Perez Takes Guatemalan Presidency as Investors Back ‘Iron Fist’

Former Guatemalan army general Otto Perez Molina swears in as president today, vowing to crack down on drug gangs and bolster the judiciary, a policy that may lead to a resumption of U.S. military aid after 34 years.

His pledge to wield an “iron-fist” against drug cartels has resonated with local business leaders and helped send bond yields to their lowest level in seventh months.

The former head of military intelligence will now need to reassure the U.S. congress that an army he helped command during a 36-year civil war has reformed, said Eric Farnsworth, vice president of the Council of the Americas in Washington. In its 1999 findings, a United Nations-sponsored commission said that witness accounts showed the government committed genocide during that war that left 200,000 dead in a country of 13.3 million.

“Any future aid would have strict conditions,” Farnsworth said in a phone interview. “You can’t just give a blank check, the scars of human rights abuses just go too deep.”

Guatemala’s army is banned from receiving aid other than for training because of past human rights abuses, said William Ostick, a U.S. State Department spokesman. Outgoing President Alvaro Colom requested in September that the U.S. lift the ban.

“This is a process of discussion over human rights and security, that will require congressional consultation,” Ostick said in an interview.

Drugs War

Perez, 61, has the backing of Guatemala’s congress to increase government spending and potentially raise taxes to fund a security buildup, said Heather Berkman of Eurasia Group, a political risk consulting firm.

“There’s a window of opportunity because of all the violence,” Berkman said in a phone interview from New York. “When it comes to security, he’ll have carte blanche support.”

Guatemala, the world’s seventh-largest coffee producer, has a murder rate of 45 per 100,000 inhabitants, compared with 20 for all of Latin America, according to the World Bank.

Mexican gangs including the Zetas have made Guatemala a base for drug trafficking, according to a January report from InSight Crime, a Washington-based security research group.

The subsequent increase in violent crime caused investment to drop to 15.3 percent of gross domestic product last year from 20 percent in 2006, Moody’s Investors Service said in a Nov. 14 report. Moody’s rates Guatemalan bonds Ba1, one level below investment grade.

Optimism

Hopes that Perez will help ease the violence pushed yields on the country’s 30-year bonds to 6.05 percent yesterday from 6.31 when he won the election on Nov. 7, according to data compiled by Bloomberg.

The number of Guatemalans who say that business will improve in the next six months rose to 63.6% in November, up from 28.6% the month before and 8.3% in September, according to a survey by Guatemala’s central bank.

Central America’s biggest economy will expand 2.8 percent in 2011, the International Monetary Fund said in an Oct. 5 report.

Perez says he plans to add 10,000 police officers and create special units to combat drug cartels. The new government will also strengthen the justice system to reduce impunity and meet conditions for restoring U.S. aid, said Eduardo Stein, an advisor on Perez’s transition team.

“It’s something we are convinced is necessary to get Guatemala out of the hole in terms of impunity,” Stein, who was Vice President under Oscar Berger from 2004 to 2008, said in a Jan. 13 phone interview from Guatemala City.

To contact the reporter on this story: Eric Sabo in Panama City at esabo1@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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