Peru - Economic Briefing September 2003

Economic Growth Receding from Past Exuberance (continued)

Central Bank lowers outlook for next year to more realistic levels
In its recent inflation report, the Central Bank announced its intention to keep the 2003 GDP growth forecast at 4.0%, unchanged from the May inflation report, as the stronger than expected external sector is compensating for the more sluggish domestic economy. The current Central bank forecast is thus just a notch below the Consensus, which was maintained at 3.9%. For 2004, however, the Central Bank lowered the GDP growth projection by half a percentage point to 4.0% from its May figure. Monetary authorities highlight the lower growth in private investment as the key motive behind the downward revision to next year’s growth. The new Central Bank forecast is now more in line with the Consensus, which was lowered to 3.8% from 3.9% last month.

Current account balance improves as exports outgrow imports
In the second quarter, the current account balance incurred a deficit of US$ 184 million. The second quarter reading was down from the US$ 464 million deficit in the first quarter and also below the US$ 257 million recorded in the second quarter last year. The improvement over last year was mainly due to a higher surplus in the trade balance, which rose to US$ 206 million from a US$ 104 million surplus in the same quarter last year. The trade balance, in turn, improved amid 11.0% exports growth (reflecting higher mining and oil activities), which exceeded the 6.2% increase of imports. As a result, the annual current account deficit narrowed from US$ 1.3 billion in the first quarter to 1.2 billion in the second. According to the Consensus, the annual current account deficit will drop further to US$ 1.1 billion by the end of the year.

Fiscal deficit drops in the second quarter
In the second quarter, the fiscal deficit reached 1.1% of GDP, down 0.7 percentage points from the same quarter last year. The drop in the fiscal deficit followed on an improvement of the central government’s account. Current revenue totalled 14.1% of GDP, up 0.6 percentage points from the same period last year, reflecting higher income tax collection (up from 2.4% of GDP to 3.2% of GDP) and an increase in the collection of the value-added tax (VAT) from 5.6% to 5.8% of GDP. The increase in the tax take was due to administrative measures oriented to improve tax collection and higher economic activity. Non-financial central government expenditure reached 13.4% of GDP, which was 3.2% higher in real terms than the level registered in the same quarter last year. The increase in expenditures was due to President Toledo’s decision to raise civil servants salaries to end the civil unrest that had unsettled the country in May and June. In addition, the increase reflects greater transfers to local governments and the Previsional Normalization Office (ONP). Consensus Forecast panellists have maintained their fiscal deficit forecast for the full year unchanged at 2.0% of GDP.