Country Report Peru August 2008

Outlook for 2008-09

• Two years into his five-year term, Alan Garcia of the centre-left Partido Aprista Peruano (Apra) is facing growing discontent as his government attempts to deal with the population's high expectations of improved social conditions.
• Although widespread demonstrations and strikes will continue, the Garcia administration will remain committed to the investor-friendly policies of the past decade while seeking to contain rising inflationary pressures.
• Governability will be constrained by the ruling party's minority position in the legislature, where alliances are fragile; potential ideological splits within Apra could further weaken the party's legislative position.
• Following real GDP growth of 9% in 2007, growth is forecast to remain strong in 2008-09, driven by rising real incomes, investment related to the Camisea natural-gas project and rising exports.
• As a result of rising global inflationary pressures, consumer price inflation will remain above the official target of 1-3% in both 2008 and 2009 despite a stable currency and vigilant monetary policy.

Monthly review

• The number of strikes and violent protests has continued to rise. A 24-hour national strike was held on July 9th to protest Mr Garcia's economic policies. There were also demonstrations against the free-trade agreement with the US.
• Rising consumer price inflation, which reached 5.7% in June, has pushed MrGarcia's approval ratings to new lows.
• In response to rising price pressures, the Central Bank raised its reference interest rate to 6% (from 5.75% previously). It was the third increase since the beginning of 2008. It also raised reserve requirements.
• Following the resignation of Luis Carranza, Luis Valdivieso was sworn in as minister of finance on July 14th. Mr Valdivieso's appointment was widely praised; he is expected to maintain Mr Carranza's disciplined fiscal policies.
• Real GDP growth fell to 7.3% in May, down from over 13% in April, mainly owing to lower fish catches. Growth was also negatively impacted by a two-day public holiday owing to Peru's hosting of the EU-Latin America summit.
• Strong job growth continues to lower the unemployment rate, which fell to a five-month low of 7.9% in June. According to official figures, during May employment growth rose by double digits for the first time this decade.
• The import bill rose by over 65% year on year in May, to US$2.5bn, pushed higher by strong increases in imports of both intermediate goods and capital goods.

Source: Country Report