Country Report Peru October 2009

Outlook for 2010-11

• The government will struggle to recover authority in an environment of continued social conflict, and will seek to deflect attention from social issues.
• The government's attempts to deliver on pledges of improved social conditions will be hampered by weak implementation capacity, boosting the appeal of the opposition ahead of the April 2011 elections.
• After widening to 3.5% of GDP in 2009, the fiscal deficit will narrow in 2010-11 to 1.5% of GDP and 0.5% of GDP respectively, as economic growth rises and the stimulatory spending boost lasting into early 2010 is gradually unwound.
• We have revised up our price forecasts for metals, and the increases in prices will help Peru's terms of trade to strengthen in 2010.
• Peru's economy will start a gradual recovery in the third quarter of 2009, and we expect GDP to grow by 3.4% in 2010 and 4.3% in 2011, led by relatively firm domestic demand, with exports supported by the mild global recovery.
• After undershooting the target of 2% (±1 percentage point) in 2009, inflation will return to target in 2010-11, supported by domestic demand growth, higher average oil prices and positive producer price inflation.
• After narrowing sharply in 2009, the current-account deficit will widen to 2% of GDP by 2011, owing mainly to a renewed widening of the income deficit as profit remittances rise again in line with investor profitability.

Monthly review

• Following a number of recent high-profile attacks by Shining Path rebels, the government has announced plans to overhaul its counter-insurgency strategy, although the prospect of a continued rise in attacks remains strong.
• A former president (1990-2000), Alberto Fujimori, has pleaded guilty in his fourth and last scheduled trial (he is already serving 25 years in prison) to protect the 2011 electoral prospects of his daughter, Keiko Fujimori.
• The housing minister, Francis Allison, has stepped down in an ongoing phone-tapping scandal that had led to the resignation of the entire cabinet in October 2008, further damaging the image of Peru's Congress.
• There have been divergent trends in fiscal revenue, with personal income tax rising and corporate direct taxes continuing to fall sharply.
• Although economic growth returned in July in seasonally adjusted terms, when output rose by 1.9% month on month, the outturn marked barely positive growth in the first seven months of the year.
• A sharp fall in imports has widened the trade surplus, contributing along with a reduced income deficit to a second-quarter current-account surplus.

This report covers the following industry codes:
SIC Code: 70;79;39
NAICS Code: 72;71;31