A Perceptible Change

A new era in Peru was to have started in July 2001 with the inauguration of Alejandro Toledo, the former shoeshine boy, as the first popularly elected president since the fall of the disgraced Alberto Fujimori. However, the first months of Toledo’s administration proved a disappointment to Peruvians. The government did not seem to be equal to the country’s enormous expectations for change after several years of economic stagnation and political crisis.

As Roberto Dañino, Toledo’s prime minister, recognizes, the public proved to be fed up of waiting for improvements and unwilling to grant the new government a honeymoon period.

Instead, the teething troubles common to any new team seemed publicly magnified by lack of coherence between members of the cabinet. Discord between ministers and Congress – where Toledo’s own Perú Posible party has been, as one diplomat puts it, “the biggest rabble” – has not helped. Grumbling over the size of Toledo’s salary added to the disenchantment.

Those types of disagreements, and in particular the many challenges that the opposition-controlled Congress issued to Toledo and his team’s executive authority, meant a further damaging period of uncertainty for investors anxiously awaiting signs of improvement and greater stability.

Only now is it becoming apparent that the Toledo government, where analysts perceived rival currents of populism and economic orthodoxy, is hitting its stride. Respected and internationally known reformers such as Dañino and Pedro-Pablo Kuczynski, the economy and finance minister, are perceived to have gained more authority as a result of recent cabinet changes. Toledo used the reshuffling to strengthen the government’s relationship with Congress.

One business executive says: “We were very worried because six months of total inactivity went by, without clear signals, and with lots of contradictions. There was a lack of leadership and a lack of a program. I think now we are seeing that they have used that time to put their program together. Now you can perceive a change. Dañino is stronger and Kuczynski is being well received. I think these are initial signs that things are taking their course.”

Such signs of greater determination and direction will be the foundations of a revival in investor confidence that Peru desperately requires.

Going back to 1997, the country has suffered from periodic external shocks, such as emerging market crises, and from fragile institutions, with Fujimori shoving aside the boundaries of constitutional government. All have deterred investment. Growth has been almost stagnant. Companies are staggering under debts. Banks have cut back lending, by refusing to throw good money after bad.

A few big inward investments did materialize, but a privatization program that was vigorous in the early 1990s ran out of steam and was essentially halted.

Now, the Toledo government is determined to accelerate privatization once more, predicting at least $1 billion-worth of asset and concession sales this year and next, with a focus on the energy sector and on infrastructure such as roads. Successful completion of this program – which will require investors to have confidence in the government leadership and clarity of vision that are now emerging – will be essential to lift the economy.

The administration believes economic growth, which should reach at least 3% this year in part because of output from the huge new Antamina copper and zinc mine, can accelerate to 5% in 2003. The giant Camisea natural gas project is under construction and should be onstream for 2004, while the mining sector should grow if currently depressed metals prices rebound.

Wall Street appears supportive, giving an enthusiastic reception in February to Peru’s first sovereign bond issue in more than 70 years. The International Monetary Fund has also backed the finance ministry’s goals. “The basic agenda is going forward,” says Kuczynski.

An uncertain global economic climate could still cause problems for Peru, and there is concern that a new El Niño climatic phenomenon could be on the way, though not as severe as the 1997 cycle, which signaled the start of the recent years of crisis. But domestically, the political situation is much clearer and more stable than it has been for years, creating a feeling that there is light at the end of the tunnel and that economic recovery is at hand.

The government also defines one of its key tasks as building a social and political consensus regarding the country’s long-term goals to cement Peru’s democracy. “This is a government that is making a transition and it is a government of consolidation of democracy. Democracy is not an act, it is a process,” says Dañino.

Jorge Flores, executive vice president of Interbank, one of the leading domestic banks, makes the point that the political noise of the last six months has been an inevitable result of the new climate. Problems have become magnified and small acts have become the cause for suspicion, he says, because “people have forgotten what it means to live in a representative democracy, with all its advantages and disadvantages.”

“Peru is one of the few countries in the world,” he states, “to have a president who can look young people in the eye and honestly say, ‘Look what you can achieve with study and hard work. I was as poor as or poorer than you.’ Yet that is not being valued. We are wasting an opportunity.”