Reserves, stable currency strengthen Toledo's hand

 BY TYLER BRIDGES

 LIMA, Peru -- President Alejandro Toledo's initial plan to reactivate Peru's moribund economy is getting good marks from analysts.

 Toledo is attempting to boost demand for goods and services by putting more money into the hands of poor people and to increase investment by making the private
 sector confident that it's safe now to buy machinery and start hiring.

 ``The reaction was very positive everywhere,'' said José Cerritelli, a specialist in Latin American emerging markets for Bear, Stearns & Co. ``People see Peru today as safe in the world of wobbly Latin American economies.''

 Bear, Stearns is predicting 3.5 percent to 4 percent growth in Peru's national production next year while J.P. Morgan is predicting a 5 percent growth, which would be a startling -- and welcome -- turnaround for a country that has been in recession for four years.

 KEY POINTS OF PLAN

 Toledo's economic plan, already approved by Congress without a fuss, proposes to:

   Increase the salaries of teachers, military personnel, health workers and police officers by 50 soles, the national currency, or about $14 per month.

   Reduce the electric bill for poor households while slightly increasing the rate for the middle class.

   Reduce the social security tax while slightly increasing income taxes on the middle class (those who earn at least $1,650 per month).

   Guarantee $500 million of housing mortgages as a way of promoting new construction.

 Toledo has further gained investor confidence by naming Pedro Pablo Kuczynski -- a successful investment banker in the United States -- as his finance minister and
 Richard Webb as his central bank president.

 Toledo also inherits an economy where, as Kuczynski recently put it, ``in comparison with other South American countries, our financial indicators are in good shape.''

 The sol has maintained a stable exchange rate of about 3.5 per dollar since 1999. In addition, Peru has $8.8 billion in reserves -- enough to finance nearly a year of
 imports -- an inflation rate of only 2.2 percent per year, and a budget deficit of only 2.2 percent of GDP.

 The huge Antimina copper mine begins full production next year, which by itself will add 1.5 percent to gross domestic product.

 ``All the ingredients are there for a strong resumption of growth,'' said Luis Oganes, J.P. Morgan's director of Latin American emerging markets.

 Toledo took office in late July having promised to create jobs in a country where half of the population lives on a daily income equivalent to the price of a Starbucks coffee in the United States.

 Three months after the presidential campaign ended, the slogan ``Toledo Trabajo'' painted on walls throughout the country serves as a reminder of his campaign promise.

 ``Nothing fewer than 72 percent of Peruvians who want to work are unemployed or underemployed; that is, their jobs don't allow them to earn enough to cover their basic needs. That has to change,'' Prime Minister Roberto Danino told Congress in late August.

 Signs of Peru's economic problems abound.

 UNDEREMPLOYED

 Unemployed workers line up outside the downtown offices of Peru's congressional members, hoping to get inside to make a pitch for assistance.

 At busy intersections, vendors selling trinkets beseech motorists to buy their goods.

 If you go to a restaurant here, expect to pay one sol (30 cents) to a young man to watch your car. Like the street vendors, he belongs to the huge underemployed class of workers who cannot find jobs in factories or offices.

 The underemployed class also includes people like Alberto Boggo, who worked as an electrician for five years but lost his job six months ago. He bought a red ``Taxi'' sticker for 10 soles and placed it on his windshield.

 ``I was earning 1,500 soles per month as an electrician,'' Boggo said. ``Driving a cab, I only earn 900 soles. And I have to work 12 hours every day but Sunday.''

 Peruvians scrape by however they can.

 ``There's no unemployment insurance,'' said Jaime Garcia, general manager of the American Chamber of Commerce of Peru. ``If they don't have a job, they have to do something to have income.''

 Garcia illustrates the difficult task facing Toledo: ``Peru needs to create 300,000 jobs every year to meet demographic growth.''

 That means growth will have to be 6 percent per year to improve living standards in real terms.

 With the growth, Toledo hopes that by 2006, the year his term ends, exports will rise from $260 per capita to $500 (they are $1,200 per person today in Chile), and the number of telephone lines will increase from 7 per 100 residents to 15.

 By showing restraint with his initial economic plan, Toledo has pleased investors. They had feared he would bow to political pressure and try to stimulate the economy solely through government spending.

 Instead, his initial spending plans are modest, said Lima economist Fritz Du Bois, who noted that Toledo also has shelved at least for now his plan to reduce the national sales tax from 18 percent to 17 percent because it would increase the budget deficit too much.

 Du Bois noted that Danino went out of his way to brief the opposition parties on the government's economic plan and even won an initial nod of support from Alan García, who was defeated by Toledo in the June presidential election.

 In a country that remains traumatized by the political uncertainty that prompted President Alberto Fujimori to resign in November 2000, the conciliatory moves will
 encourage investors.

 ``It looks like we'll be one of the bright stars of the region next year,'' Du Bois said.

                                    © 2001