PERU'S FIRST QUARTER ECONOMIC SURPRISE

UNCLAS LIMA 001995

SIPDIS

STATE FOR WHA/AND, WHA/EPSC AND EB/IFD/OMA
STATE PASS USTR (BHARMAN)
STATE PASS AID (LAC/SA)
TREASURY FOR G. SIGNORELLI
COMMERCE FOR 4331/MAC/WH/MCAMERON
DEPT OF ENERGY FOR D. PUMPHREY/ GARY WARD/SARAH
LADISLAW/MANOLIS PRINIOTAKIS
DEPT PASS TO INT/USGS/RESTON FOR DMENZIE/AGURMENDI

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD ENRG SOCI PGOV PE
SUBJECT: PERU'S FIRST QUARTER ECONOMIC SURPRISE

REF: LIMA 1825


1. (U) Summary: Just-released Q106 economic results
indicate that Peru's economy grew 6.85 percent for the
quarter, surprising the GOP and analysts alike. Given
January's and February's relatively moderate growth rates of
4.4 percent and 4.9 percent, March's 10.7 percent growth not
only exceeded analysts' projections but set a nine-year high
for monthly GDP growth. End Summary

Strong Growth Continues
--------------


2. (U) Peru's economy grew for the 19th consecutive quarter,
expanding 6.85 percent between January and March 2006,
according to the Ministry of Economy and Finance. Exports
continued to play a strong role in GDP growth, growing 22
percent to $4.6 billion. Imports reached $3.4 billion, a 28
percent increase, including nearly $1 billion in capital
goods imports. Although still under control, inflation has
been inching upwards, registering 2.9 percent on an
annualized basis.

March Came in Like a Lion...
--------------


3. (U) Based on January's and February's solid, if
unspectacular GDP growth of 4.4 and 4.9 percent
respectively, analysts had been predicting quarterly growth
of around 5 percent. Practically all sectors of the economy
grew at a faster pace in March than for the quarter as a
whole, although local press focused on dramatic increases in
construction and fishing as the primary drivers of March's
(and therefore the quarter's) success. Construction and
construction-related manufacturing activities grew 20
percent in the first quarter, especially in the urban
commercial and residential real estate markets. The fishing
sector grew 38 percent and fishing-related manufacturing
(fishmeal and canning) grew 93 percent in March, driven
largely by the GOP's decision in late March to lift the ban
on anchovy fishing in the north that had been in place in

2005.

...But Did it Go Out Like a Lamb?
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4. (U) There are also indications that the economy has
cooled off since March. Reftel reported on a slowdown in
the growth rate in textile production. Construction
industry sources report that builders have taken a wait-and-
see approach to the elections -- further confirmed by a
dramatically lower growth rate in cement sales (2.4 percent
year-on-year for April versus 14.2, 15.1, and 22.5 percent
growth for the first three months). And, imports grew only
4.1 percent in April, significantly below the 26 percent
average growth rate over the last 20 months. (Note: Q1 2006
export results are not yet available. End note.)

Inflation Bears Watching
--------------

5. (U) Although inflation remains within the Central Bank's
target ceiling, it increased steadily in the first quarter
to 2.9 percent annualized. Inflation was driven largely by
supply shocks in fresh vegetables, potatoes and other roots,
and sugar (inflation was 1.6 percent excluding these
products). There is some concern that continued high
gasoline prices will eventually translate into higher
transport costs. Given these risks, analysts and the
Central Bank will be closely monitoring inflation in the
coming months.

It's a Good Start
--------------

5. (U) Based in part on March's strong results and in part
on increasing confidence among analysts and investors (based
on recent opinion polls) that Alan Garcia will be the next
president, 2006 GDP targets are likely to be revised upwards
in the next few weeks to between 5.5 and 6 percent.

STRUBLE