CHRONICLE OF LATIN AMERICAN ECONOMIC AFFAIRS

March 10, 1994

Copyright 1994
ISSN 1054-8874

(Latin America Data Base, Latin American Institute,
University of New Mexico.  Project director: Nelson Valdes.
Economic affairs editor: Kevin Robinson.  Contact: Roma
Arellano, program manager.)

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       GENERAL
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MEXICO & CANADA REAFFIRM COMMITMENT TO
EXTEND NAFTA TO OTHER LATIN AMERICAN COUNTRIES

     According to high-level trade officials from Canada and
Mexico, both of those nations favor rapid negotiations to
incorporate more Latin American countries into the North
American Free Trade Agreement (NAFTA), beginning with Chile.
     In early March, Canadian and Mexican representatives
attended a special conference in Washington to discuss the
perspectives for expanding the three-member NAFTA into a
hemisphere-wide free trade zone that would eventually stretch
from Alaska to Argentina.  The conference--dubbed "The Future
of Economic Integration in the Western Hemisphere"--was
jointly organized by the Center for International and
Strategic Studies, the Inter-American Dialogue, and the North-
South Center at the University of Miami.
     "Canada strongly favors the expansion of NAFTA, beginning
with the rapid admission of Chile into the agreement," said
William Cosby, a high-level representative from Canada's
Office of Trade Policy, who attended the conference.  Cosby
says that Canada already opened bilateral negotiations with
Chile more than a year ago, but that the three NAFTA members
must first "clarify" the procedures and conditions under which
more countries will be allowed to join the NAFTA before trade
talks with Chile or any other nation can advance.
     In fact, on March 8, Canada's Trade Minister, Roy
MacLaren, also told a committee in Parliament studying trade
issues that Canada will push for agreements with the US and
Mexico on NAFTA's expansion during 1994.
     "I would guess, if you put it to me, that it will be
sometime in 1995, perhaps by the end of 1995, that we might
see the accession of Chile," said MacLaren.  "We hope to have
an agreement on how a negotiation like this could proceed by
later this spring.  The question then is how rapidly Canada,
Mexico, and the US want to move forward."
     For his part, Herman Von Bertrab--director of Mexico's
NAFTA Negotiating Office, who also attended the conference in
Washington--emphasized that the Mexican government is
"completely open" to negotiating more free trade accords with
other Latin American and Caribbean countries.  Indeed, on
March 4 Mexico announced the conclusion of negotiations with
Costa Rica over a bilateral free trade accord between their
two countries.
     The pact--which will be signed in April by Mexican
President Carlos Salinas de Gortari and Costa Rican President
Rafael Calderon--will take effect on Jan. 1, 1995.  Under the
accord, both countries would eliminate import tariffs in three
stages over a five to ten year period for more than 8,400
products traded between the two countries.  Once the accord
takes effect next year, import duties will be immediately
eliminated on 65% of the goods exported from Mexico to Costa
Rica, and on 85% of the products that Costa Rica ships to its
partner (for more details, see SourceMex - Economic News on
Mexico, 03/09/94).
     Von Bertrab also adamantly stressed that Mexico will not
impede efforts to extend the NAFTA throughout the hemisphere.
In February, the Office of the US Trade Representative (USTR)
had circulated a confidential memorandum among top officials
in President Bill Clinton's administration warning that Mexico
may attempt to slow NAFTA's expansion in order to prolong that
country's unilateral benefits as the only Latin American
member of the trade accord (see Chronicle 03/03/94).
     "More than anything else, the calendar for NAFTA's
expansion will be influenced by political and economic
conditions in the US," said Von Bertrab.  (Sources: Agence
France-Presse, 03/04/94; Notimex, 03/08/94; New York Times,
03/09/94)

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        HAITI
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HAITI: U.S. TRADE WITH HAITI INCREASES, DESPITE EMBARGO

     According to figures released by the US Census Bureau on
Feb. 17, US trade with Haiti increased in 1993, despite the
international trade embargo.  The embargo--which has United
Nations and Organization of American States backing--is aimed
at pressuring the military government which overthrew
President Jean-Bertrand Aristide to step down from power,
allowing the exiled president to return to the country.
     The total value of US-Haiti trade grew from US$316.2
million in 1992 to US$375.6 million last year, nearly a 19%
jump.  Between 1992 and 1993, US imports from Haiti increased
from US$107 million to US$154.3 million, while exports to
Haiti climbed from US$209.2 million to US$221.3 million.
     Much of the trade is attributed to the maquiladora
sector.  Under ex-president George Bush, an exemption clause
was included in the embargo which allows goods assembled in
Haiti from US materials to be imported into the US.  Clothing
and baseballs are among the biggest imports.
     More than 50 US companies presently trade with Haiti
under the exemption clause, according to the Amalgamated
Clothing and Textile Workers Union, which says that workers
are subject to "sweatshop" conditions in Haitian factories.
(Source: Associated Press, 02/18/94; Inter-American Trade
Monitor, 03/07/94)

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      PARAGUAY
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PARAGUAY: STATE AIRLINE PARALYZED DUE TO FINANCIAL CRISIS

     In early March, directors of Paraguay's state-run airline
(Lineas Aereas Paraguayas, LAP) announced that the company's
three planes would remain grounded until the government pays
off US$15 million in overdue debts to contractors, and
resolves some of the firm's other financial problems.
     In mid-February, LAP's directing board had reported that
since mid-1993, the airline has been losing about US$1 million
per month.  The directorate recommended that the government
sell off the firm to private investors, rather than attempt to
bail LAP out of virtual bankruptcy (see Chronicle 02/24/94).
     As of March 8, however, all LAP flights ground to a
complete halt due to lack of operating funds, according to LAP
president Jorge Diaz de Bedoya.
     "Yesterday we should have flown the DC-10 to Miami, but
there wasn't even enough money for fuel," said Diaz on March
9, after LAP was forced to cancel its evening flight to Miami
the night before.  "We have outstanding debts of US$41
million, and we cannot resume flying unless the government
pays US$15 million in debt to contractors almost immediately."
     LAP owns two planes--a DC-8 and a Boeing 707--and it
leases a DC-10.  In December, LAP canceled its flights to
Madrid, Brussels, and Hamburg due to lack of funds, reducing
the company's active routes to just Miami and a few South
American cities.
     LAP could remain paralyzed until it is privatized, since
President Juan Carlos Wasmosy's administration would rather
sell the airline than bail it out.  Reportedly, President
Wasmosy will meet in mid-March with a group of Chilean
investors interested in buying the company.  (Sources: Agence
France-Presse, 03/05/94; Associated Press, 03/09/94)

PARAGUAY: INFLATION JUMPS MARKEDLY IN FIRST TWO MONTHS OF 1994

     According to the Central Bank (Banco Central de Paraguay,
BCP), accumulated inflation for the first two months of 1994
reached 6%, nearly a full percentage point higher than in the
same time period in 1993.
     The BCP attributed the jump in prices to government
decisions in January and February to raise gasoline prices and
rates for most public services, such as transportation.  In
addition, President Juan Carlos Wasmosy authorized a one-time
wage hike of 15% at the beginning of the year, under the
condition that there would be no more salary increases until
at least 1995.  As a result, monthly consumer prices climbed
3.1% in January, and barely decreased in February to 2.9%.
     Most local economists now doubt whether the government
will be able to achieve its goal of 15% annual inflation by
year-end 1994, since the consumer price index would have to
increase by less than 9% over the next ten months.  In fact,
some independent organizations tracking inflation predict a
30% accumulated jump in consumer prices by the end of the
year.
     In 1993, the consumer price index grew by 20.4%, up from
18% annual inflation in 1992 (see Chronicle 01/13/94).
[Sources: Agence France-Presse, 01/28/94; Notimex, 03/08/94]

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         PERU
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PERU: GOVERNMENT SELLS LOCAL & LONG DISTANCE
TELEPHONE COMPANIES FOR US$2 BILLION

     On Feb. 28, the Peruvian government sold 35% of shares in
both of the two state-run telephone companies--Compania
Peruana de Telefonos (CPT) and Empresa Peruana de Telefonos
(Entelperu)--for US$2 billion to a consortium headed by
Spain's Telefonica de Espana.  The sale represents one of the
most profitable privatizations to date in Latin America, since
the government received nearly four times the base price it
had originally requested.
     The government first announced that it would sell off its
shares in the CPT and Entelperu in October 1993 as part of a
broad effort to accelerate the privatization program in Peru.
Under this year's privatization drive, the government plans to
auction off some 80 state firms, about 40 of which by the end
of June.  In addition to the telecommunications network, the
largest firms up for sale include the oil company Petroperu,
the electricity distribution system in the capital run by
ElectroLima, and a slew of state mines and mining
installations (see Chronicles 10/14/93 and 11/11/93).
     Thus, the sale of the state telecommunications monopoly
marks the first in a series of large-scale privatizations.
The government offered 35% of shares in each of its two
telephone companies.
     The CPT--which provides telephone service exclusively in
the capital--was a mixed state-private sector company.  Until
now, the government had controlled 20% of shares in the firm--
which is a publicly listed company--and the remainder of stock
was distributed among a diverse group of shareholders.  Under
the privatization plan, the government sold all of its shares,
and another 15% stake was offered as part of a capital
expansion operation, giving the winning bidder majority
control.
     In Entelperu--which handles all domestic service outside
the capital, as well as long-distance and international calls-
-the government owned 100% of shares.  Although only 35% was
sold on Feb. 28, the remainder of stock will be auctioned off
at a later date.
     A total of eight foreign firms and four Peruvian
companies participated in the auction, pulling together into
three competing consortia.  The first consortium, headed by
the US firm Southwestern Bell, included Korea Telecom, the
Carso Group of Mexico, Daewoo Telecom of South Korea, and
Peru's Banco del Credito.  The US's GTE Corporation headed a
second group, which included the Portuguese company Radio
Marconi and Brazil's Empresa de Telecomunicaciones S.A.
Finally, Telefonica de Espana joined together with three
Peruvian firms: the beer company Cerveceria Backus y Johnston
S.A., Banco Wiese, and the construction firm Grana y Montero.
     In early February, the government had set the total base
price for both companies at US$525 million, although the new
owners are required to invest at least US$1.5 billion during
the first five years of operations in an aggressive effort to
expand telecommunications installations around the country.
In the end, all three consortia entered bids substantially
above the base price, with the GTE group offering US$803
million, and the Southwestern Bell consortium US$853 million.
     Nevertheless, the US$2.002 billion offered by Telefonica
de Espana's group apparently took everybody by surprise, since
it is four times the base price set by the government, and it
totals US$346 million more than the combined offers of the
other two competing bidders.  In fact, according to government
officials, the amount offered represents the equivalent of
about 59% of the government's annual tax income, or nearly
5.2% of the nation's GDP.
     "The sheer magnitude of the investment boosted this sale
up to international proportions," boasted President Alberto
Fujimori in a spontaneous press conference shortly after the
auction.  "What group of investors bets US$2 billion in a
Latin American country?  This is a hard-earned achievement
that clearly demonstrates the success of the modernization
process in Peru."
     The bid for CPT and Entelperu represents Telefonica de
Espana's largest single investment to date in Latin America.
The company has been aggressively expanding into the regional
market, and it now holds about US$1.5 billion in shares in
four other South American telephone companies: US$817 million
in Telefonica de Argentina (TASA), US$520 million in Compania
de Telefonos de Chile (CTC), US$70 million in Entel Chile, and
US$120 million in Compania Nacional de Telefonos de Venezuela
(see Chronicle 10/28/93).
     Spokespersons for Telefonica say the firm considered the
Peruvian purchase an essential part of its plans to dominate
the telecommunications industry in the region, especially
since the company was outbid by other firms when the Mexican
government sold its company--Telefonos de Mexico (TELMEX)--in
1991.  In addition, Telefonica says the CPT and Entelperu
should prove highly profitable, since domestic demand for
telephone services in Peru far outweighs present
telecommunications capacity in the country.
     "The Peruvian market offers huge possibilities for
expansion, since at present there is an average of only 2.7
telephone lines per 100 inhabitants, compared to the average
12 lines in most other Latin American countries," said Ignacio
Santillana, a high level Telefonica consultant.
      Indeed, Peru has the least developed telecommunications
infrastructure in all of Latin America and the Caribbean, with
the exception of Haiti.  Under the terms of privatization, the
new owners must expand the number of telephone lines in Peru
from 600,000 at present to about 2 million by the end of 1998,
at which time all towns with 500 inhabitants or more must have
telephone service installed.  The government also expects the
costs of service to drop by a minimum of 20%, and possibly up
to 50%, in the same time period.
     The CPT-Entelperu deal is expected to attract even more
foreign investment to the country in the coming weeks and
months.  In the first week after the Feb. 28 auction, daily
trade more than doubled on the Lima Stock Exchange (Bolsa de
Valores de Lima, BVL), according to Jose Luque Otero,
president of the Exchange.  On March 3, for example, BVL
authorities reported 3,059 transactions worth US$62.5 million,
a new record which is more than twice the average daily value
of trade on the Exchange until now.  Much of the increased
trade was linked to businesses related to the
telecommunications industry, such as distributors of spare
parts and other accessories.
     The government also hopes that the telecommunications
auction will increase foreign interest in other upcoming
privatizations, especially the huge oil company Petroperu,
valued at about US$1 billion.  The government's Special
Privatization Committee (Comite Especial de Privatizacion,
CEPRI) will begin selling PetroPeru's assets in June, starting
with a commercial sales terminal in the city of Callao.
     Before the end of March, CEPRI will also auction off the
Centromin mining complex, which includes seven lead, zinc,
silver, and copper mines, as well as smelting-refining
installations and independent hydroelectric plants.  In early
February, CEPRI set Centromin's base price at US$340 million,
of which US$280 million must be paid for in cash, although the
remainder can be bought with foreign debt paper.
     In fact, Centromin will be the first state company in
which interested buyers will be allowed to use debt paper as
part of their bid.  In late 1993, the government approved a
law that permits debt equity swaps for up to 90% of the value
of a company (see Chronicles 11/18/93 and 12/02/93).
     Still, according to CEPRI president Raul Otero, the
government will award Centromin to the bidder which offers the
most cash above and beyond the US$280 million cash base price.
In addition, the eventual owners will be required to invest at
least US$240 million in Centromin in the first three years of
operations.
     So far, 17 foreign firms have expressed interest in
buying Centromin, including seven Canadian companies, two
Japanese, two from South Korea, and one firm each from
Britain, South Africa, Mexico, Germany, the US, and
Switzerland.
     In addition to Centromin, the government owns two other
mining companies--Mineroperu and Tintaya--both of which will
also be sold this year.  Unlike Centromin, however, the other
two will not be auctioned off as a package deal, but rather
will be sold in parts.
     On March 8, for example, the Canadian firm Cambior Inc.
won an exclusive contract to explore and exploit Mineroperu's
"La Granja" copper deposit, in the north east.  Cambior won
the concession over four other bidders--two Canadian and two
from the US--by offering to invest nearly US$800 million,
which will include the construction of a high-tech treatment
plant and a refinery.
     In the second half of April, Mineroperu will also sell
the Ilo copper refinery in the south of Peru, the San Antonio
de Poto gold deposit, and the Cajamarquilla zinc refinery.  An
attempt to auction off the Ilo refinery failed on Feb. 2, when
the five foreign companies that had announced their
participation in January all withdrew from the auction at the
eleventh hour.  According to Raul Otero, the US$75 million
base price set by CEPRI was apparently too high for the
bidders.  At the next auction in April, CEPRI plans to lower
the amount requested, although officials have so far refused
to publicly reveal the new price.
     Meanwhile, the government continues to sell off small
state firms around the country.  On Jan. 31, the Chillon
corrugated paper factory was sold on the Lima Stock Exchange
for US$6.5 million, nearly the twice the base price set by the
government.  The factory, which has the capacity to produce 70
million boxes per year, supplies 50% of the domestic market,
although it is currently operating at only 35% of its
installed capacity.  According to a BVL spokesperson,
Credibolsa--a stock exchange agent--bought the firm, although
it is unclear if Credibolsa was acting on behalf of other
investors.  (Sources: United Press International, 01/31/94;
Inter-American Trade Monitor, 03/07/94;; Agence France-Presse,
01/18-20/94, 01/25/94, 02/02-04/94, 02/10/94, 02/11/94,
02/15/94, 02/16/94, 02/22/94, 02/28/94, 03/02/94, 03/03/94,
03/07/94, 03/08/94; Spanish news service EFE, 02/01-03/94,
03/02/94, 03/03/94, 03/07/94, 03/08/94; New York Times,
03/01/94, 03/08/94)

PERU: GOVERNMENT REPORTS MODERATE
INFLATION IN FIRST TWO MONTHS OF 1994

     On March 1, the official statistics agency (Instituto
Nacional de Estadistica e Informatica, INEI) reported that the
consumer price index for the first two months of 1994 rose
3.7%, representing an important decline in monthly inflation
since the end of 1993.
     Last year, monthly inflation had decreased fairly
steadily, dropping from an average of more than 3.5% per month
in the January-June period, to an average of only about 2% per
month in the second half of the year.  In fact, from
September-November of 1993, the consumer price index remained
at about 1.6% each month.  But then it jumped again in
December to 2.5%, largely due to a 13% hike in fuel prices in
late November.
     By January, however, INEI reports that inflation declined
to 1.84%, and then it dropped slightly again to 1.82% in
February.
     "We have achieved relative price stability," said INEI
head Felix Murillo.  Murillo confidently predicts the
government will reach its goal of 25% annual inflation by
year-end 1994, which, if achieved, would represent a drop of
nearly 15 percentage points compared to 1993.
     From 1988 to 1990, the country suffered from
hyperinflation, with annual consumer price increases of nearly
8,000%.  But in 1991, President Alberto Fujimori's government
launched a rigid austerity drive to lower the country's fiscal
deficit.  Since then, inflation has dropped steadily each
year, declining to 139% in 1991, to 56.7% in 1992, and then to
39.5% in 1993.  (Sources: Agence France-Presse, 02/01/94,
03/01/94)

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       URUGUAY
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URUGUAY: GOVERNMENT RECEIVES BID FOR STATE AIRLINE FROM A
CONSORTIUM OF URUGUAYAN, ARGENTINE, & BRAZILIAN FIRMS

     On March 4, the government accepted a bid by a tripartite
consortium to purchase Uruguay's state aviation company PLUNA
(Primeras Lineas de Navegacion Aerea).  A state Advisory
Commission (Comision Asesora de Adjudicacion) will now review
the offer to determine if the buyers are capable of running
the airlines profitably.
     When President Luis Lacalle's administration announced in
mid-January that the government would reopen PLUNA to bids
from interested buyers, eight foreign firms quickly expressed
interest (see Chronicle 02/24/94).  By late February, five
companies had actually purchased the rights to participate in
the auction: the Argentine firm LAPA, Brazil's VARIG, Spanair
and Iberia of Spain, Aerolineas Argentinas, and the Chilean
airline LADECO.
     When the deadline for offers closed on March 4, however,
only one bidder--a consortium formed by LADECO, VARIG, and a
small Argentine maritime transportation company Buquebus--
actually presented a bid for PLUNA.
     Apparently, the government's refusal to postpone the
deadline discouraged the other interested firms from
participating, since all the other companies that had
purchased bidding rights requested that the government give
them more time to draw up proposals for the auction.  In fact,
the Argentine firm LAPA had especially pleaded for more time,
since that company was negotiating with the US firm
Continental Airlines to form a consortium to buy out PLUNA.
     The Advisory Commission is now studying the offer by
LADECO and its partners, and the terms of the bid remain
confidential.  Still, PLUNA directors warn that the company
will not be awarded to the LADECO consortium until the
Advisory Commission not only rules that the offer is
acceptable to the government, but that the buyers are capable
of running the airlines profitably.  In September of 1993, the
Brazilian company VASP (Viacao Aerea Sao Paulo) offered to buy
PLUNA, but the Advisory Commission later rejected that bid due
to VASP's financial instability (see Chronicle 01/13/94).
     "The Commission will urgently review the offer to respond
as quickly as possible," said PLUNA president Juan Jose
Piaggio.  "But the government will set no time limits for the
review, since the possibility still exists that the offer will
be ruled inviable, as happened in the previous auction in
1993."  (Sources: Agence France-Presse, 02/23/94, 02/24/94,
03/02/94, 03/05/94)