Peru Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	57
ISBN Number	1745-0640
Product Code	BMI02151

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Summary

In the Peru Q309 Business Forecast Report we assess the outlook for the Peruvian economy in light of the generally upbeat Q109 real GDP data. Although from a macroeconomic perspective Peru remains among the low-risk countries in the Latin American region, we caution that recent violent clashes between government security forces and local communities in protest against highly unpopular land laws could severely undermine the country's investment climate going forward. Over the longer term, this could have significant political and economic implications - we have revised down the country's long-term political risk rating to 56.5 from 61.0 on the back of a deteriorating 'characteristics of society' score. Finally, we raise concerns about what appear to be overextended global commodity prices and the potential for a shift in market sentiment. This would have considerable repercussions for Peruvian assets, particularly the nuevo sol, prompting us to err on the side of caution.

The escalation of tensions between local indigenous communities in the Amazon region of Peru and federal security forces will significantly affect the country's overall political risk profile in our view.

We believe that a restoration of normalcy is unlikely, even in light of congress pushing to suspend the most controversial presidential decrees, initially designed to provide easier access to Peru's Amazonian resources for foreign mining, exploration and logging firms. We expect a considerable cabinet reshuffle by President Alan Garc?-a in the coming months, as the president will look to cut losses from the current popular backlash. However, a full reversal in policy will be unlikely, in our view, as the authorities will seek to honour the terms of the recently signed free trade agreement (FTA) with the US.

First-quarter real GDP growth in Peru came in at an eight-year low of 1.8% year-on-year (y-o-y), affirming our view that domestic demand experienced a sharp slowdown during the early stages of 2009. Though the upcoming Q209 data are likely to show relatively subdued economic activity, we believe that Q109 could have formed the peak of the rate of economic deceleration in Peru, as the country remains in our 'low risk' category of Latin American economies. The first-quarter real GDP growth figure supports our projection for 3.2% economic growth in Peru this year.

Solid macroeconomic fundamentals in Peru provide a long-term attractive investment climate for foreign retail firms. This has recently been seen with the announcement of a PEN60mn investment by US food giant Kraft Foods, as part of a plan to step up promotions, and expand its production and storage facilities. The move comes shortly after soft drink and snack food giant PepsiCo announced the acquisition of Peru-based snack producer Karinto and is an indication of the current attractiveness of the market, which has been one of Latin America's most resilient performers during the economic downturn. We caution, however, that rising public unrest could significantly jeopardise Peru's business environment.

Content

Executive Summary
Significant Slowdown Ahead
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Violent Clashes to Leave Scar on Political Landscape
- The Violent Escalation of Clashes between Local Indigenous Communities and Government Security Forces Is Likely to Have Longer-Term Political Consequences for The Peruvian Government.
- Tabl E: Political Overvi Ew
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Q1 Gdp: An Encouraging Picture
- We Are Encouraged by Peru's First Quarter Real Gdp Data, and, with 1.8% Y-O-Y Growth, Expect This to Form The Nadir of Economic Activity This Year.
- Monetary Policy
- Easing Cycle Running Its Course
- Peru's Central Bank Continued to Slash Interest Rates Aggressively in June, Lowering The Policy Rate 100bps to 3.00%.
- Balance of Payments
- A More Benign Outlook for The Current Account
- We Are Revising Our 2009 Current Account Deficit Forecast from 6.1% of Gdp to 3.8% on The Back of A More Constructive Outlook on Peru's Commodity Exports.
- Exchange Rate Policy
- Sol Well Supported but Downside Bias
- Strong Commodity Prices and An Improved Current Account Outlook Will Provide Strong Support for The Peruvian Nuevo Sol in Our View.
- Copper to Average US$4,300/Tonne in 2009
- Supply and Demand Pointing to Market Tightness
- We Have Revised up Our Average Copper Price Forecast for 2009 to US$4,300/Tonne, from US$3,500/Tonne Previously, on The Back of Historically Tight Inventory Levels amid Ongoing Chinese Stockpiling of The Red Metal.
- Regional Outlook
- Banking Sector: Lessons Learnt, but Risks Remain
- Historically The Achilles' Heel of The Regional Economy, Latin America's Banking Sector Has Been Much Better Placed This Time around to Ward off Global Financial Headwinds.
Chapter 3: 10-Year Forecast
- The Peruvian Economy to 2018
- 2009-2018: Coming off The Export Boom
- Economic Growth in Peru Will Moderate to An Average Growth Rate of 4.5% over The next 10 Years.
Chapter 4: Special Report
- The Outlook for Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Retail
- Executive Summary
- Our Assumption for Consumer Spending per Capita Is for An Increase from US$2,525 in 2007 to US$4,250 by 2013.
- Tabl E: Key Retail Indicators , 2006-2013
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Economic Activity
- Table: Monetary Policy
- Table: Balance of Payments
- Table: Exchange Rate Policy
- Table: Long-Term Macroeconomic Forecasts
- Table: Loan-to-Deposit Ratios, Selected States
- Table: Loan Growth, Selected States
- Table: Commercial Banking Business Environment Ratings, Selected States
- Table: Bmi Business and Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Latin America Annual Fdi Inflows
- Table: Bmi Trade Ratings
- Table: Top Export Destinations
- Table: Global Assumptions
- Table: Global & Regional Real Gdp Growth
- Table: Commodities