Only two months after the inauguration of President Fujimori ended the political jitters, politics is once again at the centre of the attention.  President Fujimori’s announcement to call for new elections next year and to hand over power by July 2001 has had a significant impact in the exchange rate and capital markets.  These effects have subsided by now as the political situation stabilised.  However, the political uncertainty is likely to cause some restraint from domestic and international investors alike, which should affect growth prospects for the Peruvian economy.

New presidential elections in 2001.  On 16 September, President Alberto Fujimori, stunned the country and international observers alike with his announcement to call for new presidential elections and to hand over power by July 2001.  The announcement followed the release of a videotape that showed the presidential national security advisor Vladimiro Montesinos bribing congressman Alberto Kouri of opposition party Peru Posible in an effort to win him over to Fujimori's party.  Montesinos, who headed the National Intelligence Service (SIN, Servicio de Inteligencia Nacional), has been Fujimori’s long-time political associate and has been accused for several years for being responsible for human rights abuses, blackmail, and intimidation of the press. 

Fears of military coup subside.  Fujimori’s call for new elections and his promise to dissolve the SIN had sparked concerns over the possibility of a military coup.  Montesinos, who is generally acclaimed for having successfully extinguished terrorism in Peru in the early 1990s, commands widespread support in the military.   In what seemed to be a horsetrade between the government and the military, Montesinos was allowed to escape to Panama on 23 September, which served to eas the fears of a military takeover.  However, the coalition between President Fujimori, his intelligence chief Vladimiro Montesinos, and the armed forces, which formed what observers called the governing "triangle of power", has come to an end and has left a power vacuum. 

Political uncertainty ahead.  Governing Peru will become increasingly difficult for Fujimori until a new government takes over.  Since the outbreak of the political crisis, eleven congressmen have left Fujimori’s party, erasing his carefully crafted majority in Congress.  While Congress approved the constitutional reforms necessary to implement the new electoral framework on 5 October, paving the way for elections as early as March 2001 and a new president’s inauguration on 28 July 2001, other policy agenda items will probably fall victim to Fujimori’s eroded power base.  The political uncertainty may also stall the privatisation process that was expected to be revived under economy minister Carlos Boloña, thus thwarting any hopes for improvement on the fiscal front.  The important Camisea auction, slated for 20 October, will not be postponed, according to government sources.

August GDP comes in stronger than expected.  While the political climate will most likely affect economic performance in the coming months, August production came in strong.  On 6 October, the National Statistical Institute (INEI) reported that GDP increased by 4.9% year-over-year.  The August reading, which is just a notch above the July growth rate of 4.8%, came in well above market expectations, which anticipated an expansion between 3.7% and 3.9% based on weak fishing data released earlier.  The 19.8% contraction in the fishing sector was offset by continued strength in the manufacturing industry, which increased by 10.8% compared to the same month last year.  The manufacturing industry has been the strongest growing sector this year apart from the volatile fishing industry, and, when excluding April, this year has been growing at double-digit rates since October 1999.  Owing to the strong expansion in manufacturing, electricity and water added 5.3% over August 1999.  Commerce increased 6.9% and in the mining industry, a two-month contraction ended with a 0.9% increase in August.  Construction, however, remained in negative territory, contracting another 0.9% over August 1999, after the 3.5% contraction in July. 

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