June 5, 2006

Peru’s new leader faces huge challenges

By Robin Emmott

LIMA, Peru (Reuters) - Alan Garcia, Peru's new
president-elect, pledges to do what few Latin American leaders
have achieved: seduce Wall Street with prudent policies and
simultaneously lift millions out of poverty.

In a sign of the optimism surrounding Garcia, who aims to
atone for his disastrous 1985-1990 presidency, stocks in Lima
surged 2 percent on Monday, thrilled by his pledges of strong
economic growth and a low budget deficit. Peru's foreign bonds
also climbed and the sol currency touched a seven-year high in
early trading.

Hundreds of thousands of people danced in the streets on
Sunday night shouting: "He's going to give us a better life,"
ecstatic at the prospect of Garcia's promises of loans,
schools, drinking water and cheap gasoline.

But making good on ambitious promises of 7 percent annual
economic growth, a fiscal deficit of 1 percent of gross
domestic product and cutting both illiteracy rates and soaring
domestic fuel prices could be too much for Garcia.

"The country is a time bomb," wrote Augusto Alvarez, editor
of respected daily Peru.21, in an editorial. "The benefits of
(economic) progress don't reach the half of Peruvians who live
in poverty, many of them in the southern Andes and who did not
vote for Garcia."

Garcia's left-of-center American Popular Revolutionary
Alliance will have a minority share of Peru's fractured
Congress, outweighed by the nationalist movement of ex-army
commander Ollanta Humala, whom Garcia beat with 53 percent of
the votes to 47 percent with 92 percent of votes counted.

Humala vows to be a fierce opposition leader and is
extremely popular in poor southern provinces, underscoring how
polarized Peru is between the impoverished Andes and a coastal
society that is home to foreign-owned megamarkets, banks and
beauty salons.

"Humala isn't going to disappear. He's put things like
nationalization of our mining resources on the agenda. A lot of
people still want that," said Martin Sanchez, a street vendor
who voted for Humala in Lima on Sunday.

Humala won 15 out of Peru's 25 provinces, mostly poor and
rural Andean regions where few households have a telephone or
running water. But Garcia won in Lima, home to almost a third
of the population.

"The south (of Peru) is always looking for a messiah ... We
are going to have a serious problem (in alleviating poverty
there)," Garcia told think-tank the Inter-American Dialogue.


Garcia's first term, which began with high hopes, quickly
went sour when he sharply limited international debt payments
to 10 percent of export revenues. The virtual default made the
country an international financial pariah, and Peru spiraled
into hyperinflation.

Mainly because of that economic crisis, Peru's gross
domestic product per capita is lower today than in 1975.

But Garcia has staged a huge political comeback from the
economic distress and food lines of his 1985-1990 government by
courting New York bankers and sporting traditional Andean dress
in trips to remote towns that have barely changed since the
Spanish conquest of the 1500s.

That was a tactic that worked for outgoing Peruvian
President Alejandro Toledo, the son of an Andean laborer who
played up both his indigenous roots and his training as a
U.S.-educated economist.

But while Toledo succeeded in helping Peru's $75 billion
economy grow for an unprecedented four straight years, he
failed miserably in his promises to create jobs and prosperity
for the poor, making him one of Latin America's most unpopular
leaders with a single-digit approval rating in 2005.

(Additional reporting by Walker Simon)