Peru - Economic Briefing June 2003

Social Unrest Despite Buoyant Economy (continued)

Toledo calls state of emergency amid demonstrations and strikes
The public sector balances could be further strained in the coming months, as the Toledo administration is under increasing pressure to deliver on its campaign promises to improve the dire economic situation of the poorer income spheres, which could have severe impact on the fiscal balances. In the past month, numerous interest groups have gone on strike and popular demonstrations prompted Toledo to impose a state of emergency on almost half of Peru on 27 May, ordering the army to restore public order, at the cost of one life and many wounded. Meanwhile the Toledo administration has given in to many popular demands, including fixed minimum prices for freight tariffs and providing a 14% salary increase for teachers, likely to be extended to the police force and public health service workers. The fiscal impact of these measures could reach up to 0.5 percentage points of GDP.

Consumer prices drop again in May
In May, consumer prices dropped 0.03%. The decline represents the second consecutive month of dropping consumer prices, as April recorded a decline of a similar magnitude (-0.05%). Declining prices for transport and communications as well as lower housing costs were the main drivers behind the May price decline, contrasted by price increases in clothing. The May figure lowered the annual headline inflation rate to 2.4% from 2.6% in April and 3.4% in March. Headline inflation is now a notch below the Central Bank’s year-end target of 2.5% with 1% margin to either side of the mark. The Consensus is optimistic that monetary authorities will achieve their target and sees year-end headline inflation at 2.4%, down a notch from last month’s forecast.

Current account virtually unchanged from same period last year
In the first quarter of 2003, the current account incurred a deficit of US$ 382 million, virtually unchanged from the deficit recorded in the same period last year. The trade deficit declined to US$ 8 million from US$ 65 million in the first quarter of 2002. Healthy export performance (+28.5% year-on-year) explains the first quarter narrowing in the trade deficit, as import grew at a robust but lesser pace (+23.9% yoy). Exports surged amid very buoyant traditional exports, in particular mining, oil and fishing exports. The strong import growth rate reflects a surge in intermediate goods purchases (+35.5% yoy), owing to the higher oil price, whereas capital (+16.0% yoy) and consumer goods (+11.0% yoy) increased at a more moderate rhythm.

Financial account surplus doubles amid strong inflows of the Camisea gas project
The financial account balance registered a surplus of US$ 891 million, more than sufficient to cover the current account gap. The first quarter capital account surplus is more than twice the level recorded in the same period last year and was due to the higher inflows of capital into the private and public sector, as well as a higher entry of short-term capital. Private capital inflows profited mostly from direct investment in the Camisea gas project, which alone accounted for US$ 219 million of the total. In addition, the capital account benefited from increased financing in the oil and mining sectors as well as lower bond-related payments. As a consequence, net international reserves of the Central Bank increased US$ 845 million in the current quarter.