Country Report Peru July 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 challenges and divisions among his supporters owing to rising inflation and social conflicts.
• Having gained the backing of the country's business sector, unlike in his ruinous first term as president (1985-90), Mr Garcia will continue to implement the investor-friendly policies of the past decade.
• Governability will be constrained by the ruling party's minority position in the legislature, where alliances are fragile, and will also face serious challenges stemming from high expectations of improved social conditions.
• 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

• Around 50 mining unions began an indefinite national strike on June 30th in a bid to force Congress to approve legislation that would lift the cap on profit-sharing for mine workers and improve pensions.
• The Congress, which has single-digit public approval ratings, was facing one of its worst crises in years in mid-June following a public scuffle and shouting match among legislators over proposed constitutional reforms.
• At its June monetary policy meeting, the Banco Central de Reserva del Peru (BCRP, the Central Bank), raised its reference interest rate to 5.75% (from 5.5% previously), its sixth consecutive rise and fourth increase in 12 months.
• In its latest macroeconomic forecast, the BCRP acknowledges that it will overshoot its inflation target in 2008, for the second consecutive year. The Bank expects inflation to end 2008 at 4%, well above the target range of 1-3%.
• Real GDP expanded by 13.3% year on year in April, well above the official forecasts. This was the strongest monthly growth in 13 years and boosted the GDP growth rate for the first four months of 2008 to 10.5%.
• Surging imports continue to narrow the trade surplus despite strong export performance. The trade surplus narrowed by 14% year on year, to US$1.9bn, in January-April.