Country Report Peru May 2009

Summary

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, 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.
Economic growth will slow to 1.3% in 2009 as external demand weakens sharply. Growth in 2010 will rise to 2.5% as US demand begins to recover andtogether with new investmentboosts export volumes.
As a result of sharply slowing demand, consumer price inflation will fall back within the official target of 1-3% in 2009. Inflation will rise in 2010 as demand recovers.

A former president, Alberto Fujimori (1990-2000), was found guilty of human rights abuses and sentenced to 25 years in prison in early April. Both the trial and sentencing have exposed deep social divisions within Peru.
An ambush by Sendero Luminoso in the province of Ayacucho left 15 soldiers dead. Although the guerrilla group's resurgence does not present a threat to national security, there are indications that its size and influence are rising.
At its April monetary policy meeting the Banco Central de Reserva del Peru (BCRP, the Central Bank) lowered its benchmark interest rate by 100 basis points (to 5%), the largest single cut ever.
Falling corporate profits and slowing economic growth led to a sharp reduction in direct tax revenue in March, while falling trade volumes brought down revenue from customs.
Peru signed a free-trade agreement (FTA) with China in late April. The pact covers more than 90% of goods, including Chinese electronics and machinery and Peruvian fishmeal and minerals.
Economic growth slowed dramatically in February (to just 0.2%) as the impact of the global recession on the domestic economy intensified.
Merchandise export earnings totalled US$1.8bn in February, down by 27% year on year, while the import bill fell by 19% to US$1.5bn. As a result, the trade surplus contracted by 54% year on year, to US$254m.

Source: Country Report