Peru Business Forecast Report

Rising Unrest To Threaten Investment Climate Although recent GDP data reaffirmed our view that Peru will avoid a recession this year, the overall economic and political situation in the Andean country remains tense. Rising public unrest increases the macroeconomic uncertainty factor over the medium term. Moreover, in the Q409 Peru Business Forecast Report we voice our concerns that a broader spill-over of socio-economic implications from widespread resistance to foreign mining and exploration activity in the Amazon region could throw the country off its path towards greater regional economic convergence with Brazil and Chile.

Although Peru's general election remains some way off, we are concerned about the potential for more populist political forces to increase their influence on policymaking. Our long-term core view for a burgeoning consumer market remains on track, but in this report we focus on the growing number of risks facing our baseline scenario.

Cabinet changes and reform proposals by President Alan Garc?-a suggest that the government is looking to distance itself from June's violent protests, and increasingly wants to be seen to address Peru's deeply entrenched problems of corruption and regional disparity. Although Prime Minister Javier Vel??zques Quesqu?(C)n has called on congress to prioritise the debate on mid-term elections for the legislature, under Peru's current constitution, the executive continues to be untouchable by popular referendum. Moreover, the focus on holding legislators accountable via mid-terms is encouraging given Peru's track record. However, here too, we believe that the proposed changes aim to take further attention away from the government and its heavy-handed approach towards the June protests.

We have only moderately adjusted our 2009 real GDP growth forecast from 2.3% to 2.0% on the back of the latest economic data. The main reason for our downward adjustment is the alarming rate at which gross fixed capital formation contracted in Q209. Gross fixed capital formation contracted by 16.2% year-on-year (y-o-y) in the second quarter, marking the biggest drop in fixed investment since Q199. Following a very weak first quarter expansion of 3.9% y-o-y, this brings the H109 total to -7.0%, the weakest reading since 2001. Fixed private investment in particular fell off a cliff in Q209, contracting by 20.8% y-o-y - the biggest quarterly drop on record in the 1994 GDP series tracked by the Banco Central de Reserva del Per?? (BCRP).

Peru's business environment could be braced for greater uncertainty over the coming years. The outbreak of violence in the northern Amazon region of Bagua in June has highlighted just how sensitive the issue of foreign investment into the country's remote areas is. The political backlash of the clashes between indigenous communities and government forces has forced the administration of President Garc?-a to backtrack on two presidential decrees, which were a vital part of the recently signed US free trade agreement, allowing foreign firms easier access to the vast amounts of natural resources in the Amazon region. With the government growing increasingly unpopular and social tensions still high, a deterioration of the business environment cannot be ruled out.