Peru picks up protest pieces

June 20, 2002

LIMA, Peru (Reuters) - The government of President Alejandro Toledo on Thursday denied a Cabinet crisis the day after it halted fierce protests by putting a controversial privatization on hold, a move that prompted a high-profile minister to quit.

"The information that I have is that there is no Cabinet crisis ... and there will be no more resignations," Foreign Minister Diego Garcia Sayan told RPP radio.

The unpopular Toledo government, facing the worst crisis of its 11 months in office, halted almost a week of anti-privatization protests in southern Peru on Wednesday in a deal that put on hold the sale of power companies Egasa and Egesur until courts rule on its validity.

The protest woes -- fueled by fears the state asset sales could trigger layoffs and rate hikes -- were compounded when Interior Minister Fernando Rospigliosi handed in his irrevocable resignation just hours after officials inked the deal, widely seen as a climbdown, to end the protests.

The sale is seen as a key part of the government's plan to raise up to $800 million this year to plug the budget deficit and fund road, power, water, health and education projects.

Belgium's Tractebel, a unit of French utility Suez, won an auction of the companies in an auction last Friday with a $167.4 million bid.

The government's deal came three days after Toledo declared a 30-day state of emergency and sent 1,700 troops and police to Peru's second city, Arequipa. One person died in the protests.

Toledo is at record lows in the polls, with the backing of just one in five Peruvians.

On Thursday, workers removed rocks from the graceful colonial city's streets, washed walls clean of graffiti and stores and banks reopened for business.

"We are rebuilding the city after achieving a victory -- Arequipa has come back to life," said Martin Ojeda, a construction worker in the main square where on Wednesday thousands gathered in a jubilant celebration.

ANALYSTS SKEPTICAL

But analysts, who have kept a close eye on the privatization plan, were less enthusiastic about the delay and warned Peru could have a tough time meeting fiscal goals. Privatizations are seen as key to helping this poor Andean nation meet a 2002 budget deficit goal of 1.9 percent-2.2 percent of GDP.

So far this year, Peru has raised $566 million, or nearly three-quarters of its $800 million goal, including the Egasa and Egesur sales which are now on ice.

"It would have been much more beneficial if the government had been firm in its decision to privatize ... instead of yielding to illegal pressures clearly motivated by politics," said Federico Kaune, senior economist at Goldman Sachs in New York.

"With this deal, not only does the privatization process become more uncertain ... but this decision could cost the president popularity and endanger the recovery of investment in the second half of the year," he said in a research note.

Peru's country risk, which measures the spread of Peruvian bonds against safe-haven U.S. Treasuries, climbed 41 basis points to 606 basis points on the JP Morgan Emerging Markets Bond Index Plus. Wider spreads reflect the perception of increased risk.

"There are new questions about the likelihood of the privatization timetable being completed," said Bear Stearns analyst Jose Cerritelli. He said in a research note that Peru's credit outlook could suffer due to the risk of similar protests spreading to other parts of the country.

"Politically this can be seen as a defeat for the government because it was forced to back-track. But it's also a lesson for the future," said political analyst Ernest Velit.

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