PERU TODAY

Peru's economy expanded 9.9% in the year to September, driven by strong internal demand growth (12.7%), the continuing expansion of key sectors such as construction and non-primary manufacturing, and by significant inward investment flows. Despite the turmoil of the credit crunch, the International Monetary Fund (IMF) has projected Peru's growth in 2008 at 9.2% and in 2009 at a sturdy 7%. Construction, hydrocarbon exploitation and non-primary manufacturing are expected to be the main contributors to growth in 2009.

Some of the contributing factors that have placed Peru in a relatively stronger position to withstand the effects of the financial crisis are:

- Low financial exposure to short term outflows

According to the Central Bank (BCRP), a primary reason why Peru's banking system is less vulnerable to the global financial turbulence is its lower dependence on short-term external finance and greater share of long-term maturity finance vehicles. In this respect, the former grew by only 31% in the year to the end of September whereas the later grew by 54.6% and closed on 60% of the banking sector's overall external financial obligations. This guarantees the execution of investment commitments in the critical short run.

-Ample International Reserves

By mid September, Peru had accumulated US$34,8 billion in net international reserves, almost equivalent to the country's total foreign debt, highlighting its ability to meet any outstanding liquidity commitments should it become necessary. As of 20 October, despite significant currency swap operations, the reserves stand at US$33.15 billion.

Significantly, these reserves are almost three times the amount needed to service any outstanding short-term external debt and the current account deficit, currently running at only 3.2% of GDP and projected to remain at 3% in the following two years.

-Investment Commitments to 2010

Foreign Direct Investment (FDI) is expected to grow substantially in 2008 (by 50%) to reach US$ 8 billion dollars at year's end. Private investment is leading the way with 32.6% growth in the second trimester, reaching its highest level, at 23.4% of GDP, since 1995.

Private investment commitments in 2009 and 2010 will be key to maintaining growth and are expected to equal 23.8% and 24.6% of GDP, respectively, in 2009 and 2010. The main sectors that will benefit are mining, hydrocarbon, industry and electricity. Total private investment flows for the period 2008-2010 are expected to reach US$35.51 billion dollars.

United Kingdom private investment will play a key role in this period. According to the Trade and Investment Section of the British Embassy, the UK is currently the second investor in Peru, having recently surpassed the U.S. by mid-2008, UK investment reached US$3.4 billion*. Furthermore, 12 UK businesses would have entered the Peruvian goods and services market in the last year.

According to information from PROINVERSION, current pending minimum investment commitments from UK businesses would exceed US$2.6 billion, much of which will be concentrated in the mining sector. However, recent discoveries of greater extractive potential for particular projects have led some UK companies to re-evaluate their required investments. The Peruvian Embassy estimates that only in mining projects phased investment over the following years could well surpass US$ 6 billion**.

-Diversified export markets

Peru has significantly diversified its export markets, rendering it less dependent to slowing growth in specific markets, although it will still be affected by the overall world economic slowdown. Its exports are distributed as follows: Europe (27%), Asia (25%), Latin America and the Caribbean (21%), U.S.A. (20%), the rest (7%).

-Inflation projected to decrease

Inflation was an important deflator for growth in 2008, with the hike in foodstuffs and energy prices, combined with strong internal demand growth, leading to a 5.8% projected rate in 2008 (according to the IMF). However, as prices for commodities and energy have been dropping, the Central Bank expects inflation to move towards its target rate in 2009 and 2010. The IMF anticipates inflation at 3.5% in 2009.

-Fiscal Responsibility

As a result of fiscally responsible policy and preventive budget tightening, even in the context of the crisis Peru is expected to run a fiscal surplus of 1% of GDP each of the next two years.

Significant Foreign Debt has been serviced, lowering overall Public Debt: Foreign debt advance payments in the last two years have contributed to lowering total debt to only 23.8% of GDP, a relatively low figure in the regional context.

-Confidence in market mechanisms

On 14 October, Minister of Economics and Finance Luis Valdivieso announced that Peru is considering auctioning government-backed bonds -with a maturity window of 30 years- in the international finance market, as a means to raise US$ 600 million dollars. Valdivieso highlighted that this option was being consulted with market participants and economists and that major investors had already expressed their interest.

Valdivieso considered this market-based solution as a viable alternative to IMF, World Bank and other multilateral emergency funding in the cases of emerging markets, such as Peru, that enjoy strong indicators of macroeconomic and fiscal stability, like net reserves and Investment Grade. He highlighted the importance that emerging markets restore confidence in the international market system.

Peru's bond auction would be its first since March 2007, when it raised US$ 1.2 billion dollars.

SOURCES: PROINVERSION, CENTRAL BANK (BCRP), INTERNATIONAL MONETARY FUND (IMF) - WORLD ECONOMIC OUTLOOK, EL COMERCIO, GESTION, LA RAZON.

(1) The Peruvian Embassy assumes no responsibility for the validity or accuracy of the information contained in this report. Information has been collected from diverse sources and is cited to the best possible degree. Figures and estimates can greatly vary between official and non-official sources.

*Includes direct transfers from UK Dependencies.

**As with all information contained in this report, the Peruvian Embassy assumes neither responsibility in its estimates nor in the figures disclosed even when cited from official sources.