Investors Upset With Fujimori

Associated Press -- 14 July 2000

by Rick Vecchio

LIMA, Peru (AP) - Already facing the wrath of the U.S. Congress after his contentious re-election, President Alberto Fujimori is falling out with foreign investors who are upset with what they view as a shift toward populist economic policies.

Peru's ailing business sector was up in arms this week as Fujimori's government showed signs of reversing a 10-year record of market-friendly policies amid allegations that he is backing off promises to strengthen Peru's democracy.

Fujimori is working to push at least a dozen bills crafted from ``urgent'' presidential decrees through Congress in its final session before he loses a clear majority at the end of the month.

He pledged Thursday that his measures would bring 5 to 6 percent growth by year's end and said that he is ``betting'' on ``an economy with social impact'' - an uncharacteristic statement for Fujimori, known during his decade in power for fiscal austerity and towing a strict free-market line. In past governments, such phrases have been associated with populist economic policies that focused on spending on the poor without regard for macroeconomics or balanced budgets.

Some analysts believe the move toward populist policies may be an attempt to shore up his popularity as he becomes more isolated internationally and internal opposition grows to his authoritarian rule.

An array of economists, opposition politicians and business leaders are calling such reforms misguided, particularly as the politically vulnerable nation is losing foreign investment at a furious pace.

Foreign direct investment in the first three months of the year dropped 88 percent compared to the same period in 1999, from $499 million to $62 million, the Central Bank reported.

Fujimori won an unprecedented third five-year term in a questioned presidential runoff May 28 that was boycotted by his opponent, Alejandro Toledo, who charged Fujimori planned to rig the results.

The Clinton administration has said it is reserving judgment on whether to impose sanctions.

But the U.S. Congress last month held back $42 million of emergency anti-narcotics and development aid for Peru. This week, Sen. Paul Coverdell, a Georgia Republican, introduced bipartisan legislation to withhold $10 million more and to require the United States oppose aid to Peru in most votes of international financial institutions, like the International Monetary Fund.

Salomon Smith Barney last week advised investors against putting money into Peru's stock market. On Thursday, it gave a negative rating to Peruvian bonds, citing Fujimori's autocratic style, eroding political support and apparent shift to populist policies.

``We do not understand why the government has decided to push for measures that are upsetting the business community at a time when, politically, the government is not sufficiently strong,'' said Ricardo Adrogue, a vice president of economic and marketing analysis for Salomon Smith Barney. Industrial groups are complaining that the rules under which they do business are ``erratic and increasingly unpredictable,'' the firm reported Thursday. ``They complain that the rule of law is implemented in a discretionary fashion.''

Under Fujimori's main proposal approved Thursday by Congress, companies would lose an automatic tax-free status for profits reinvested into new mining projects.

Jose Morales, vice president of the business group representing the mining and energy sector, said that ending the incentive could drive potential investors to countries like Chile or Brazil, depriving Peru of hundreds of millions of dollars.

Mining of gold, copper, lead and zinc contributes about 12.5 percent of Peru's annual tax revenue.

Fujimori implemented the tax-free incentive in 1992 when the economy was just beginning to recover from years of runaway inflation and foreign companies were still a favored target of leftist rebels.