FEATURE-Peru swims up current, defying the odds

Reuters,, 04.02.03, 12:00 PM ET By Missy Ryan LIMA, Peru, April 2 (Reuters) - Housekeeper Dulia Aguilar has heard President Alejandro Toledo's promises of cheap, subsidized houses for thousands of poor Peruvians, but she can't come up with the $164 a month she would need to buy her own. That means she continues to take the daily hour-and-a-half bus ride to work from the humble neighborhood where she and her daughter rent a sparsely furnished room and share a bathroom with a dozen others for 200 soles ($57) a month. Aguilar is just one of the millions of Peruvians who shake their heads in dismay as they listen to the Toledo government boast that Peru has Latin America's fastest growing and most promising economy. "They say that to look good outside of Peru, but things at home are different," she said. "We don't feel (growth)." The Peruvian economy has indeed shown signs of strength and potential -- growing 5.2 percent in 2002 -- and the Toledo government is hoping those figures will attract needed trade and investment. But it remains to be seen if the nation can fully turn the page and attract new business only three years after being rocked by a corruption scandal that ended the 10-year presidency of Alberto Fujimori and a decades-long rebel conflict involving the Maoist Shining Path. Dark as parts of Peru's political side have been, opportunities to capitalize on the country's growth may help to shroud its past. "The numbers don't lie. Peru's doing extremely well by Latin American standards and better than anyone, even government officials, had anticipated," said Mauro Leos, sovereign credit analyst at Moody's ratings agency. But it's "difficult to get a sense of what lies ahead," he added, echoing other analysts' warnings that Peru must work hard to keep fiscal and political challenges in line to fend off world economy woes and sustain growth. They insist that Peru -- which has long relied on exporting raw materials like minerals and marine products -- must create more jobs, boost private investment and resist the temptation to take on too much debt. NEW LIFE AFTER SLUMP The Toledo government says Latin America's No. 7 economy is booming after a four-year slump, thanks to rekindled consumer demand, manufacturing growth, a state housing push, strong mining output and prospects for increased trade. Peru's strong showing last year contrasts those of neighbors like Argentina, whose economy contracted an estimated 11 percent last year amid currency and debt woes. Peru shares borders with violence-ridden Colombia and Brazil, which last year elected left-leaning Luiz Inacio Lula da Silva as president. In oil-rich Venezuela, the economy shrank 8.9 percent last year amid political unrest and a crippling two-month-long nationwide strike that aimed to oust President Hugo Chavez. The region's biggest economy, Brazil, grew just 1.5 percent in 2002 and the entire region shrank around 0.5 percent last year, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). The Peruvian government forecasts 4 to 5 percent economic growth for this year -- almost double the region-wide growth estimate of 2.1 percent for 2003. But some economists say the country will fall short of its projection. "There is an economic advance, but unfortunately it's not sustainable over time and doesn't enhance people's quality of life because it isn't creating jobs," said Enrique Cornejo, an adviser to the main opposition party APRA in Peru's Congress. Peru grew at a brisk pace in the early 1990s, but in 1998 was hit by fallout from the Asian financial crisis and the devastating weather phenomenon El Nino. Then came the downfall of Fujimori, who had been praised for bringing economic reform and growth to Peru in the 1990s. Fujimori's chief of secret police and close adviser, Vladimiro Montesinos, was also accused of corruption, bribery and lesser crimes. Montesinos fled the country in 2000, but was back earlier this year to stand trial. On March 24, he was sentenced to five years and four months in jail for arranging favors for his former mistress' relatives. The Fujimori/Montesinos debacle, as well as a bloody rebel conflict that killed 30,000 people and inflicted $25 billion in damages in the 1980s and 1990s, rattled some investors. The Shining Path, Peru's fiercest rebel group, is now a shadow of its former self but the government says rebel die-hards still pose a threat. All this has left President Toledo with the task of restoring Peru's patina with the international community. POLISHING THE IMAGE Analysts say that even now Peru cannot let strong headline economic figures distract it from such critical issues as tax reforms and making sure that the country's labor laws favor companies and not just workers. They say Toledo, whose popularity dipped to 21 percent in a recent poll, must remain focused on political issues that could create distractions for him if they go unattended. Toledo's Peru Posible party boasts the largest bloc in Congress, but the leader has faced divisions, such as a heated debate over phone rates, even among party loyalists. Toledo sparred with Congress over a bill to eliminate a fixed monthly telephone fee, which would have altered a 1994 privatization contract and reduced revenue for telecoms leader Telefonica del Peru (nyse: TDP - news - people). Some analysts say that kind of legislative action could frighten investors. "There is a perceived risk from Congress ... but it can be minimized because of the executive's tendency to reject laws that could cloud the long-term outlook for investment risk," said Jorge Luis Rodriguez, an analyst at Centura brokerage. Peru must kindle private investment, which the Central Bank says should grow 5.4 percent in 2003, to sustain growth, while increasing export capacity to take advantage of trade deals. Last year, the country cheered inclusion of new products like apparel in a trade deal that gives duty-free access to U.S. markets for certain goods from Peru, Bolivia, Ecuador and Colombia. Peru is also seeking a bilateral U.S. trade deal. Debt, which worries investors, must also be kept under control, analysts say. The Toledo government has faced fiscal shortfalls after failing as planned to privatize state assets. Peru has sold $750 million in bonds on world capital markets so far this year. "(The new debt) solves a problem in the short term, but in 10 years, will Peru have the cash it needs to meet those obligations?" APRA economist Cornejo said, warning that debt service costs were out of proportion with exports. Peru generally pays $2.5 billion a year in debt service while exports grew to $7.68 billion in 2002. But the government says the new debt will help shelter it from the effects of war and a shaky world economy. "We're about to enter a period of heightened uncertainty ... and if there's one thing we've learned in Latin America, it's how sensitive and vulnerable economies are. Peru is no exception to external shocks," Moody's analyst Leos added.