Economy and Trade
Peru has been home to South America’s fastest-growing economy during the current decade. This partly reflects booming prices for mineral exports—Peru is the world’s third-largest producer of copper, zinc, and tin, as well as the world’s leading producer of silver. However, the government has also made significant progress in improving economic management, and liberalizing the economy. These measures have stimulated foreign investment, and helped to diversify the economy—exports of agricultural products, fishmeal, and textiles have also grown strongly. In recognition of the country’s progress, Peru’s debt was awarded an investment-grade credit rating in 2008 by Fitch, a ratings agency. However, sharp divides remain within the country. Around 13.7% of the population lived in extreme poverty in 2007, according to the government, although this figure is falling at a rapid pace. The United States is Peru’s main trade partner, accounting for around one-fifth of exports. China is now Peru’s second-largest trading partner.
Economic Policy over 12 Months
In its 2008 annual review of Peru’s economy, published in February 2009, the International Monetary Fund (IMF) praised the government for establishing a sound policy framework. It said that the strong fiscal surpluses achieved in recent years had supported a significant reduction in public debt, while a sound monetary policy had been instrumental in helping to maintain macroeconomic stability and reduce dollarization. It added that structural reforms had reduced fiscal and financial vulnerabilities, and had helped to improve long-term growth prospects, and support poverty reduction.
The government is estimated to have recorded a budget surplus of 2.7% of GDP in 2008, which it expects to fall to 1% in 2009, reflecting measures to stave off the impact of the global economic slowdown, as well as lower revenues as the economy slows. In December 2008, the authorities announced a US$3 billion stimulus package of spending on infrastructure, to boost construction and create jobs. In early 2009, the Government unveiled a set of 40 measures to ease restrictions, and attract private investors.
The central bank targets annual inflation of 2%, within a tolerance band of plus or minus one percentage point. In February 2009, the central bank trimmed its benchmark interest rate from 6.5% to 6.25%, a measure aimed at mitigating the impact of the global economic crisis on the domestic economy. The central bank acted as inflationary pressures began to subside in the country (see Economic Performance below). In January 2009, the central bank also took measures to provide more liquidity for lenders. It reduced reserve requirements in local currency after bank lending slowed in December. The bank cut the minimum legal reserve requirement to 6.5% of deposits, from 7.5%.
During 2008, the central bank raised interest rates six times (each time by 25 basis points), from 5% at the start of the year, in a bid to contain inflation. The final increase (in September 2008) lifted interest rates to 6.5%, the highest level since at least July 2001. Furthermore, the central bank increased the rate of reserve requirements in 2008 to curb the growth of liquidity and credit. The central bank also intervened in foreign-exchange markets in the latter part of 2008, in an attempt to slow the dollar’s gains against the local currency. It sold around US$6 billion during this process.
Economic Performance over 12 Months
The economy grew by 9.8% in 2008, the fastest pace in 14 years, fueled by strong commodity prices. Growth was led by a 16% increase in the construction of highways, infrastructure, private housing, and other projects, according to the government. The retail sector expanded by 12%, reflecting buoyant consumer spending. Peru enjoyed average growth of more than 6% each year between 2002 and 2008, as prices for exported metals soared.
However, the economy slowed significantly in the latter months of 2008, and in early 2009, reflecting falling international prices for metals, as well as the global economic slowdown. The economy expanded at an annual rate of just 5.6% in January 2009. In February 2009, the IMF said that economic growth would probably slow to 6% in 2009. It said this outlook reflected the slowdown in the global economy and tighter financial conditions, which would affect exports and private investment.
Fueled by high food and fuel prices, headline inflation reached 6.7% in 2008, exceeding the 1–3% target range, but remaining one of the lowest in the region. Falling international prices for commodities helped to ease inflation concerns in the final months of 2008, and this positive trend was maintained in 2009. Inflation fell to a monthly rate of just 0.11% in January 2009, the lowest monthly rate since November 2007.
Despite the strength of the economy, unemployment increased by one percentage point, to 8.8%. This rise largely reflected job losses in the final quarter, as international companies in the resources sector cut back on their operations and investment programs. Labor leaders reported in December 2008 that at least 6,000 miners had lost their jobs.
The banking sector has remained largely immune to the problems afflicting financial systems in other countries. The IMF said, in its 2008 annual review, that large foreign-exchange reserves, strong financial-soundness indicators, and the domestic banks’ limited financial reliance on external funding had helped to preserve the system’s stability. The authorities also introduced prudential measures in 2008, including more restrictive rules for consumer credit, new dynamic provisioning, and a strengthening of banks’ minimum capital requirements.
The country recorded a current account gap of 3.2% of GDP in 2008, which the central bank expects to widen to 3.3% in 2009. The central bank said the current account gap would be more than covered by long-term foreign investment, which is expected to equal 5.3% of GDP in 2009.
Support for Inward Investment and Imports
The government is eager to encourage foreign investment in Peru, and the investment environment is liberal. PROINVERSIÓN, the Peruvian Investment Promotion Agency, has been created as a strategic ally for the promotion of investments in Peru. See its website for further details on investing in Peru.
Peru has also liberalized its trade regime in recent years. The government places a high priority on preferential trade agreements with other countries. Peru has moved away from its largely uniform tariff structure, thus increasing the level of effective assistance to some sectors. For more information on the country’s trade regime, see the latest World Trade Organization report (published in October 2007) on Peru.
PROINVERSIÓN offers detailed information on the Peruvian tax regime, including information on exemptions.
GDP growth: 9.8% (2008, government figures)
GDP per capita: US$8,500 (2008, est.)
CPI: 6.7% (2008, government figures)
Key interest rate: 6.5% (February 2009)
Exchange rate versus dollar: nuevo sol per US dollar—2.9322 (2008, est.)
Unemployment: 8.8% (2008, government figures)
FDI: US$32.14 billion (2008, est.)
Current-account deficit/surplus −US$3.631 billion (2008, est.)
Population: 29,180,900 (July 2008, est.)
Source: CIA World Factbook except where stated