PERU'S ECONOMIC BOOM CONTINUES IN 2007

UNCLAS SECTION 01 OF 02 LIMA 000103 SIPDIS SIPDIS COMMERCE FOR 4331/MAC/WH/MCAMERON TREASURY FOR MMALLOY USTR FOR BHARMAN AND MCARRILLO E.O. 12958: N/A TAGS: ECON EFIN USTR PE SUBJECT: PERU'S ECONOMIC BOOM CONTINUES IN 2007 SUMMARY -------------- ¶1. 2007 was a banner economic year for Peru, despite a devastating 8.0 earthquake in August just south of Lima. The stellar numbers for 2007 continue an upward trend, as Peru reaps the fruits of earlier economic reforms and liberalization, as well as the current Garcia Administration's prudent economic policies. Peru's economy has grown every month for the past 78 months, including an impressive 8.3% in 2007, the biggest GDP increase in a dozen years. Peru is the only county in the hemisphere to have posted at least 4% GDP growth for each of the past 6 years while keeping average inflation under 2%. ¶2. Soaring private investment and domestic demand fueled the 2007 growth, with export growth playing less of a role than in previous years. 2007 also brought Peru low inflation, a budget surplus, decreasing debt, and declining poverty rates. Topping the cake, the U.S. Congress ratified and President Bush signed the U.S.-Peru Trade Promotion Act in December, and the free trade agreement should enter into force later this year. Most Peruvians consider the FTA crucial for continuing growth through trade and investment, helping to reduce poverty, and locking in the hard-won economic and social reforms of the past decade. End Summary. VIBRANT GROWTH SINCE MID-2001 -------------- ¶3. Following a 7.6% expansion in 2006, Peru racked up another great economic year in 2007. Minister of Economy and Finance Luis Carranza announced January 8 that Peru's economy grew by an estimated 8.3% in 2007, its biggest GDP increase in 12 years. GDP per capita rose to an estimated $3,931 (over 50% higher than in 2004). The official figures for 2007 will be released on February ¶15. ¶4. Carranza highlighted that the Peruvian economy has been growing steadily since mid-2001, making the current expansion Peru's longest. Canada's Scotiabank said in a recent report that Peru is living its Golden Age. GDP in 2007 was fueled by vigorous domestic demand, with private investment increasing 25.5% and private consumption 7.4%. ¶5. For the January-November period, construction surged 15.8% from 2006 to 2007, manufacturing increased 10.7%, retail and wholesale trade 9.9%, and other services 9.0%. Agriculture and livestock grew a meager 1.9% and mining and hydrocarbons 1.1%. Although exports were the main driver of growth in previous years, they grew only 4.7% over the first three quarters of 2007. FDI SURGING -------------- ¶6. The importance of Foreign Direct Investment (FDI) in Peru is increasing, and accounted for almost a third (31.1%) of total Gross Fixed Private Investment during the first three quarters of 2007. Based on Central Bank (BCR) data, Post estimates FDI totaled close to $6 billion in 2007. The Hunt Oil-led Peru LNG gas export project alone spent about $750 million in Peru in 2007 (and the total investment will be $3.6 billion). FDI has been well diversified over the past few years, including sectors like power generation, oil and gas, mining, banking, and retail trade. RESISTING INFLATIONARY PRESSURE -------------- ¶7. Inflation (based on the average Lima Consumer Price Index, CPI) edged down to 1.8% in 2007 from 2.0% in 2006. However, measured at year-end, inflation edged up to 3.9% from 1.1% a year earlier. This late-year surge is projected to continue into 2008, with average inflation expected to reach 2.4-3.0% in 2008. Price increases in food and clothing were the main causes of inflation. ¶8. The GOP's "Petroleum Products Stabilization Fund," created as a temporary fuels prices containment mechanism in 2004, continued to help keep inflation low. Under this mechanism, oil refineries draw from the fund when world oil prices exceed a certain price range, and replenish the fund when world oil prices fall below that price range, thereby avoiding passing oil price increases to the consumer. Analysts at the private Banco de Credito (BCP) told us they estimate that the direct effect of the mechanism was a 0.9% reduction in the Lima CPI in 2007. FULL PUBLIC COFFERS & APPRECIATING CURRENCY LIMA 00000103 002 OF 002 -------------- ¶9. A pleased Carranza noted that Peru had a fiscal surplus of about 2.9% of GDP in 2007 and of 2% in 2006, after running deficits for every year since at least 1970. Public debt dropped to 28.9% of GDP. Tax revenues soared 13.3% in real terms in 2007. Foreign reserves surged to a whopping $27.7 billion from $17.3 billion in ¶2006. The currency (new sol) averaged 3.13 per USD, a 4.4% appreciation in the year, partly the result of massive support operations by the Central Bank. BETTER THAN DOW & EASIER CREDIT -------------- ¶10. The Lima Stock Exchange (BVL) was the second most profitable in the region, after Brazil, with the general index rising over 36% in ¶2007. The BVL grew by a world-best 168.3% in 2006. Credit (bank loans) soared to $22.3 billion, a 41.2% increase over 2006 and the highest percentage increase in a dozen years. Consumer loans increased 58.8% and loans to small enterprises rose 49.1%. The delinquency rate on loans continued its downtrend, reaching an all-time low of 0.93% for commercial loans and 2.69% for consumer loans. MORE JOBS & LESS POVERTY -------------- ¶11. Employment increased by 5% nation-wide and 10% in Lima, bringing Lima unemployment down to 7.9%. Peru's poverty rate has long hovered around 50%, with extreme poverty at 24%. These numbers are finally beginning to come down, and the Garcia Administration's ambitious aim to reduce poverty to 30% by 2011 now seems possible. Poverty was 48.7% (17.4% extreme) in 2005 and 44.5% (16.1% extreme) in 2006. Most of this progress has been in Lima (24.2% poverty and 0.9% extreme poverty in 2007),along the coast, and in urban areas. Poverty remains extremely high elsewhere, particularly in the rural highlands (76.5% poverty and 46.5% extreme poverty in 2007). ROSY OUTLOOK -------------- ¶12. Business executives and analysts are bullish on Peru's near future in spite of potential risks on the international front. There are high expectations that, once implemented, the trade agreement with the U.S. will provide a boost, and there are trade negotiations underway with numerous countries. Peru is hosting the Asia Pacific Economic Cooperation (APEC) forum as well as the European Union - Latin America Summit in 2008, which should bring additional foreign interest. The BCR's December survey on macroeconomic expectations showed executives and analysts forecasting GDP growth near 7% in 2008, and between 6-7% for 2009. Minister Carranza projected that per capita GDP would reach $5,279 in 2011. COMMENT: PERU ON THE RIGHT TRACK -------------- ¶13. Peruvians see the U.S.-Peru Trade Promotion Agreement (PTPA) as a sign of positive things to come. Many see the PTPA as not only fostering growth through trade and investment, but also as a crucial mechanism to lock in the economic and social reforms of the last decade. Observers agree that Peru has been on the right track, and is likely to continue in this direction. 2008 is a showcase year for Peru, which has become a model for economic success through open markets and fiscal discipline. The GOP's most pressing challenge is to convert this positive macroeconomic situation into effective social and economic policies that reach marginalized Peruvians in the poor highlands and hard-to-reach jungle areas. NEALON