Peru - Economic Briefing December 2003

Robust Growth to Continue Next Year

The Peruvian economy is in for yet another year of robust growth. While past drivers such as new mining operations and favourable climatic conditions are unlikely to be repeated, further advancement on the Camisea project should drive investment and the more favourable development of the global economy will provide upside potential for the country’s external sector and commodity prices.

Economic growth accelerates in September
In September, the economy expanded by 3.6% compared to the same month last year. The reading was slightly above last month’s Consensus Forecast but below the 3.1% growth observed in August. Mining was the main driver behind the acceleration, as the sector expanded at an annual rate of 10.0% following 1.2% growth in August. Fishing, on the other hand, reverted back into negative territory with a 5.8% contraction after only one month of positive growth observed in August.

Healthy investment bolsters third quarter growth
In the third quarter, gross domestic product (GDP) grew 3.5% over the same period last year. The reading was virtually unchanged from 3.6% annual growth observed in the second quarter and exceeded last month’s Consensus expectations of 3.2% growth, which had been lowered from 4.1% expected the month before, amid dismal developments in July and August. Investment was the key behind the healthy third quarter growth pace. Exports, on the other hand, lagged significantly behind. Gross fixed investment increased by 5.0%, which represented the fifth consecutive quarter of growth and was well above the 3.5% growth registered in the second quarter. The strong investment growth is entirely due to private investment, which increased by 6.6% (Q2: +4.9% year-on-year). The robust growth is in part due to the giant Camisea gas field project, which lifted capital goods acquisitions, excluding construction materials, by 22.1%. In addition, private investment profited from other large-scale refurbishing projects at La Pampilla and the Southern, Yanacocha, Yauliyacu and Ares mining facilities. Public investment, in contrast, contracted by 3.8% over the third quarter 2002 due to the drop in central government capital expenses, which was only partially offset by larger outlays for state-owned enterprises.

Consumption grows amid higher public spending
Total consumption expanded 2.8% over the third quarter 2002, virtually unchanged from the 2.9% growth registered in the second quarter. Private consumption expanded 2.9% (Q2: +3.0% yoy). The increase in private consumption is related to the pickup in consumer oriented credits (+26.1% yoy) and the growth of consumption good imports (+2.9% yoy), in particular of electrical appliances (+11.8% yoy). Public consumption accelerated from 1.9% growth in the second quarter to 2.5% in the third, amid higher salaries in education, justice and health, as well as increased spending in goods and services for domestic affairs and defence.

Mining leads growth amid strong metals output
In the third quarter, mining and fuel expanded 7.5% over the same period last year. While this was down from 10.8% annual growth observed in the second quarter, mining remained the fastest growing sector in the third quarter. As repeatedly reported in past editions of the LatinFocus Consensus Forecast, mining has profited from strong metals output, in particular gold, due to both higher prices and volumes (mainly from Minera Yanacocha and Barrick Misquichilca gold mines). Fuels, on the other hand, remained mired in negative territory for the fifth consecutive quarter, despite healthy oil prices, as the reserves of the currently exploited fields are being diminished and new drilling projects are not delivery the desired results.

Fishing contracts for third consecutive quarter
Fishing marked the bottom of all sectors. In the third quarter, fishing output dropped by 12.3% over the same period last year. While better than the 16.0% decline observed in the second quarter, the third quarter decline marks the third consecutive double digit drop. If the fourth quarter does not present a big swing in fishing activities, the sector could see an even worse year than 1998 when the weather phenomenon El Niño sent fishing tumbling 13.4%. Fishing only accounts for a tiny fraction of total GDP. However, it serves as an important input in the primary manufacturing industry. Consequently, primary manufacturing output also dropped in the third quarter albeit at a much more moderate 1.3% pace, as strong input from metal mining partially offset the impact of missing inputs from fishing.