Peru - Economic Briefing August 2003

Toledo Reshuffles Again to Stem Erosion in Popular Support

President Alejandro Toledo has reshuffled his cabinet for the second time within a month. Faced with a steep decline in popular support, Toledo changed key cabinet positionsof the Economy and Finance Minister and the Interior Minister. Meanwhile, economic growth begins to trail off from previous exuberant growth rates, which had boosted the economy through the first quarter this year but were unsustainable, as they depended on non-recurring factors.

Growth continues to trail off in May
In May, the economy expanded by 1.8% compared to the same month last year. The reading was almost a full percentage point below last month’s Consensus Forecast of 2.7% growth and confirms the deceleration in economic activity. The economy had expanded by 5.2% in 2002, propelled by new mining operations in the first half and favourable climatic conditions in the second half, which boosted fishing and the related manufacturing industries. In the second quarter, the higher comparison basis of last year is beginning to kick in and the growth rates in excess of 5% are now drawing to an end. In the first quarter, the economy had still expanded by 5.1%, with growth peaking at 6.0% in March. Thereafter, growth dropped to 2.9% in April and 1.8% in May. Next to the higher comparison base – GDP expanded by 9.2% and 5.7% in April and May 2002 respectively – the economy is suffering from unfavourable climatic conditions, which sent the fishing industry into a nosedive.

Fishing in severe slump amid unfavourable climatic conditions
In May, the fishing sector contracted 26.8% (April: +6.9% yoy) and thus constituted the worst-performing sector. Next to a short-term fishing ban at the beginning of the month, the sector suffered from adverse climatic conditions, which led to a further decline in the anchovy catch. Anchovies are the most important fish species, accounting for almost half of all the fishing output. Lack of input from fishing also sent primary manufacturing, which depends to a large extent on fishing for its input, into a tailspin. In May, manufacturing based on raw materials declined 6.6% over May 2002, following a 9.2% expansion in the previous month. Non-primary manufacturing, on the other hand, experienced a notable improvement, as the sector reverted from 3.2% output decline in April to a 1.3% expansion in May. The improvement in non-primary manufacturing over the April reading was broad based, but most pronounced in capital goods output, which accelerated from a 35.3% contraction in April to a 1.3% expansion in May. Consumer and intermediate goods also re-entered positive territory following the output declines in April.

Mining mushrooms amid stronger zinc and gold output
Mining experienced the most positive development of all sectors. In May, the sector added 14.0% over the same month last year The strong reading was mainly due to buoyant metal mining, in particular zinc and gold, whereas copper, which accounts for more than one quarter of total metal mining output, dropped 4.2% over last year. Zinc added 36.2% over the same month last year, propelled by a doubling of output levels in the Antamina mine and positive developments in other zinc mines. Gold added 19.1% over May 2002, reflecting strong output increases in the Yanacocha and Barrick Misquichilca mining operations, which count among the largest gold mines in the country.

Outlook sliced as past growth seems unsustainable amid faltering global economy
With the global economy faltering, it becomes increasingly evident that the Peruvian economy will not continue to grow at the exuberant rates seen in the past year. After the dismal May GDP reading, Consensus Forecast panellists have sliced their second quarter growth forecast to just 2.3%, down from 3.7% expected last month. This is less than half the pace of economic growth observed in the first quarter. Moreover, the second half is also seen more pessimistically at 3.3% annual growth. Consequently, Consensus Forecast panellists also cut the forecast for the full year by 0.2 percenatge points since last month to 3.9%.