Country Report Peru November 2008

Summary

In the remainder of his term, the main challenge for Mr Garcia will be to maintain stability in a country where deep social and regional divisions are contributing to growing political tensions.
The government's attempts to deliver on pledges of improved social conditions will be constrained by weak implementation capacity; this will boost the appeal of the opposition ahead of the 2011 presidential election.
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.
Economic growth will slow to a still-robust 5.5% in 2009 as external demand weakens. In 2010 GDP growth will rise slightly, boosted by the FTA with theUS.
The Central Bank will continue to intervene in the foreign exchange market in order to prevent an excessive weakening of the nuevo sol against the US dollar.
Despite vigilant monetary policy, consumer price inflation will remain above the official target of 1-3% in 2009; in 2010 we expect inflation to fall back within the target range.

A corruption scandal involving the award of state hydrocarbons contracts, dubbed "petrogate," led to the resignation of the entire cabinet including its popular prime minister, Jorge del Castillo, on October 10th.
Mr Garcia's appointment of Yehude Simon, a popular left-leaning governor, as prime minister could damage Apra's tacit alliance with the Fujimorista bloc in Congress, on which it relies to pass legislation.
The monetary authorities moved quickly in October to boost liquidity in the face of the international financial crisis; the Central Bank intervened heavily in the foreign exchange market in an effort to keep the exchange rate steady.
Twelve-month consumer price inflation decelerated to 6.2% in September, down slightly from 6.3% in August. Monthly inflation fell to 0.57% in September (from 0.59% in August).
Real GDP expanded by 8.9% year on year in August, faster than in July (8.3%) but slower than in June (11.5%), boosting growth for the first eight months of the year to 9.9%. Growth continues to be driven by strong domestic demand.
The trade surplus narrowed by 11% year on year in August, to US$475.8m, as a result of continued strong growth in import spending.

This report covers the following industry codes:
SIC Code: 59
NAICS Code: 44