Country Report Peru June 2009

Outlook for 2009-10

• The government of Alan Garcia will struggle to recover authority following clashes between indigenous demonstrators and security forces in June in which more than 60 people were killed.
• The government's attempts to deliver on pledges of improved social conditions will be hindered by weak implementation capacity, boosting the appeal of the opposition ahead of the 2011 elections.
• Policymakers are relatively well placed to mitigate the damage inflicted on the domestic economy by the global financial crisis, owing to Peru's sound public finances and a comfortable cushion of international reserves.
• Countercyclical measures and Asian commodity demand will enable Peru to escape recession but GDP growth will slow to 1.3% in 2009, rising to 2.6% in 2010 as strengthening external demand boosts exports and investment.
• Sharply slowing demand and subdued import prices will enable consumer price inflation to fall back within the official target of 1-3% in 2009. Inflation will rise in 2010 as demand recovers.

Monthly review

• A long-standing dispute between the authorities and indigenous groups in the eastern province of Amazonias over rights to natural resources erupted into the worst violence in a decade in early June, resulting in at least 60 fatalities.
• The government's official poverty rate fell sharply in 2008--despite historically high inflationto 36.2% of the population. Just over 12% of the population is now classified as living in extreme poverty (on less than US$1.50 per day).
• At its monthly monetary policy meeting, the Banco Central de Reserva del Peru (BCRP, the Central Bank) slashed its reference interest rate by a further 100 basis points to 3%, the lowest level since November 2005.
• The central government accounts closed the first four months of 2009 with a modest surplus of Ns1.3bn (US$409.8m, 0.3% of GDP) following two consecutive quarterly deficits in the second half of 2008.
• Real GDP expanded by only 1.8% year on year in the first quarterthe slowest quarterly growth rate in seven yearsafter recording growth of 6.5% in the fourth quarter of 2008 and 10.9% in the third.
• The consumer price index (CPI) fell by 0.04% in May, reducing 12-month inflation to 4.2%, still outside the Central Bank's 1-3% target.
• The current-account deficit narrowed to US$478m (1.7% of GDP) in the first quarter. This was a result of sharp falls in investment, which cut imports by 26.8% year on year, and services debits (owing to falling freight costs).

This report covers the following industry codes:
SIC Code: 60;37;2834;80
NAICS Code: 52;336;3254;62