Peru - Economic Briefing March 2004

Toledo Reshuffles Cabinet to Stem Eroding Popularity

Faced with record low approval ratings amid renewed corruption scandals, President Toledo reshuffled his cabinet for the fifth time since the beginning of his presidential term two-and-a-half years ago.  The move is unlikely to bring about substantial changes in the robust economic outlook, as a favourable external setting and the large scale Camisea gas project should bolster economic growth this year.

Economy develops below expectations in December
In December, the economy expanded by 3.1% compared to the same month 2002.  The reading was well below market expectations, which had anticipated that growth would come in above 4% in the final month of the year.  However, the December reading was well above the anaemic 0.8% growth registered in November.  The growth pattern observed in the year-on-year comparison is also reflected in data adjusted for seasonal factors.  According to seasonally adjusted figures, the economy expanded 0.6% over the preceding month compared to a pronounced 1.1% decline in November.   

2003 showed continuous deceleration in economic growth
Owing to the below-expectations December performance, data for gross domestic product (GDP) for the fourth quarter and the full year also came in a notch below projections.  In the fourth quarter, the economy expanded by 2.8% over the same year-ago period, which represented a slowdown compared to the 3.4% growth recorded in the third quarter.  In fact, the economy decelerated continuously throughout the year, having started with 6.2% growth in the first quarter and 3.7% in the second.  Most of the slowdown was due to a changing comparison base in the prior year that was characterised by one-time effects such as new large-scale mining projects, in particular the Antamina mining facilities.  For the full year, GDP expanded 4.0%, following on 4.9% growth in 2002. 

Higher public sector activity supports growth
A combination of external and domestic factors drove fourth quarter growth.  The positive contribution from the external sector increased, as export growth accelerated from 1.8% in the third quarter to 3.9% in the fourth, due to the dynamism in mining particularly zinc and silver.  In addition, fish-meal, crude oil and garment output experienced solid growth, the latter reflecting the benefits granted by the Andean Trade Promotion and Drug Eradication Act (ATPDEA).  Import growth, on the other hand, slowed from 3.5% in the third quarter to 2.0% in the fourth.  Similarly, domestic demand slowed from 3.7% in the third quarter to 2.5% in the final quarter of the year.  The principal reason for this slowdown was a deceleration in investment activity, which deteriorated from 8.0% annual growth in the third quarter to a 0.6% contraction in the fourth, in the wake of a sizeable inventory adjustment.  However, gross fixed investment remained relatively stable at 4.5% (Q3: +4.7% year-on-year).  The stability in investment can be attributed to a strong acceleration in public investment, which increased at a resilient 11.8% pace in the final quarter (Q3: -4.5% yoy), amid the execution of central government projects in transportation, energy and mines and housing as well as those developed by state-owned enterprises.  Private investment, in contrast slowed (Q3: +6.5% yoy, Q4: +2.8% yoy), despite progress in important projects such as Camisea and those carried out by mining enterprises such as Yanacocha (Cerro Negro and Minas Conga) and Barrick (Alto Chicama). 

Accelerated government consumption compensates for slower growth in private consumption
Total consumption accelerated from 2.9% annual growth in the third quarter to 3.2% in the fourth.  As with investment, higher public sector activity accounted for the acceleration, whereas private consumption decelerated (Q3: +2.9% yoy; Q4: +2.6% yoy).  The greater public consumption reflects wage increases in education and justice and higher outlays in defense and domestic affairs. Private consumption was supported by higher imports of durable consumption goods, as well as the expansion in consumer oriented credit from financial enterprises, which mushroomed 24.9% over the same period last year. 

Primary sectors experience notable slowdown in final quarter
The slowdown in GDP growth from the third to fourth quarter seized virtually all sectors of the economy but was most concentrated in the primary sectors.  Primary manufacturing dropped 5.2% over the same period last year, following on a much more moderate 0.9% contraction in the third quarter.  The deterioration of raw material processing activities was due to the lower production of fish-meal and fish-oil, as well as lower non-ferrous metal output.  The developments are reflected in the preceding sectors.  The contraction in fishing grew from 9.2% in the third quarter to 11.5% in the fourth quarter and growth in mining slowed from 7.5% to 4.2%.  On a positive note, construction activity picked up from 2.6% growth to 3.2% in the final quarter of the year, reflecting higher sales of cement associated to housing programs and the Camisea mining project. 

Outlook remains healthy
Despite the slowdown observed last year, the outlook for 2004 remains healthy.  Next to favourable prices for key export commodities, the economy should profit from the ramp up of the giant Camisea gas project, which should begin to contribute positively to economic activity in the second half of the year.  This is also reflected in the estimate of Consensus Forecast panellists, who expect economic growth to accelerate to 4.5% in the second half of 2004.  Full-year growth is seen at 3.9%, down from 4.0% expected last month.  Barring further negative surprises on the political front, particularly in light of the approaching 2006 national elections, the economy should remain on the robust growth trajectory in the coming year.  Currently, Consensus Forecast panellists expect GDP to expand 3.7% in 2005, down a notch from last month’s forecast.