Peru - Economic Briefing April 2004

Economy Set for Robust Growth (continued)

Camisea gas project will boost mining and overall economic performance this year
Mining should continue to constitute a major driver of the Peruvian economy.  In early 2004, the sector has benefited from substantially higher metal prices.  By the end of March, the price for copper was 93.2% above last year; zinc exceeded the price at the end of March 2003 by 42.4%, gold by 28.5% and silver by 21.8%.  These four metals account for 85.4% of total metal mining output.  Next to the direct impact resulting from the higher proceeds and tax takes, Peru should also benefit from new investment projects.  The largest boost to mining investment in 2004, however, should stem from the Camisea project, which includes exploitation of the Camisea gas fields in the Ucayali Basin; the transportation of natural gas and natural gas liquids in two pipelines across the Andes to the Pisco area on the Peruvian Coast; processing and export of natural gas liquids; and the transportation and distribution of natural gas to Lima.  The entire project will cost about US$ 1.6 billion and will enable Peru not only to become self-sufficient in energy but also a net exporter of energy.  The investment is expected to add 0.8% to Peru’s GDP for each year of the project life and should also improve not only the country’s trade balance but also public sector balances by boosting tax collection and royalties.

Other services drag overall performance down in January
The positive developments in fishing and mining, which constituted the two fastest growing sectors in January, were contrasted by a notable slowdown in the so-called other services.  Other services consist of financial services, real estate and government services among others and account for almost 40% of total GDP.  In January this mega sector increased by 2.2% over January 2003, following on a 6.8% expansion observed in December.  As a result of the high weight in the calculation of GDP, the subsector is the sole reason for the reduced growth rate.  All other sectors improved over December.

Positive outlook maintained
The outlook for 2004 remains healthy.  Next to favourable prices for key export commodities, the economy will 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%, unchanged from 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, which is also unchanged from last month’s forecast. 

Inflation drops in March
In March, consumer prices rose 0.46%.  The reading was slightly below last month’s Consensus, which had prices growing by 0.52%.  Higher prices for food and beverages constituted the main driver behind the March increase, assisted by education and culture as well as housing, fuels and electricity.  The March reading reduced annual headline inflation from 3.4% in February to 2.8%.  The Consensus believes that inflation will drop further to 2.4% by the end of the year, just slightly below the Central Bank’s 2.5% target.