Country Report Peru September 2008

Outlook for 2008-09

• Two years into his five-year term, Alan Garcia of the centre-left Partido Aprista Peruano (Apra) is facing growing discontent as his government struggles to deliver on pledges of improved social conditions.
• 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.
• Growth is forecast to remain strong in 2008, driven by rising real incomes, gas and mining investment and rising exports, before slowing in 2009 as higher inflation curbs private consumption and external demand weakens.
• As a result of rising global inflationary pressures, consumer price inflation will remain above the official target of 1-3% in both 2008 and 2009 despite a stable currency and vigilant monetary policy.

Monthly review

• Congress's repeal of two land use decrees following indigenous protests has underscored the government's difficulties in implementing its commitments under the free-trade agreement (FTA) with the US.
• Rising inflation, energy problems and social unrest lowered Mr Garcia's public approval ratings to just 22% in August. On the first anniversary of a major earthquake, many criticised the speed of reconstruction efforts.
• At its August monetary policy meeting, the Central Bank raised its policy interest rate by 25 basis points, to 6.25%. Since the BCRP's current tightening cycle began in mid-2007, the rate has been raised by a total of 175 basis points.
• In an effort to relieve inflationary pressures, the government has proposed a modest 2009 budget to Congress. Proposed total expenditure of Ns72.4bn (US$24.5bn) is 1.8% higher in nominal terms than the 2008 budget.
• Twelve-month consumer price inflation jumped to 6.3% in August, its highest level since September 1998 and well above the Central Bank's upper limit of 3%. Producer price inflation reached 10%.
• Boosted by domestic demand growth of 17.4% in June, real GDP expanded by 11.5% year on year. Economic growth for the first half of 2008 was 10.3%, the fastest expansion in 13 years.