Peru - Economic Briefing February 2003

El Niño Clouds Less Overshadowing Than Expected

The economy continues to expand along a very favourable growth trajectory and after having finished 2002 in the top spot as the region’s fastest growing economy. The outlook for this year looks increasingly positive. Even the dreaded weather phenomenon El Niño, which threatened the country’s fishing industry and agriculture seems to be milder than expected.

Buoyant economy in November continues trend of resilient economic growth in 2002
In November, the economy expanded by 5.9% compared to the same month the in 2001, according to Central Bank estimates. The November reading was well ahead of economic growth registered in October last year, when the economy expanded “only” 4.5% and underlines the vigorous state of the economy, which last year experienced the fastest growth in the region. In the first eleven months, the economy expanded a solid 4.8% compared to the same period in 2001, which is also the rate the government estimates for the year as a whole. The latest Central Bank estimate sees GDP growth at 4.9% . Nevertheless, the Consensus is a notch short of the government estimate, with growth seen at 4.7% in 2002.

Strong fishing boosts primary-based manufacturing
The November performance was propelled by fishing, which on a year-on-year basis expanded a whopping 57.7%. The fishing sector is notorious for its erratic shifts, as the performance depends to a large extent on climatic conditions and government imposed fishing bans. Only a month before, in October, fishing declined 27.3% on an annual basis. While fishing itself does not constitute an important share in total output, it serves as a vital input to primary manufacturing, which typically follows the erratic pattern of the fishing industry, mitigated only by the more constant flow of other primary inputs. As a result of the favourable fishing season in November, manufacturing based on raw materials expanded a very solid 16.0% in November compared to a 6.8% contraction in October. This more than doubled the growth rate of total manufacturing from 3.1% in October to 7.4% in November, even though growth in non-primary industries slowed from 5.7% in October to 5.2% in November.

Mining and construction disappointing in November
The positive development of fishing and primary manufacturing was contrasted by mining and construction, which performed much worse than in October. Mining expanded a meagre 2.6% compared to 4.5% in October. The weakening was entirely due to a slowdown in metal mining, whereas fuels actually improved compared to October. Nevertheless, despite the November trough the sector performed very well last year. In the first eleven months of 2002, metal mining added 13.8% over the same period 2001 and thus constituted the fastest growing sector of the economy. Throughout most of the year, metal mining was boosted by the ramping up of the Compania Minera Antamina mining operations. In 2002, the company increased copper output 110.8% to 341,412 tonnes, which was over 40% of total Peruvian copper production in 2002. Antamina’s zinc output soared even more, by 227.9% to 260,434 tonnes, almost in reach of the country’s largest zinc miner, Volcan Compania Minera, where output declined 13.6% to 275,935 tonnes. Finally, construction declined 0.3% compared to November 2001 and thus constituted the only sector with negative growth. Moreover, the November construction reading ended a string of 13 consecutive months of growth, which had lifted the sector after a crippling two-year recession.

Economy to grow strongly in 2003, led by private consumption and external sector
The majority of analysts believes that the positive development in 2002 will carry over into this year and the Consensus for GDP growth was lifted yet another 0.1 percentage point to the current 3.5%. The Central Bank is even more upbeat about the perspectives for the Peruvian economy. In its annual inflation report, published in January, the Bank estimates that GDP will grow 4.0% this year. As in the past year, growth is seen to be broad-based, with positive contributions from both the domestic side of the economy and the external sector. Monetary authorities expect private consumption to expand at a 4.0% clip, virtually unchanged from 2002, amid a moderate increase in employment and higher disposable income. Public consumption however, is expected to drop off from 2.7% in 2002 to 1.6%. The Bank anticipates a notable uptick in private investment. In 2002, private investment grew at an anaemic 0.6% rate, albeit with an upward trend throughout the year. In 2003, private investment should be boosted by higher profits in the last year and increased opportunities in the external sector, which are likely to emerge from to the Andean Trade Promotion and Drug Eradication Act (ATPDEA, Acuerdo de Promoción Comercial Andina y de Erradicación de la Droga). The ATPDEA will renew and extend the benefits granted unilaterally by the U.S. government under the Andean Trade Preferences Act (ATPA) until the end of 2006. Finally, private investment will also receive a boost by large-scale mining projects, such as Camisea, Southern and Yanacocha. Public investment should grow 5.9% in 2003, following on three consecutive years of contraction. Monetery officials anticipate public investment to be boosted by large scale projects in reconstruction of infrastructure and highways.

Construction will lead growth amid higher private investment and important infrastructure projects
On a sectoral basis, 2003 growth will be led by construction, which is seen to expand 5.5% amid the above mentioned public sector infrastructure projects and an increase in private investment. In addition, construction will profit from an increase in mortgage loans, which the Central Bank estimates will grow 12%, the same pace as in 2002. Mining will loose the pole position it has held in the past two years, as no major new mining projects are likely to boost output this year. Nevertheless, mining will grow 4.1% this year, amid higher production of copper (Southern Toquepala and BHP Billiton Tintaya), gold (Yanacocha) and zinc (Volcan).