The political crisis is taking its first toll on the economy, which contracted for the first time this year in September.  The outlook for next year’s growth is getting ever more clouded since investors are expected to refrain from any decision-making as long as the political uncertainty persists.

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.   

Political crisis exacerbated.  The political crisis, triggered by the 16 September release of a videotape showing national security advisor Vladimiro Montesinos bribing an opposition congressman, took a turn for the worse in October.  While the former strongman in the Fujimori administration does not have to stand charges directly related to the bribery, he has been charged with a number of crimes including assassination, torture, drugs trafficking, tax fraud and money laundering.  Switzerland has frozen US$ 50 million in bank accounts tied to Montesinos and Panama confirmed its willingness to investigate reports that he had accounts in that country.  Montesinos fled for Panama into exile last month but was expelled by the Central American country and returned to Peru. 

His return triggered a battle between Fujimori and Montesinos for control of Peru's armed forces.  Despite a highly spectacular manhunt led by Fujimori personally, Montesinos has so far has eluded capture.  The inability to hunt Montesinos down raised speculations that sections of the military were shielding him and heightened concerns that a military coup was in the making.  Therefore, Fujimori, in an attempt to purge Montesinos loyalists from the military, fired the armed forces chief and the heads of the navy and air force.  A military coup attempt staged by a small force within the military has failed and loyal troops are continuing to search for the remaining handful of rebel soldiers in southern Peru. 

Even though some uncertainty was removed by the Congressional decision to set nationwide elections for next April with the new president assuming power on 28 July, the six month time frame is considered too long and as a result the Peruvian economy is likely to bear the consequences of a protracted political uncertainty.  Investor confidence, in particular, will suffer as firms postpone investment decisions until political concerns subside. 

Economy compromised.  The political jitters have begun to hamper economic performance.  For the first time this year, the National Statistical Institute (INEI) reported a contraction in economic growth.  In September, Gross Domestic Product (GDP) shrank by 0.1% compared to the same month last year.  This is a far cry from market expectations, which hovered around 3.0%.  In the first nine months of the year, GDP increased by 4.9%.  The main sectors responsible for the dismal September reading were fishing (-11.9% year-over-year) and construction (-10.6% yoy).  Fishing once again suffered from a fishing ban on the all-important anchovies.  While fishing does not represent much in the GDP, it has a multiplier affect on retail and manufacturing.  The slump in construction did not come as a surprise as government spending cuts heralded cutbacks in roads and other public works projects.  In fact, construction is the only sector that exhibited negative growth in the first nine months of the year (-0.9% over the same period in 1999), following the hefty 12.3% contraction in 1999.  More surprising was the fact that the manufacturing sector, which so far had been the main driving force behind economic growth this year, entered negative territory, contracting 1.5% over September 1999, following double-digit growth rates in the four previous months.  A crippling truckers strike that paralysed transport for a good part of October, hindered the regular flow of production and led to lower output mainly in food, beverage and machinery equipment.  The strike also affected retail and wholesale trade businesses, which registered meagre 0.2% growth over the same month last year, following 6.9% growth reported for August.  INEI also used the occasion to provide revised numbers for GDP growth in February 6.0% (vs 6.4% reported earlier); March 7.4% (vs. 7.7%); April 4.0% (vs. 4.2%); May (unchanged); June 4.6% (vs. 5.1%); July 4.9% (upward! vs. 4.8%); and August (unchanged).   

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