Country Report Peru at a Glance: 2004-05
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Country Report April 2004 Peru Peru at a glance: 2004-05 OVERVIEW The government, led by Alejandro Toledo, is weak, and his personal popularity remains low. Although continued criticism of Mr Toledo’s leadership has prompted speculation over the past year that he might not last until the end of his constitutional term, in July 2006, there is little political desire to remove him, meaning that unless a serious scandal involving him or his inner circle of advisers emerges, he will remain president until July 2006. In mid-February Mr Toledo inaugurated his fifth cabinet in three years to prevent a collapse of his administration. The largely non-party-political nature of the new cabinet is expected to benefit the government. Opposition parties will take advantage of Mr Toledo's weakness, but they have little interest in forcing him from office. The government will be supported by continued economic stability and growth. Economic policy will be kept broadly pro-market, with particular emphasis given to tight fiscal policy and low inflation, but some policy dilution can be expected. Solid economic growth will help the government to increase revenue collection in 2004-05. A global economic recovery is under way, but there are medium-term risks to the Economist Intelligence Unit’s forecast. Economic growth in Peru will reach an annual average of 4% in 2004- 05, driven by mining and exports. Inflation will stay low, the exchange rate will be stable and the current-account deficit will stay within manageable levels. Key changes from last month Political outlook • The president's position remains weak, but we consider that he will remain in the post until his constitutional mandate ends, in 2006. Economic policy outlook • A substantial increase in tax revenue in 2004 will allow the government some room for manoeuvre in increasing social expenditure. Economic forecast • There are no major changes to our economic forecast. April 2004 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Peru 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2004-05 7 Political outlook 8 Economic policy outlook 9 Economic forecast 12 The political scene 16 Economic policy 18 The domestic economy 18 Economic trends 21 Agriculture 22 Mining 23 Manufacturing 23 Infrastructure 24 Foreign trade and payments List of tables 9 International assumptions summary 11 Forecast summary 16 Non financial public-sector (NFPS) operations 18 Gross domestic product by expenditure, 2003 19 Gross domestic product growth by sector 20 Consumer price inflation 21 Average interbank exchange rate 24 Merchandise exports 25 Merchandise imports 25 Current account List of figures 11 Gross domestic product 11 Consumer price inflation Country Report April 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 . Peru 3 Summary April 2004 Outlook for 2004-05 The government, led by Alejandro Toledo, is weak, and his personal popularity remains low. Although continued criticism of his leadership has prompted speculation that he might not last until the end of his constitutional term, in July 2006, the Economist Intelligence Unit considers it likely that he will see out his term of office. Economic policy will be kept broadly pro-market, with particular emphasis given to tight fiscal policy and low inflation, but some policy dilution can be expected. Solid economic growth will help the government to increase revenue collection in 2004-05. A global economic recovery is under way, but there are medium-term risks to our forecast. Economic growth will reach an annual average of 4% in 2004-05, driven by mining and exports. Inflation will remain low, the exchange rate will be stable and the current-account deficit will stay within manageable levels. The political scene A number of new scandals have further damaged Mr Toledo's credibility. In mid-February Mr Toledo inaugurated his fifth cabinet in three years, with Pedro Pablo Kuczynski returning to the Ministry of Finance. The prime minister, Carlos Ferrero, only just won the congressional vote to support his new cabinet's programme. Mr Toledo's Perú Posible party remains divided and its alliance with the FIM strained. The new head of the intelligence service has been forced to resign. The opposition has started to take a stronger stance against Mr Toledo. Congressmen have been criticised over their salaries. Economic policy The fiscal deficit target of 1.9% of GDP was reached in 2003. Current revenue continues to rise strongly following the implementation in 2003 and early 2004 of a number of tax reforms, including, from March 2004, the introduction of a controversial new tax on banking transactions. The Central Bank has imposed a 20% reserve requirement on foreign bank credits. The government is starting to prepare for negotiations towards an FTA with the US. The domestic economy Economic growth reached 4% in 2003, driven by mining and exports. Non- primary manufacturing expanded by 3.4% in 2003, owing mainly to increased demand from the US for Peruvian textile products. Construction continues to be buoyed by Mivivienda and the Camisea natural-gas project. Consumer price inflation has edged upwards but remains within target. Exchange-rate stability continues. Agricultural output has increased only slowly. Metallic mining re- mains the economy's most dynamic sector. Manufacturing output has been sluggish. Competition in the mobile-phone market has been threatened by Telefónica's purchase of BellSouth's South American operations. Foreign trade and payments The merchandise trade surplus expanded to US$710m in 2003, helping to bring the current-account deficit down to 1.8% of GDP. The incomes deficit continues to rise sharply, owing to rapidly increasing profit remittances abroad. Editors: Martin Pickering (editor); Justine Thody (consulting editor) Editorial closing date: April 8th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report April 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 4 Peru Political structure Official name Republic of Peru Form of state Presidential democracy The executive The president, who is directly elected for a five-year term, may not be re-elected to a second consecutive term; he appoints a Council of Ministers Head of state Elected president, currently Alejandro Toledo, who was inaugurated as president in July 2001, having won a second-round election in June; he is scheduled to govern until July 28th 2006 National legislature Congress consists of a 120-member single chamber, which can be dissolved once during a presidential term Legal system Courts of first instance in the provincial capitals; the Supreme Court sits in Lima National elections November 2002 (regional and municipal); next elections due 2006 (presidential and congressional) National government Mr Toledo leads the government; his party, Perú Posible, with 47 of 120 seats in Congress, formed an alliance with the FIM and has also co-opted the congressman elected under the banner of Todos por la Victoria Main political organisations Government: Perú Posible, in alliance with the Frente Independiente Moralizador