What Fujimori failed to deliver in his 28 July inaugural speech he compensated for by appointing well-respected politicians to key cabinet positions.  Particularly the appointment of free market economist Boloña was well received and helped dispel concerns raised by the more state-interventionist penchant evident in Fujimori’s inaugural address.  Meanwhile, the economy recovers and growing domestic demand has led to a spike in inflation.

Economy enjoys strong first half 2000.  On 11 August, the National Statistical Institute (INEI) announced that economic activity increased 5.1% in June compared with same month last year.  The figures, which are calculated with the new base year of 1994, further indicated that national production increased 6.0% in the first half of the year compared with the same period in 1999.  In the first six months of the year, all economic sectors contributed positively to growth.  Favourable weather conditions paved the way for a strong 20.2% recovery in the fishing sector following the weak fishing season in the first half of 1999.  The manufacturing industry was the second best performing sector, increasing 11.6% over the same period last year.  Other sectors also put in a strong performance:  Commerce increased 8.3%, agriculture peaked 5.9% and electricity and water industry gained 5.0% over first half 1999.  Only two sectors exhibited a weak performance in the first half:  mining increased a meagre 2.9% and the construction industry brought up the end with 1.6% growth over the same period 1999.  The construction sector has hardly recovered from the recession in 1999, when it contracted some 12.3%, despite strong public investment in the first half of 2000.  The weak performance of the construction sector indicates that tight credit conditions continue to stifle private sector investment.  In 1999, limited credits stifled the private sector, which as a result only accounted for 19% of investment of the construction sector.

Inflation rebounds.  Consumer prices spiked again after remaining two months virtually unchanged (May: +0.02%; June: +0.06%).  According to INEI, the consumer price index increased 0.52% in July, the second highest reading since April 1999.  As a result, annual inflation reversed the downward trend set at the beginning of this year and peaked at 3.5%, up from 3.2% in June.  Prices were pushed by higher consumer demand, which rose in the wake of the national holidays (Fiestas Patrias) at the end of July.  Food and beverages, housing, fuels and electricity as well as transport and communications were the main product groups responsible for the July price hike.  Since the July increase was mainly driven by transitory phenomena (higher fuel prices and additional “fiesta”-demand) the upward movement in prices is unlikely to persist.  However, the anticipated pick-up in domestic demand towards the end of the year should raise inflationary pressures somewhat.

Exchange rate recovers amid subsiding political jitters.  The Nuevo Sol continued to strengthen in July, but has not yet gained all of the ground lost in the wake of the political uncertainties related to the presidential elections.  While the more stable political climate should strengthen the Nuevo Sol further, the higher than expected July inflation may counteract the improvement. 

Continue >>