With the government promising to yank its fiscal belt even tighter and crack down on spending after a political crisis scuppered this year's deficit and growth targets, wary investors are likely to sit out the storm, delaying Peru's privatization plans.

Economists say that will leave the government hunting for some $1.8 billion to service the national debt in 2001.

They could struggle to find it from overseas lenders whose view of Peru has darkened, or be forced to borrow from the domestic financial system or pension funds, jacking up interest rates.

Foreign banks are already leery of extending credit lines in a climate where bankruptcy looms for many firms buckling under debts and facing lackluster consumer demand. By August, 1,043 companies had filed for Chapter 11 so far this year.

Peru plunged into crisis earlier this month when President Alberto Fujimori, responding to a corruption scandal involving his powerful former spymaster and key advisor, announced new elections would be held five years early in which he would not run.

Peru has only just emerged from a tumultuous election -- Fujimori won a flawed May runoff vote boycotted by the opposition -- that badly rattled investor confidence in this poor Andean country.

"The effects (of the crisis) are being felt. For example, we were evaluating some credit lines ... foreign banks are reexamining their policies toward Peru," Luis Alcazar, Finance Director of the country's biggest zinc producer, Volcan, told Reuters.

"Uncertainty is going to continue until there are elections," he added. Fujimori has yet to name the date, but has indicated he wants polls in March to allow a July handover.

"Everything depends on the transition period, which is key ... Meanwhile, the recession will be sharper, there be will higher prices, more corporate restructuring, more bankruptcies and more unemployment."

"LOST YEAR"

A senior banking source said one thing in Peru was clear: things would get worse before they got better.

"Companies had expected the light at the end of the tunnel by the middle of next year. Now it has been delayed until early 2002. Suddenly, the tunnel has got a lot longer," he said.

"In general in the business world, the outlook (for Peru) is pretty bleak. Anyone who's got an investment plan will put it off unless it's a real slam-dunk. It's a lost year," he added.

Although diplomats take Fujimori at his word and expect Latin America's longest serving elected leader to leave the presidential palace by next July, many analysts expect him to seek to maintain an influence over the political scene.

And since Fujimori has no anointed heir, meaning he could try to put a "puppet" in the palace, and pull the strings, analysts say.

That would increase the likelihood that the government would spend heavily in the run-up to elections. Expenses incurred by the government in this year's campaign contributed to an austerity drive announced in August to cut spending by $125 million.

Julio Velarde, a professor at Lima's Pacifico University and a former economic ministry advisor, said that was why a transition government would be the best solution now.

"The reason spending goes up (before elections) is because the party in government wants to influence the outcome. That would not be the case with a transition government," he said.

"In every election, there is a loosening of the fiscal budget in the run-up to the election and a tightening immediately afterward," said the senior banking source. "Now we're going from one election into another, so fiscal tightening won't happen. Fiscal revenues will go down."

He forecasts a 2000 budget deficit of 2.5 percent of gross domestic product -- outside the 2.0-2.1 percent goal set with the International Monetary Fund and compared with 2.6 percent of GDP in 1999.

The government has already said it will not meet its growth target of 5.5 percent this year.

Bruno Boccara, Director of Latin American sovereign ratings at ratings agency Standard & Poor's -- which last week darkened its outlook on Peruvian debt, as did Moody's Investors Service -- said, however, he did not expect punishment from the IMF.

"My guess is that now Peru is at the start of a reform process that will include institutional and political reforms, I imagine the IMF would be basically supportive," he said.

FINDING THE FUNDS

But Peru still needs to come up with the cash to meet interest payments on its massive $19.3 billion public debt.

"The preliminary strategy of Economy Minister Carlos Bolona, which has been interrupted a bit, was to get funds from multilaterals -- the World Bank, the Inter-American Development Bank and the Andean Development Corporation," he said.

With Peru's goal of raising $650 million in privatization revenues this year now in doubt -- despite government assurances that projects, such as a second stage sale of the Camisea natural gas field, would go ahead as planned -- the senior banking source said Peru had few options.

"Raising cash externally will be difficult because international banks and capital markets will be leery about Peru in the next few months. If they seek to raise money internally, they could borrow here or borrow from funds in the pension funds, which would drive up interest rates," he said.

Interest rates, however, are already very high. The official lending rate is now 12.5 percent.

"If they borrow internally, the market can finance them, but not for long -- only until the (July) handover," he said.

What remains to be seen is what state the economy will be in by then.

"Fujimori could be handing over a time bomb. He's got to make sure it doesn't explode in his hands," the source said.