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Economy
decelerates in July
In July,
economic activity expanded 8.3% over the same month the previous year.
The result was well down from the 11.5% growth observed in June, but
broadly in line with market expectations of an 8.2% expansion. Although
broad-based, the deceleration over the previous month was primarily caused
by slower growth in commerce, which decelerated sharply, from 18.9% annual
growth in June to 9.6%. Construction, on the other hand, accelerated from
the already strong 16.4% to 18.1%. As a result of the July reading, the
annual average growth rate inched down from 9.9% in June to 9.8%, which,
notwithstanding the June reading, constitutes the fastest pace in over 12
years.
A month-on-month comparison confirms the slowdown
suggested by the annual figures, as economic activity increased 0.21% over
June in seasonally adjusted terms.
Recession
in industrialised economies to affect economy
During the
last month, emerging economies have suffered the biggest financial
correction of the last decades. Peru was no exception. In the first 10
days of October, the stock market lost more than 32% of its value and the
sovereign spread jumped 195 basis points. Even though Peruvian banks are
largely unaffected by the financial crisis, international investors are
withdrawing their funds, rapidly seeking safe havens in triple A assets in
the wake of the confidence crisis that spread all over the world after
Lehman Brother’s bankruptcy in mid-September. Until recently, the
financial sector crisis was seen as having only a limited impact on the
global economy. However, the latest developments in global financial
markets have changed that notion. Consensus Forecast participants are
expecting the developed world to enter into a recession and grow less than
1.0% next year. As a result, emerging economies will face substantially
weaker external demand and hence export growth, which has constituted one
of the key growth drivers of the current business cycle, will indeed
wane. The rich world’s recession will certainly take its toll on Peru, as
45% of the country’s exports are directed towards these countries.
Moreover, international commodity prices have experienced a huge
correction in the last weeks. Prices for copper, one of the Peru’s key
export commodities, dropped 22.1% in the first 10 days of October, the
biggest weekly slide in 20 years. As a result, companies such as the
Australian miner Strike Resources Ltd. have decided to delay some mining
projects in Peru. If the recent trend in commodity prices does not
revert, Peru will suffer from a slowdown in both the domestic and the
external side of the economy. That said, the country is better prepared
to face an economic slowdown than in the past. Due to the commodity price
rally and the exports boom observed during the last five years, Peru has
registered three consecutive years of current account surpluses. As a
result, the country has accumulated more than US$ 34 billion in
international reserves (equivalent to 14 months of imports and more than
96% of the country’s external debt) and the public sector has registered
two consecutive years of fiscal surpluses. Moreover, Finance Minister
Luis Valdivieso has emphasised that the country has not been severely
affected by the international crisis so far and that the government owns
US$ 3.0 billion in savings that it could use in case the crisis affects
the economy. On the monetary side, the Central Bank is already
intervening in the foreign exchange market in an attempt to stabilise the
currency and thus avert the inflationary effects from a weaker currency.
To that end, monetary authorities have offered repurchase agreements
(repos) in dollars
to ensure
foreign currency liquidity. In its attempt to stem inflation, the Central
Bank is assisted by declining oil prices, which should help ease
inflationary pressures in the near future and thus increase the Central
Bank’s manoeuvring room to loosen monetary policy. With three quarters of
the year behind us, the financial market turbulence is unlikely to dent
this year’s growth estimates. In fact, Consensus Forecast participants
have raised
their
economic growth projection for this year by 0.6 percentage points to 8.9%,
as the economy will continue to benefit from strong domestic demand. For
next year, however, panellists have lowered their economic growth forecast
from the 6.7% expected last month to the current 6.5% projection.
Moreover, panellists are likely to further adjust their forecasts for next
year, as the repercussions of the financial sector crisis on the global
economy become more apparent.
Cabinet
resigns amid corruption scandal
On 10
October, President Alan García accepted the resignation of his entire
cabinet in an effort to deal with an escalating corruption scandal that
has caused the biggest crisis of his administration. The political crisis
began after taped recordings of former officials discussing kickbacks on
government oil concessions emerged on 5 October. García has chosen Yehude
Simon, a leftist governor of the northern region of Lambayeque, as his new
prime minister. Other minister posts have not been assigned, but the
president may end up reappointing some members of the resigning cabinet.
Currently, García faces an adverse political environment, as his level of
support fell to 19% in September, the lowest such level during his
presidency, according to a survey conducted by Apoyo. The cabinet’s
resignation may give the president an opportunity to regain some support.
Inflation
moderates less than expected
In September,
consumer prices increased 0.57% over the previous month. The reading was
only a notch below the 0.59% price rise observed in August and also
exceeded market expectations of a 0.40% increase. The September reading
was largely influenced by higher prices for transportation and
communication, household equipment as well as for food and beverages. In
particular, transportation prices are rising fast (September: +2.47%
month-on-month) as the government started to reduce fuel subsidies during
recent months. As a result of the September price increase, annual
headline inflation inched down from 6.3% in August to 6.2%. Annual core
inflation, which excludes volatile energy and food items, reached 5.3% in
September, up from August’s 5.1% rate. At the current level, annual
headline inflation more than triples the Central Bank’s 2.0% target for
this year, and even widely exceeds the ±1% tolerance margin around the
target rate. In an attempt to prevent high commodity prices and strong
domestic demand from affecting inflation expectations further, monetary
officials have lifted the reserve requirement ratios several times since
the beginning of the year and have raised the reference interest rate by
150 basis points since January. Amid the recent financial market turmoil,
however, the Peruvian financial sector is facing higher financing costs in
the international market, which prompted the Central Bank to abstain from
raising local interest rates and reserve ratios further at the last policy
meeting on 9 October. Monetary officials have stated that they expect
inflation to moderate to 5.5% by the end of the year but do not see
inflation falling back into the target range until the second half of
2009. The government is even less optimistic, expecting inflation to
reach 5.8% by the end of this year and 3.5% next year. Consensus Forecast
panellists see inflation moderating only to 6.0% by the end of this year,
which is up 0.4 percentage points from last month’s Consensus.
For next
year,
panellists expect inflation to moderate to 4.0%, which is 0.1 percentage
points above last month’s forecast. |
