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Archive, 1993: Fujimori on Peru

Apr 1, 1993

Peruvian President Alberto Fujimori has established his country's economy by cutting inflation from 7,600% in 1990 to 57% last year and trimming public sector deficit to 2.5% of GDP in 1992 from 6.5% in 1990. In March, Peru took a big step toward regaining its international financial composure by wiping away over $1.7 billion of arrears to the World Bank and the IMF. The IMF responded by authorizing Peru to draw a $1.4 billion credit over three years, with about $136 million to be channeled towards reducing the country's commercial bank debt. The credit will support Peru's economic program. The President graciously delivered closing remarks at a recent LatinFinance conference held in Lima. Later, he answered some questions from Katherine Conradt concerning the country's capital markets

Q: What are some recent changes that have been made in Peru to promote investment in its capital markets?

A: In the last two years, my administration has enacted a set of rules aimed at promoting private investment—domestic as well as foreign—in the different economic sectors of the country. With this, we seek to establish basic principles which guarantee investors a more secure, transparent and stable legal environment.

In regard to foreign investment, I’d like to emphasize an important aspect: the equal treatment (of the foreign investor) in comparison with the domestic investor, including—and this has to stand out—as it applies to access to internal credit. This my administration established in the most recent rules legislated. In the same sense, the excessive restrictions that had been applied during the last two decades have been repealed, principally those related to remittances of capital and profits abroad.

Furthermore, I would venture to point out that if a foreign investor used legal framework as the only factor to decide his investment, our country would be, at present, the most obvious choice. (And this is the case) even more so, if we consider the general context of legislation on labor and financial markets, as well as the conditions of stability which permit investment.

Q: In regard to foreign investment, what is the investor profile (direct or indirect) that you’re trying to attract? Why?

A: Although it’s true that this administration has established a system which promotes foreign investment in a general way, the current framework of tax and legal stability is provided for investors who don’t aspire to easy speculative profit, rather the contrary. The framework encourages investors who direct their resources toward permanent productive activities and, in this fashion, who generate a greater number of jobs and productive collaborations with the rest of the economy.

In this sense, my administration legislated in addition to the Law of Foreign Investment Promotion: an Investment Migration Program. The purpose of this program is to facilitate the immigration of foreign citizens who bring funds or make non-speculative investments in our country.

Q: How will new pension funds affect activity on the Lima Bolsa?

A: Without a doubt, the creation of the SPP, or Private Pension Fund Administration System, will generate huge resources which shall be absorbed by our capital markets. Indeed, it is foreseeable that many financial instruments where pension funds will be able to invest are directly related to operations currently carried out by the Bolsa.

Additionally, CONASEV (Comisión Nacional Supervisora de Empresas y Valores, or the National Supervisory Commission for Enterprises and Securities) has promoted the creation of new instruments—among them, mutual funds—through which a greater development in capital markets is expected. This will permit, at the same time, our current level of financial intermediation to increase to coefficients that bring us nearer to those observed in industrialized countries.

Q: In regard to pension fund administrators (AFPs), what has been done to protect retirement monies?

A: In the first place, I would like to point out that the AFPs will be strictly controlled by the Pension Fund Superintendency, which will guard the security and adequate profitability of pension funds in such a way that the system—through the administrators—provides pensions in accord with the needs of worker in his retirement.

In the second place, a series of safeguards has been established so that workers who continue in the system managed by the IPSS (previous national pension system) continue to receive the sum of their pensions. To this end, relative budgetary measures will be carried out annually.

Q: It seems that the Bolsa sets no limits on foreign investment. Is this so? What regulations affect those who wish to invest in the country?

A: As I indicated before, and I hope this is very clear, with the new legal framework in force, the foreign investor receives the same treatment as the domestic investor and, therefore, is not limited when carrying out operations on the Lima Stock Exchange.

My administration has endorsed and ratified various guarantee agreements for foreign investment. One of them, with the Multilateral Investment Guarantee Agency (MIGA), was signed by the Peruvian government. This protects the foreign investor from non-commercial risks, such as control over the transfer of profits and expropriations.

Moreover, we hope that Congress ratifies the agreement signed with the Investment Council for the Solution of Investment-related Differences (ICSID), which is a court for the resolution of controversies tied to foreign investment.

Finally, I’d like to point out that my administration is continuously having discussions with representatives of principal investor countries—and investors in this country—for the purpose of offering greater guarantees to the foreign investor.

Q: The process of privatization appears to have had a rough start. Do you think conditions for privatization will improve in 1993? What will be done to smooth the process?

A: We shouldn’t forget that when the privatization process was initiated in our country, the economy was recovering from economic imbalances caused by hyperinflation. Logically, investor confidence—both domestic and international, but above all the latter—was quite negative. Moreover, I would like to add that the efforts that my administration made on this issue were counteracted by politicians who, based on the concept of strategic state enterprises, used this rationalization to impede a process that should be carried out using technical and commercial criteria.

In spite of the difficulties this presented, satisfactory results were achieved, such as the successful sale of Hierro Perú S.A., the privatization of the Compañía Peruana del Gas—Solgas, the sale of service stations belonging to Petróleos de Perú and, initially, the sale of stocks which COFIDE held in Sogewiese Leasing S.A., to mention a few.

And something important that I’d like to make very clear is that the privatization I’m talking about shouldn’t only be understood as a transfer of property—and this is most important—but also as a change in the organizational and operational structure of companies which, for their characteristics, should remain under state management. In this way, these companies can be made more flexible and efficient and thus make the plan for free competition effective—competition that the new economic politics aims to introduce for cost reduction and improvement in the quality of goods and services.

In that sense, I would like to point out that my administration hopes to finish the restoration of state organizations this year, with special emphasis on those sectors of greatest social importance: health and education.

I believe that the advances achieved in the process of privatizing public companies in 1992 shall be complemented in 1993 by the transfer of the greatest productive units, aiming not only for new investment but—and this would likely result—for technology and efficiency.

Q: For which sectors do you anticipate the greatest growth?

A: In order to reverse the current situation of economic activity, my administration will stimulate growth through an increase in public expenditure—but without falling into populist tendencies—so as not to produce imbalances which would lead to even greater adjustments. In this way, we hope that in 1993, economic growth is sustained in most economic sectors. In addition, I should point out that the majority of sectors count on a framework which offers the legal and tax stability necessary for private investment to be carried out with total security.

In addition to that previously said, we hope for a greater level of economic activity for 1993, although certainly there will be some sectors that grow less than others.

Principal investments, which have been readied for the current year and which will be driven directly by the state, will allow the construction sector to significantly increase its level of activity. For this we are relying on about $180 million, provided by the Inter-American Development Bank and the Public Treasury. The monies will be applied to the rehabilitation and construction of highways.

In regard to the agriculture sector, this will receive the greatest financial help that my administration can offer. Also benefitting this sector is the relative low intensity of the recent El Niño phenomenon.

In closing, I would like to emphasize that corrections of the principal macroeconomic distortions, such as the reduction of the interest rate, real recovery of the exchange rate and greater price stability, will positively influence behavior of the manufacturing industry.

Q: What is your plan to control inflation?

A: In the first place, I want to be clear that price stability is indispensable if the recovery and increasing dynamism of our economic activity is to be steady and enduring. In this sense, the government has proposed, from the beginning, to diminish price growth to international levels.

During the entire period of my administration significant advances have been made toward the completion of this objective, and this goal has been clear so that, during 1993, actions will be directed at destroying the causes of inflation, not simply the symptoms of the problem. As well, public tariff prices now won’t be calculated taking a determined period as a base and adjusting it as a function of the time period. Now, an efficient company with high productivity will be taken as a base and, in agreement with it, tariffs will be fixed accordingly.

Within this framework, an important factor in the strategy to combat inflation in 1993 will be the strengthening of public finances. We look for a fiscal deficit both reduced and under control, with finances sustained by better collection of taxes. Thus, an appreciable increase in public spending is permitted.

For its part, monetary politics will continue to be managed with caution by the Central Reserve Bank, now that the margin for maneuvering for the management of monetary instruments will be minimal.

Finally, another key point for the control of inflation will be the lowering of the interest rate. In the immediate term, an important method to facilitate the reduction of the interest rate will be the implementation of a fully funded buying program and private sector debt restructuring, which my administration will decidedly push.

Q: What economic models are you currently following?

A: In this regard, what I can say is that all methods applied to date are enclosed within a system where the medium- and long-term of a modern and competitive economy are consolidated, where participation of the state is reduced significantly in activities that should be developed by the private sector and where, rather, one has a strong state which pays attention to basic needs of the population: security, education, health and infrastructure.

From the beginning, my administration initiated important reforms— which up to this moment are still being announced—whose orientation is clear: to better efficiency of the productive sector, reestablish a climate of confidence that allows the rebirth of investment and production, especially in the private sector, within a plan of freedom and sound competence. At the same time, it attempts to modify the behavioral standards of people influenced by long years of applied socioeconomic politics—policies not simply mistaken but also counterproductive—that punished success and initiative, not to mention lacked respect for the rights of others, for the legal order and for private property.

Decades of excessive state intervention in the economic task also encouraged the easy return to protectionism and fostered inefficiency and corruption, and everyone knows the alarming levels that these reached. In this manner, the deregulatory methods initiated are going to continue so to achieve a greater competitiveness in production and a greater benefit for consumers.

Q: In conclusion, modernization allows a country to pay more attention to social issues. As you know, poverty is one of the main problems that Latin America, in general, faces. What specific means would your government adopt to deal with this problem?

A: My administration, since its beginning, has worried about attending to the needs of the most poor, although I should acknowledge that various events made it difficult to put into motion the mechanisms that were devised for its control. The creation of the Emergency Social Program, better known as PES (Programa de Emergencia Social), directed by representatives of various public, private and ecclesiastic institutions, wasn’t able to complete the objective for which it was created. For that reason, that program was deactivated.

As a replacement, FONCODES (Compensation and Social Development Fund) was created. It is an entity with ministerial rank, charged with attending to the basic needs of the poorest in the population. It does not, however, donate to the poor. Basically, FONCODES provides programs for the development of productive employment, as well as offers financial help to small projects and for mini-businesses.

Currently, in spite of the scarce resources with which this institution has had to manage, various projects employing artisans are being carried out. An example of this is the construction of a hundred small boats that will be sent to the jungle as well as the building of tools for school. These projects, at the same time, generate a decent employment for the person and offer help to the people who need it most.

Additionally, we have a program in the design stage for school breakfasts, but these will be supervised by the Institute of Nutritional Investigation. The program is designed in such a way that the child doesn’t simply receive a glass of milk, but a balanced breakfast. This program will begin in zones where the most impoverished live and will later be expanded throughout the nation. Along the same lines, we count on the National Nutrition Program, which has under its authority the execution of emergency programs for assisting the needy by promoting a special system exchanging food for productive work. It’s thanks to these important efforts that a favorable environment has been built to encourage giving. It is expected to accumulate resources amounting to $200 million—the same money which will be used for carrying out new projects.

Finally, I would like to mention that each one of the social sectors, such as education and health will, in addition to using the major resources offered by the Public Treasury in 1993, work toward integral solutions to their own problems, looking for opportune financing to help cover the needs of their own sectors. Here I would like to point out the $69 million loan, made by the Inter-American Development Bank for the health sector, will permit financing a program for strengthening that sector, especially for preventative actions and emergency situations. LF

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