Peru: Narrow Growth Won't Solve the Debt Problem

Solid growth doesn't solve all economic problems. That's a lesson Peru's President Alejandro Toledo is learning rather quickly.

Peru's real gross domestic product is forecast to grow about 3.5% in 2002 following a recession in 2001. In January and February, the economy was up 3.6% from its year-ago levels. If the expectations are met, Peru's economy will post the fastest growth in Latin America this year. The stock market rose 10% in the first quarter, with a further, though smaller, advance seen for this quarter.

Unfortunately, the gains in the economy and equity prices are narrowly based. Mining, specifically production from the new Antamina copper mine, is accounting for the bulk of real GDP growth, and mining companies are responsible for a significant share of the stock market rise. Public building projects also are adding heavily to GDP growth. The manufacturing and retail sectors are growing by only about 1%.

Increased government spending at a time of falling tax revenues is straining the federal budget. Lima will struggle to meet this year's budget goals mandated in a loan package with the International Monetary Fund. The stand-by agreement limits this fiscal year's deficit to 1.9% of GDP, but economists see the red ink totaling as much as 3%. The government hopes to earn up to $1 billion through privatization plans.

The worsening debt position is hampering moves toward economic and constitutional reforms. Although Toledo campaigned as a populist, critics say the mercurial leader named too many pro-business advisers to his Cabinet, and he has been slow to create jobs in a country where half the population lives in crushing poverty. His approval rating sank to 25% in March, vs. 74% when he took office in July, 2001.

For now, foreign investors have faith in Toledo's prospects. In early February, Peru successfully issued $500 million in internationally traded bonds as part of a $1.21 billion bond swap. Peru's foray into the bond market was historic: The last time it issued such securities was in 1928.

By James C. Cooper & Kathleen Madigan

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