Peru - Economic Briefing December  2001

Peruvian Economy Recovers from Recession but Is Close to Deflation (continued)

Current account imbalance improves as trade balance goes positive

In the third quarter, the current account balance registered a deficit of US$ 141 million, a significant improvement from the US$ 250 million deficit recorded in the second quarter and only marginally worse than the US$ 120 million for the same quarter last year.  The improvement in the current account balance is mainly attributable to changes in the trade balance which reverted from a US$ 16 million deficit in the second quarter to a US$ 41 million surplus in the third quarter.  In addition, the services balance also improved somewhat, whereas transfers remained virtually unchanged. 

The annual current account deficit now stands at US$ 1.4 billion and is expected to remain at that level for the whole year.  Next year, panellists forecast the current account deficit to remain unchanged, as higher imports, in the wake of increasing domestic demand, will be compensated for by higher mining exports. 

The surplus in the capital account balance was more than sufficient to cover the current account gap but dropped from US$ 454 million in the second quarter to US$ 272 million in the third quarter, as higher private sector long-term capital inflows were not sufficient to compensate for lower public sector long-term inflows and the strong outflow of short-term capital. 

Exchange rate continues to strengthen

In November, the Nuevo Sol continued its strengthening trend, which started in early June when the currency hit a high at 3.63 Soles per US$.  Since then the currency has appreciated more than 5% in nominal terms, ending the month at 3.44 Soles per US$.  Key factors behind the Sol's strengthening have been the start of operations at the Antamina mine, disbursements of foreign direct investment in the banking sector and the expiration of forward positions that have not been renewed. 

Panellists do not see the currency continuing this trend, however, and expect the Sol to finish this year at 3.48 per US$, which would still represent a small annual appreciation in nominal terms.  However, owing to the steep drop in inflation, the currency has actually lost ground in real terms.  In 2002, the currency is expected to depreciate only marginally. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.