Country Report Peru March 2009

Outlook for 2009-10

• Social unrest is set to increase in the coming year as administrative inefficiencies and political fragmentation impair the effectiveness of policies aimed at mitigating the impact of the global economic downturn.
• The government's attempts to deliver on pledges of improved social conditions will be hindered by weak implementation capacity; this will boost 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.
• Collapsing industrial production in OECD countries is hitting emerging economies more severely, leading us to make further downward revisions to our forecasts for global trade and growth in 2009-10.
• Economic growth will slow to 3% in 2009 as external demand weakens sharply. Growth in 2010 will rise to 4% as US demand begins to recover andtogether with new investmentboosts export volumes.
• Despite sharply slowing demand, consumer price inflation will remain above the official target of 1-3% in 2009; we expect inflation to fall back within the target range by mid-2010.

Monthly review

• There is growing concern that the Sendero Luminoso (Shining Path) Maoist guerrilla movement may be starting to regain a foothold in areas of Peru that might once more make it a force that undermines public security.
• The popularity of Alan Garcia, has risen, owing to his economic policy response to the global crisis, and approval of the appointment of a new interior minister with a reputation for being tough on corruption and crime.
• A former president, Alberto Fujimori (1990-2000) is close to being sentenced for human rights abuses alleged to have taken place under his direct orders when president.
• Implementation of the economic stimulus plan, announced in January, has been halting, and many aspects of the programme are unlikely to be implemented before mid-2009 at the earliest.
• Interest rates were cut in March for the second consecutive month as inflation fell and domestic demand showed further signs of easing.
• Economic growth reached its slowest pace in five years in the fourth quarter of 2008, bringing full-year growth to a still-strong 9.8%.
• The current account recorded a small deficit in the fourth quarter.

Source: Country Report