Fiscal Deficit (%GDP)

Source: Banco Central de Reserva del Peru/ *Projections: MEF

Basic macroeconomic balance and lower country risk 
 
Economic growth has benefited from exchange and price stability in Peru now lasting over ten years. As a consequence of the firm commitment of economic authorities to the necessary fiscal balance and a conservative monetary policy, Peru has preserved stable price level and exchange rates. Peru has the lowest inflation in Latin America.  Its very stable exchange rate fluctuates freely governed by supply and demand.

Inflation fluctuates within the established target band rate from 1% to 3%. Although the local currency has revalued occasionally in recent years, the involved magnitudes were very small compared to the average increase of international prices of relevance for Peruvian foreign trade.

Exchange Rates in Latin America (January index 2001 = 100)

Source: Bloomberg and Banco de Crédito del Perú

Inflación en América Latina 

Source: Banco Central de Reserva del Perú, Chile, Mexico and Argentina / Data as of October 2006

   
International analysts and capital markets have recognized the strong fundamentals of the Peruvian economy. At the end of 2006, the EMBI+ country risk indicator awarded by investment bank JP Morgan Chase reached 120 basis points (its lowest level ever), meaning the discount (or interest) rate applied to Peruvian debt at that time was only 1.2 percent points above US Treasury Bonds.

In the last five years, the drop has exceeded 5 percentage points (more than 500 basis points) leading to major cost savings in some local projects.

Moreover, two of the main international rating companies have rated Peruvian public debt instruments one step below investment grade. Standard & Poor’s (S&P) upgraded Peru’s long-term debt risk rate in foreign currency, from BB to BB+, and its rating of long-term sovereign debt in domestic currency from BB+ to BBB-. Fitch Ratings had done so before, taking the lead in upgrading Peru’s credit risk.

Credit Classification - Latin America Comparison

Source: Standard & Poor's, Moody's and Fitch Rating

Peru Country Risk Vs Latin American Risk (EMBI+)
(in basis points)
Figures as of June 2007   

Source: Bloomberg 

KEY INDUSTRIES

At the end of 2006, the best performing industries were construction (14.8% growth), trade (12.3%), agriculture (7.2%), manufacturing (6.9%) and other services (7.2%).

Construction’s strong growth is reflected more in shopping centers, independent house starts, infrastructure building and an expanding realty market.  Construction is strongly driven by government-supported programs such as MiVivienda (social housing program) and others with similar funding schemes. Main infrastructure works and large projects were Cerro Verde mining company’s primary sulfur plant expansion, Southern Copper’s Ilo smelter plant upgrade, the construction of the Pillones dam and the start of the Inter-ocean highway, among others.

GDP per Sector 2006 (% var)

Source: Banco Central de Reserva del Perú

Agriculture grew an average 7.2%, reflecting the 7.9% and 6.6% increases in crop and livestock production, respectively. Driven by farm exports, this sector is making Peru known worldwide for its asparagus, artichokes, piquillo pepper, red peppers (páprika) and other produce.

Manufacturing industry’s  growth (6.9%) was mainly driven by non-primary manufacturing that typically adds more value and has a greater impact in creating jobs. Growth focused on serving expanding local markets, and consolidating old and capturing new foreign markets. Remarkably, manufacturing industries grew against the background of a more strongly competitive local and external environment. Food, beverages, and tobacco; and paper and printing were the most dynamic industries.
 

   Domestic Gross Product by Productive Sectors (Percentage Var.)

1/ Preliminary / 2/ Including forestry

Source: Banco Central de Reserva del Peru, INEI

Potential Growth Sectors   
  
Main industries with major growth potential include agribusiness and farm exports, fish farming, forestry, tourism, mining and hydrocarbons, and services, among others. Peru has been specializing in high-price products growing, like vegetables and fruits. We are currently the leading country in asparagus and dry red pepper (páprika) exports. Peruvian asparagus exports exceeded US$ 290 million, while páprikaexports reached US$ 73.3 million in 2006. Due to agroexports fast development, it is expected that some 300,000 ha will be allocated to horticulture and fruit growing for exports in the mid-term. This growth is sustained by significant investments made by the private sector.

In Peru, aquiculture and fish farming are expected develop and consolidate as a leading Peruvian exports industry profiting from optimum sea and continental conditions, availability of nutrients and great biodiversity. Moreover, Peru’s clean seas, rivers, lakes and lagoons, combined with local expertise and leadership in exports worldwide of fishmeal used for animal feed, create additional opportunities for growth.

Some 1.7 million foreign tourists visit Peru each year.  This figure is still low taking in consideration the country’s landmarks. Not surprisingly, some years tourism has grown about 20%. Tourist arrivals are expected to reach three million.  At least three  independent travel circuits need to be developed. 

The Southern Circuit, currently the most attractive, may attract up to 2 million tourists per year in the medium term once access to some areas improves and traveler flows are rearranged accordingly. Developing the Northeast Circuit is now a priority.  Private companies have shown interest. The Central Circuit’s main attraction is a visit to the city of Lima and its surrounding areas. Longer trips may cover two or more circuits.

Forests also provide potential for development.  Peru is the world’s ninth country for forest surface, second only to Brazil in Latin America.  Located in the South American tropics where most of the world’s rainforests are found, Peru has 78.8 million ha of natural forests and over 8 million ha of lands available for reforestation.

It is estimated that US$ 3 billion per year can be earned from exports of timber and its byproducts, to meet world demand worth over US$ 100 billion and thereby create steady jobs for some 400,000 Peruvians.
 

In the energy and mines sector, successful prospecting resulted in the announcement of important projects. Investments in mining will reach US$ 2 billion a year, also including non metallic mineral projects, and extraction and use of gas and petroleum.

Several other investments will be made in the manufacturing, trading, real estate and services sectors, totaling annual private investments of US$ 20 billion.