Country Report Peru October 2008

Outlook for 2009-10

• In the remainder of his term, the main challenge for the president, Alan Garcia, will be to maintain social 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.
• Although widespread demonstrations and strikes will continue, the Garcia administration will remain committed to the investor-friendly policies of the past decade, while seeking to contain rising inflationary pressures.
• 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 6.5% in 2009 as higher inflation curbs private consumption and external demand weakens. In 2010 growth will rebound, boosted by the FTA with the US.
• Despite a stable currency and 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.

Monthly review

• The number of strikes and violent protests in Peru has continued to rise. There were 161 social conflicts in August, more than double the number in August 2007.
• Mr Garcia's public approval ratings fell to their lowest point in two years in September (below 20%), following widespread social unrest and continuing price rises.
• At its September monetary policy meeting, the Central Bank raised the policy interest rate by 25 basis points, to 6.5%, the highest rate in seven years.
• Real GDP growth slowed to 8.3% in July (from 11.5% in June); growth for the first seven months of 2008 eased to 10.1% year on year (from 10.3% in the first half).
• The government continues to promote further exploitation of Peru's hydrocarbon resources: in September, it awarded 17 hydrocarbons exploration and exploitation lots and selected a company to build a key gas pipeline.
• The trade surplus continued to narrow in July, contracting by 67% year on year (to US$304.6m) as a result of continued strong growth in import spending.