Peru - Economic Briefing December 2004

Camisea Gas Project Spurs Mining (continued)

Outlook remains solid as Camisea project will bolster growth in second half
Consensus Forecast panellists remain upbeat about growth prospects and the economy is seen as experiencing yet another year of robust growth.  In the final quarter, economic activity is expected to almost maintain the third quarter pace, with activity growing by 4.7%, as external demand continues to thrive and the giant Camisea project will add momentum.  For the full year, GDP should grow by 4.3%, which is unchanged from last month’s forecast.  The second-half boost should also provide a solid backdrop for continued robust growth next year, which is anticipated to reach 4.0%, also unchanged from last month.

Inflation rises slightly in November and likely to overshoot this year’s target
In November, consumer prices increased 0.29%.  The reading was above last month’s Consensus Forecast figure, which saw prices rising 0.15% and exceeded the 0.02% decline registered in October.  As in the previous months, higher prices for housing, fuels and electricity as well as transport/communications and health-related goods and services were compensated for by lower prices for food and beverages.  As a result of the November price spike, annual headline inflation rose to 4.1% from 4.0% in October.  Thus, inflation remains well above the Central Bank’s 1% tolerance margin around the 2.5% central target and monetary authorities acknowledged that the year-end rate is likely to overshoot the target by a full percentage point   Core inflation, which excludes the erratic effects of volatile categories such as fresh fruits and vegetables as well as fuels, is developing more favourably.  In November, the core inflation index increased only 0.15% and annual core inflation dropped from 3.0% in October to 2.9%.  Given the benign development of core inflation, Consensus Forecast panellists expect headline inflation to converge towards the Central Bank’s 2.5% target by the end of next year.

Current account registers first surplus in 15 years
In the third quarter, the current account balance incurred a surplus of US$ 173 million.  The surplus contrasted a US$ 225 million deficit observed in the second quarter and the US$ 226 million deficit in the third quarter last year.  In fact, the surplus was the first positive current account reading since 1989.  The improvement over the same period last year was mainly due to a higher surplus in the trade balance, which more than tripled from last year’s third quarter surplus of US$ 233 million to US$ 830 million.  The trade balance profited from the strong global economy, which boosted exports a massive 45.2% over the level registered in the same quarter last year, as both prices (+16%) and volumes (+25%) increased.  Imports also expanded at a solid if more moderate 21.7% growth pace.  Thus, the annual current account deficit dropped from US$ 707 million in the second quarter to US$ 309 million in the third.  However, Consensus Forecast panellists believe the deficit to rise US$ 643 million by the end of the year and add another US$ 50 million in 2005 to reach US$ 698 million.