Country Report Peru September 2009

Outlook for 2009-10

• The Garcia administration 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 2011 elections.
• A sharp revenue fall and downward revisions to our 2009 GDP growth forecast have led us to revise our forecast for the 2009 and 2010 fiscal deficits, from 2.3% and 1% of GDP in our August report, to 3.4% and 1.3% of GDP now.
• The worst of the global GDP contraction is over, on the back of fading inventory reductions and as aggressive fiscal and monetary stimuli have an impact. We have revised up our global GDP forecasts in 2009-10 as a result.
• Poor second-quarter data have led us to revise down our growth forecast for 2009 to 1% (from 1.3% last month), although a stronger global outlook has led us to revise up our growth forecast for next year from 2.7% to 3%.
• The current-account deficit will narrow in 2009 to 0.6% of GDP as the trade surplus and services and income deficits all narrow. The deficit will widen again in 2010 (to 1.7% of GDP) as the income deficit widens again.

Monthly review

• Mr? Garcia continues to struggle on the domestic policy front, despite attempts to take hold of the policy debate. An appeal to nationalist sentiment and talk of popular decentralisation have failed to disguise Peru's social troubles.
• The Central Bank continued its aggressive monetary easing in August, cutting its reference rate to 1.25%, a record low, and has signalled that although no further cuts are likely, it will remain vigilant.
• The fall in tax revenue collection deepened in July, and with expenditure growth still strong, the central government deficit reached 0.5% of forecast GDP, compared with a 2.4% surplus in the same period of 2008.
• GDP contracted by 1.1% year on year in the second quarter, led by a very sharp fall in investment and continued destocking. The external sector provided a net positive contribution to growth.
• Inflation returned to its target 1-3% range in July, helped by subdued domestic demand and continued negative producer price inflation.
• The trade surplus strengthened in May and June owing to sharp falls in the import bill, which offset still substantial falls in export earnings.