monthly Annual Jan 0.9 6.9 0.0 5.1 0.1 3.8 Feb 1.2 8.1 0.3 4.1 0.5 4.0 Mar 1.3 8.2 0.3 3.4 –– Apr 0.6 8.4 0.6 3.4 – – May 0.6 8.3 0.6 3.2 – – Jun 0.5 7.7 0.5 2.9 – – Jul 0.6 7.4 0.2 2.5 – – Aug 0.3 7.5 0.3 2.4 – – Sep –0.5 6.6 0.2 3.4 – – Oct –0.3 6.1 0.5 3.7 – – Nov 0.0 6.0 –0.1 3.9 – – Dec 0.6 6.0 0.3 3.7 – – Inflation (av) –7.3–3.5– – Source: Banco Central de Reserva del Perú.

—and remains low at the A strengthening of the nuevo sol and muted consumer demand kept price start of 2000 pressures low in January, and the index rose by only 0.1% in the month. A 2.8% fall in food prices—caused mainly by a 12.4% fall in the price of poultry—offset the 1.1% rise in fuel prices. In February, with consumer demand picking up, prices rose by 0.48%, leading to an annual inflation rate of 3.95%.

The nuevo sol appreciated The exchange rate appreciated in early 2000, reaching Ns3.403:$1 in the first by 3% between January week of March, a 3% appreciation over two months. This trend is in contrast to and March late 1999, when the currency came under pressure owing to rising import volumes and higher demand for dollars in forward operations. The appreciation in the year to date has been mainly influenced by an increased supply of dollars in the market. Major operations in the stockmarket contributed to this, particularly the government’s sale in January of its remaining shares in Edegel ($83m) and the announcement of a share swap between Telefónica de España and Telefónica del Perú, at a premium of 40% over the share value (see Financial sector). The payment of taxes during February and the state use of its domestic currency deposits in March to pay pensions to retired public employees reinforced the downward pressure on the dollar.

Oil and gas

The first stage of Camisea On February 16th a consortium of Pluspetrol (40%, Argentina), Hunt Oil (40%, is sold— US) and SK Corporation (20%, Korea) won the first-phase exploration bid for the Camisea natural gas and hydrocarbon deposits in the south-central jungle. The winning bid—an offer of 37.24% of the royalties extracted—was much higher than the government’s minimum threshold of 10%, and just over a 35.05% bid by the French giant ELF/TotalFina. Pluspetrol-Hunt-SK will invest $1.6bn in the exploration phase, $400m of which will come by 2003. The consortium now has the rights to develop the fields for 40 years.

Electroperú, the state-owned electricity company, has underwritten the agreement to guarantee a domestic market for the fuel. The agreement ties Electroperú to buying 70m cu ft/day and contains an 80% take-or-pay clause for 15 years. Private generating companies will choose between buying gas from Electroperú or directly from the distributor.

—and the second is delayed The second (transport and distribution) phase of the Camisea project has been postponed until after the April presidential election. The delay was partly owing to the bidders, who decided to gather in mega-consortiums to reduce competition for the bid and potentially increase their profits.

Oil and gas output falls Oil output decreased by 11.2% year on year in January—following an 8.4% fall in 1999—and preliminary figures suggest that the trend continued in February. This was owing in part to the depletion of some light crude oil reservoirs in the Northern Jungle, which in the past permitted production in the heavy crude oilfields that are currently closed. Natural gas output also registered a significant decrease year on year in January (of 57.6%).

Fuel production

Jan Year 1999 2000 % change 1998 1999 % change Crude oil (m barrels) 3.4 3.1 –11.2 42.2 38.7 –8.4 Natural gas (bn cu ft) 1.6 0.7 –57.6 14.4 14.6 1.5 Source: Ministerio de Energía y Minas.

A pipeline between Andoas (Ecuador) and Station No 5 (Peru) will be constructed to interconnect the Norperuano pipeline with the Ecuadorian pipeline. The project, which forms part of the Global Peace Accord with Ecuador, will be financed by the Canadian Petroleum Institute.

Mining

Gold drives growth in Mining output grew by 7.2% in 1999, with metallic mining particularly mining output— dynamic. Gold, Peru’s highest export earner, registered the strongest growth (32.4%) followed by tin (14.4%) and copper (9.6%).

Yanacocha, Newmont and Buenaventura’s open mine in Cajamarca, the largest gold producer in Latin America, increased output from 1.34m oz in 1998 to

1.65m oz in 1999. Pierina, Barrick Gold’s open mine in Ancash, the continent’s second largest gold producer, registered output of 837,407 oz with a production cost of $42 per oz, 14.3% less than in 1998 and one of the lowest production costs in the world. In 2000 Barrick Gold is forecasting production of 800,000 oz at a cost of $43 per oz.

Investment prospects in the sector remain good, with Sulliden Exploration—a Canadian mining company—reportedly interested in gold deposits at Santo Toribio in Ancash, 3 km south of Barrick Gold’s Pierina open mine. In December Ecuadorian Minerals Corporation (EMC) announced the discovery of an important gold reserve in Prospecto Minero Vetaspata, 160 miles south of Juliaca (Puno), and an exploration plan for 2000.

Mining production (‘000 units) Dec Year 1998 1999 % change 1998 1999 % change Copper (tonnes) 48.3 51.8 7.2 483.3 529.9 9.6 Lead (tonnes) 21.3 22.6 6.1 257.7 264.6 2.7 Zinc (tonnes) 71.8 72.4 0.8 869.0 889.5 2.4 Silver (kg) 167.6 192.9 15.1 2,024.3 2,211.9 9.3 Gold (kg) 9.5 10.2 7.4 93.8 124.2 32.4 Iron (tonnes) 248.3 178.9 –28.0 3,172.7 2,594.4 –18.2 Tin (tonnes) 1.9 2.6 36.8 25.7 29.4 14.4 Source: Ministerio de Energía y Minas.

—followed by copper Copper mining grew by 9.6% in 1999, explained by the expansion in Southern Peru Copper Corp’s open mine Cuajone, and the cost improvements in Cerro Verde and Tintaya. As with gold, the sector appears set to expand further. Milpo has discovered a potential 75m-tonne copper deposit in Cerro Lindo, which also contains zinc, gold, silver and lead. The deposits are gathered in a small area, making the project feasible for medium-scale mining. Antamina, the $1.3bn copper and zinc project in east Huaráz, is expected to begin operations by the start of 2002, six months ahead of schedule. According to an agreement with the Peruvian government, Antamina will invest $872m in 2000. Antamina has underwritten a contract with a French-Peruvian consortium for the construction of the mining duct, for $140m, which will be open in April 2001.

Manufacturing

Manufacturing growth Manufacturing output expanded by 7.6% in 1999, driven by a recovery in figures are questioned— primary resource processing, which grew by 22.2% year on year after an El Niño-affected 1998. Fishmeal and sugar production, which increased by 109.1% and 34.4% respectively in 1999, drove the growth in primary resource processing. Non-primary manufacturing activity expanded by 2.3% over 1999, with most of this growth in the last quarter of the year, owing largely to a low base of comparison with late 1998. However, the growth figures for manufacturing output have been contested (see The domestic economy), along with

the overall GDP figures for 1999. The positive growth of the non-primary sector over the whole of 1999 is curious when considering that the two traditionally most important indicators of manufacturing growth— construction and imports of capital goods—both contracted in 1999, by 12.4% and 18.6% respectively.

—but some companies have A difficult year forced many companies to look to cost, efficiency and prod- performed well uctivity improvements to survive. In the beer industry, Unión de Cervecerías Peruanas Backus & Johnston reported net profits of $50.5m in 1999, an increase of 58% on 1998. The company sold its participation in AFP Unión to Santander Group in late 1999 (1st quarter 2000, page 25), which helped to reduce costs over the year.

With construction activity low throughout the year, net profits of Cementos Lima, one of Peru’s largest cement companies, fell by 14% in 1999, owing to a 15% fall in sales and hefty financial expenses. However, the company reduced sales costs by 12.6% over the year, allowing it to maintain operational margins at 1998 levels. In 2000 the cement industry should see a recovery in output owing to post-El Niño public-sector reconstruction and housing projects, and investment in mining and the concessions programme in transport infrastructure. In the first half of the year, investment in construction will be led by the public sector, with private-sector investment—particularly in mining— coming on stream in the second half of the year.

The automotive industry According to the Asociación de Representantes Automotrices del Perú (Araper, continues to struggle the Peruvian automobile association), automobile sales have continued to fall, for the third consecutive year. In January 2000, 832 new vehicles were sold, compared with 1,525 in January 1999 and 3,006 in January 1998.

Agriculture

Agricultural output grew Agricultural output increased by 12.1% in 1999 as harvests returned to normal by 12.1% in 1999— levels following the destruction caused by El Niño in 1998. The potato and rice output rises were owing both to increased areas under cultivation and efficiency improvements. The output of industrial crops increased by 12.7% in

1999, with climatic conditions particularly good for cotton and coffee. Nevertheless, the low international price of coffee resulted in losses estimated at $80m in the industry. Non-traditional products, which have been promoted in recent years, also fared well, with mango production registering growth of 35.9% and apples 10.6% over the year.

—but the sector still has Producer prices continued to fall in 1999, owing partly to an excess of supply. financial problems The domestic price of rice fell by 20.5% over the year and potato prices by 30.4%. With prices low and output levels erratic, the agricultural sector continues to face financial problems, and banks remain reluctant to extend credit to the sector. Agriculture currently makes an outlay of $1.4bn for each year’s crop cycle and receives around $1.2bn, including $600m from the financial system and self-supported rural funds, and around $500m in credits from the Ministry of Agriculture. The government has also announced plans to establish an agrarian bank to provide further support for the sector (1st quarter 1999, page 18).

Agricultural output (‘000 tonnes) Dec Year 1998 1999 % change 1998 1999 % change Potato 195.7 128.4 –34.4 2,589.3 3,049.6 17.8 Rice 120.7 64.8 –46.3 1,548.8 1,946.8 25.7 Cotton 7.0 4.5 –35.7 95.3 136.0 42.7 Coffee 0.0 0.1 0.0 119.9 145.0 20.9 Yellew corn 59.6 56.3 –5.5 702.5 807.6 15.0 Sugar cane 522.1 581.9 11.5 5,705.3 6,302.3 10.5 Maize 0.8 1.1 37.9 230.5 250.2 8.6 Dry bean 1.8 1.7 –5.6 67.6 69.8 3.3 Wheat 0.9 2.2 144.4 146.3 168.7 15.3 Soybean 0.2 0.1 –50.0 2.9 2.8 –2.6 Sorghum 0.0 0.0 0.0 0.3 0.0 n/a Livestocka 22.6 23.7 4.9 258.1 278.5 7.9 Othera 21.8 20.3 –6.7 262.6 282.0 7.4 Totala 60.5 55.4 –8.4 800.9 897.4 12.1 a At constant 1979 prices Source: Ministerio de Agricultura.

Fisheries output grows but Fisheries output grew by 66.3% in 1999, following an El Niño-affected 1998. financial problems remain However, over-fishing remains a problem, and fishing bans are still imposed periodically to allow stocks to replenish. The government has proposed a fund to reduce the size of the fleet (1st quarter 2000, pages 27-28), and negotiations are ongoing as to how this will be funded and achieved. In 1999 the industry was hampered by low international soya prices—soya competes with fishmeal for animal feed—and the export price of fishmeal plummeted (see Foreign trade and payments). Many companies in the sector remain heavily indebted, and in 1999 three large fisheries (Pesquera Hayduk, Consorcio Pesquero Carolina and Pesquera San Antonio) entered the government’s debt restructuring programme.

Fisheries output (‘000 tonnes) Dec Year 1998 1999 % change 1998 1999 % change Offshore fishinga 5.7 11.2 97.1 33.9 59.1 74.0 Human consumptiona 1.4 1.6 14.3 14.9 16.0 7.5 Canned 20.1 21.0 4.6 218.2 204.5 –6.3 Fresh 25.5 26.6 4.2 249.2 269.0 8.0 Frozen 4.9 11.5 135.2 128.6 113.1 –12.0 Dried-salted 1.5 2.7 84.3 18.1 32.3 78.6 Industrial usea 4.3 9.7 123.4 19.0 43.0 126.0 Anchovy 457.9 1,681.3 267.2 1,205.5 6,772.6 461.8 Other species 358.0 54.4 –84.8 2,490.8 1,049.1 –57.9 Deep-sea fishinga 0.5 0.6 22.7 5.3 6.2 16.9 Fresh 1.2 1.4 16.1 14.0 18.3 30.3 Dried-salted 1.9 2.5 28.5 23.1 25.3 9.4 Totala 6.2 11.8 91.6 39.3 65.3 66.3 a At constant 1979 prices Source: Ministerio de Pesquería.

Infrastructure

Investment in telecoms The telecommunications sector, which received 25.6% of private investment in continues Peru in 1999, is the largest beneficiary of private investment in the country, and the industry has been growing at an average annual rate of 21.6% since 1994. As part of the ongoing liberalisation of the fixed telephony market in Peru, FirstCom Perú will start its wired telephony service in Lima between May and July. The company also plans to expand services to the provinces by the end of 2000 and has targeted a 10-20% share of the long-distance-call market.

Basis for concessions on A basis for concessions in personal communications services (PCS), wireless mobile telephony are sold telephony and local carriers was agreed in February. The concession will allow a third company to enter the mobile market to compete with Telefónica del Perú and BellSouth. Leap Wireless (USA), Banco Santander Central Hispano- Airtel, Global Village, Teléfonos de México, Técnicas Metálicas and Operadora Protel are some of the companies that have pre-qualified for the bid.

The first railway The Comisión de Privatización (Copri, the privatisation commission) is still concession is still being evaluating the financial framework for the Red Vial No 5, which will be the evaluated first railway concession to be awarded. The concession to operate the railway will require some $135m of investment.

Aeroperú could fly again The future of Aeroperú, the troubled national airline, is uncertain following a court decision to hand over the administration of the company to its minority partners, its workers. Aeroperú is still looking for a financial restructuring plan, and will need to attract new investors to put the company’s finances back on track so that it can recommence operations. Aeroperú currently has debts of some $124m, $54m of which is owed to Aeroméxico, Mexico’s largest airline.

Financial and other services

Bad debt levels Since the Russian crisis of mid-1998, the financial sector has been under strain. remain high The high-risk profile of many companies in Peru following one-and-a-half years of depressed domestic demand has kept interest rates high, and new credit has been low as a consequence. Many companies have struggled to pay their debts, so the quality of the financial sector’s assets continued to deteriorate in 1999, albeit at a slower pace than in 1998. The level of refinanced loans grew by 22.5%, to $617.5m. The ratio of past-due loans (PDLs) as a percentage of total loans reached 8.4% in December, compared with 7% at end-1998.

Deposits in the banking system totalled $12.6bn in December 1999, a 2.9% year-on-year contraction, with time deposits increasing their share of the total from 45.9% to 54.7% and the proportion of savings deposits decreasing from 33.6% to 27.2%. This is the result of the banks requiring more stable funding to match their long-term loan exposures.

Other consequences of the financial crisis were cost-cutting programmes, personnel reduction, mergers and acquisitions. Only 19 of the 26 commercial banks that started 1999 survived the year, while there was one new entrant to the market. The mergers included Banco de Lima Sudaméris and Banco Wiese; Banco del Nuevo Mundo and Banco del País; and Banco Santander and Bancosur. Some other banks merged with financial subsidiaries: Interbank with Porfin; Banco Continental with Financiera San Pedro. In November the Superintendencia de Banca y Seguros (SBS, the Banking and Insurance Superintendency), intervened and liquidated Banex. The changes that the sector underwent in 1999 appear to have strengthened the industry, and its efficiency ratio (operating expenses/net interest income and non- interest income) improved in 1999 to 55% from 55.9%, owing to lower operating expenses.

Telecoms boosts the In early January the Bolsa de Valores de Lima (BVL, the Lima stock exchange) stockmarket was characterised by low volumes, resulting from investor fears of a rise in US interest rates. However, on January 13th the general and selective indices rose by 4.3% and 6.1% respectively, owing to an announcement by Telefónica de España of an offer to buy up all the share capital of its Latin American subsidiaries at a premium of 40% of the average quoted price in the five days before the offer. the BVL indices were subsequently boosted by foreign investors buying shares in Telefónica del Perú and selling them overseas to take advantage of the spread, which fluctuated between 6% and 8%.

Since January the market has stabilised. Political uncertainty in the approach to the elections has dulled sentiment in the markets in the past month, with the investor-friendly Alberto Fujimori now less likely to win the elections in the first round of voting.

Foreign trade and payments

Export growth is led by Merchandise export earnings grew by 6.6% in 1999, with traditional exports— traditional products— particularly fishmeal and gold—leading growth. After an El Niño-affected 1998, fishmeal volume exports rose by 121.4% over the year, but a slump in fishmeal prices since October 1998 restricted earnings growth to 35.9% year on year. Prices of Peru’s other three main exports—gold, copper and zinc—rose in the second half of 1999, and with volume growth of 34.7%, 7.1% and 1.7% respectively, earnings for these three products grew by 13.1%, to $2.4bn.

—and with non-traditional Earnings of traditional agricultural exports fell by 12.6% over the year, owing exports beginning to lower prices. Export volumes for coffee grew, but with prices low, earnings to recover— fell by 6.7%. However, coffee earnings rose year on year in the fourth quarter as the international price started to show signs of recovery. After contracting in the first half of 1999, non-traditional export earnings started to post positive growth rates in the third and fourth quarter (1.3% and 6.3%, respectively). The growth was led by textiles and agricultural products, with export volumes and prices falling in the wake of the Asian crisis owing to price competition and reduced demand. Textiles are regaining markets that were lost during the Asian crisis.

—and the import bill With domestic demand depressed throughout 1999, particularly in the first falling three quarters of the year, the import bill fell by 18.1%, to $6.7bn. In the fourth quarter, the contraction was just 2.7%, compared with 18.3% in the third quarter. This was owing to two main factors: a low base of comparison with the fourth quarter of 1998—when the slump in domestic demand was first apparent—and rising oil imports as international prices recovered in the second half of the year. While oil-related imports of raw materials and intermediate goods rose by 17% year on year in the fourth quarter, imports of consumer and capital goods fell by 10% and 4% respectively.

Merchandise trade ($ m; fob-fob) 1998 1999 % change Exports 5,735.1 6,113.9 6.6 Traditional products 3,690.2 4,138.5 12.1 Non-traditional products 1,968.0 1,873.8 –4.8 Others 76.9 101.6 32.3 Imports 8,199.8 6,713.9 –18.1 Consumer goods 1,883.8 1,438.3 –23.7 Raw materials & intermediate goods 3,386.6 3,003.1 –11.3 Capital goods 2,592.4 2,139.5 –17.5 Other goods 337.0 132.9 –60.6 Trade balance –2,464.8 –599.9 –75.7 Source: Banco Central de Reserva del Perú.

The current-account deficit As a result of the export growth and sharp fall in the import bill, the trade narrows to 3.6% of GDP deficit narrowed by 75.7%, to $600m, in 1999. Growth of 17.1% in earnings from travel—principally tourism—and a fall in transport debits contributed 29

most to the 14.1% contraction in the services deficit in 1999. As a result, despite an increase in net investment outflows, the current-account deficit narrowed to $2bn, equivalent to 3.6% of GDP. Between 1995 and 1998—years of strong demand and high investment—the current-account deficit averaged 6.1% of GDP.

Current account ($m) 1997 1998 1999 Exports (fob) 6,832 5,735 6,114 Imports (fob) –8,553 –8,200 –6,714 Trade balance –1,721 –2,465 –600 Services: credit 1,538 1,752 1,679 Services: debit –2,305 –2,292 –2,143 Services balance –767 –540 –464 Net investment income –1,472 –1,484 –1,635 Net current transfers 681 698 669 Current-account balance –3,279 –3,791 –2,030 (% of GDP) –5.0 –6.1 –3.6 Source: Banco Central de Reserva del Perú.

FDI inflows fell in 1999 Following the cutting of international credit lines in the wake of the Russian crisis in August 1998, net capital flows contracted by 67.9%, to $692m. Foreign direct investment (FDI) reached its lowest level—$779.24m—in five years in 1999. While privatisation receipts increased in 1999 compared with 1998 (from $60m to $219m), they were still well below the 1996 level of $1.7bn.

Balance of payments ($m) 1998 1999 % change Current-account balance –3,791 –2,030 –46.5 Private-sector capital flows 2,235 2,123 –5.0 Public-sector capital flows –58 422 n/a Short-term capital flows –24 –1,853 7,620.8 Financial account 2,153 692 –67.9 Exceptional financing 365 18 –95.1 Change in international reserves (– indicates increase) 1,006 775 n/a Change in Central Bank reserves 986 780 –20.9 Valuation changes and monetisation of gold –20 5 n/a Net errors and omissions 266 546 105.3 Privatisation inflows 60 219 265.0 Private-sector long-term capital flows excluding privatisation 2,175 1,904 –12.5

Note: totals may not add due to rounding. Source: Banco Central de Reserva del Perú. 30

International reserves According to Central Bank figures, international reserves fell by $775m in 1999 begin to recover to $8.4bn, the lowest level for three years. By mid-February 2000, however, international reserves had increased by $606m, largely owing to increased deposits by the financial system in the Central Bank. According to the Sociedad de Comercio Exterior del Perú (ComexPerú, the Peruvian foreign trade association), the early-2000 increase in reserves reflects both seasonal factors and improvements in the position of Peru’s financial system. High levels of dollar liquidity should help to reduce interest rates and lead to growth in credit demand.