When Toledo assumes power on 28 July his administration will face an economy deeply mired in recession.  However, Toledo does not come empty-handed.  While on a tour in the United States and Europe, the former World Bank economist collected substantial financial aid from international organisations and western governments, which have proven eager to support the Peru’s democratisation process.  

Nomination of new economy minister causes relief.  President-elect Alejandro Toledo, who will assume power on 28 July, nominated Pedro Pablo Kuczynski as economy minister.  Other cabinet members have not yet been selected and are expected to be announced only a few days before Toledo’s inauguration.  Even though Kuczynski’s designation was widely expected, it brought a sigh of relief from investors who had been concerned that the delay in his nomination indicated differences with Toledo over the government's new emergency social and production plan (PESP, Programa de Emergencia Social Productivo).  The PESP aims to deliver on the wide-ranging promises made in Toledo’s electoral campaign and thus to satisfy high public expectations for jobs and poverty relief.  The PESP will be focused on the impoverished highlands where support for Toledo has been strongest and will create jobs mainly via public construction works.  Since financial details have not yet been released, markets fear that the PESP could include excessive fiscal spending.  Toledo and his economic team presented their emergency plan to investors and international lenders in the United States and Europe.  Apparently, the program has found support, since Toledo announced that they secured some US$ 1.7 billion in international financial aid, more than triple the amount he had planned to obtain. 

GDP numbers revised downward.  Even though the schedule of actual loan disbursements from the new aid package has not yet been announced the first instalments are unlikely to arrive before the end of the year. However, the aid package announcement should serve as a confidence boost, particularly to the business community and comes at a welcome time when the economy remains mired in recession.  In May, the economy contracted another 0.4% compared to the same month last year, the sixth consecutive monthly contraction.  On a positive note, the 0.4%-contraction was above market expectations of 1.0%.  In addition, numbers for March and April were revised upward to -3.1% in March (previous: -3.6%) and -0.3% in April (previous: -0.9%).  As a result, economic activity dropped “only” 1.6% in the first five months of the year compared to the same period last year.  The National Statistical Institute also revised GDP numbers for 1999 and 2000 downward from 1.4% to 0.9% and from 3.6% to 3.1% respectively (Note: All GDP numbers in the following forecast pages reflect the changes as provided by INEI and the economy ministry on 5 July and the Central Bank Bulletin from 6 July).  Since the adjustments lower the comparison base for this year growth forecasts should be affected positively.

Economy bottomed out in first quarter but annual forecasts were slashed again.  The May contraction was led by construction, which dropped 6.4% over May 2000.  This represents a marked improvement compared to the 7.8% contraction reported for April and the negative double-digit rates seen between September 2000 and March 2001.  The construction industry is benefiting from a reactivation of public works programmes, whereas private construction activity remains subdued.  The manufacturing industry expanded by 0.7%, driven by strong primary manufacturing in the wake of a favourable fishing season.  Non-primary manufacturing remained in negative territory.  Wholesale and retail trade activities dropped 1.1%, unchanged from April, indicating that consumers are not yet willing to anticipate an improvement of economic conditions in their shopping behaviour.  Nevertheless, the GDP rates reported for April and May indicate that the economy bottomed out in the first quarter.  Following the 2.6% GDP contraction in the first quarter, the Consensus expects the economy to contract in the second quarter, but to strengthen in the last to quarters.  For the year as a whole, panellists now forecast GDP to grow only modestly, down 0.3 percentage points over last month’s forecast.  Toledo’s announcements to revive the economy have not yet impressed analysts.  In 2002, the growth forecast for the economy next year remained unchanged.

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