PERU - PRIVATE SECTOR ASSESSENT

VOLUME V - ECONOMIC PERSPECIAVES: 1983-1985

Coopers & Lybrand May 1983 INDEX PaRe

INTRODUCTION . 4 THE VARIABLES ...... 4 INIERNATIONALSITUATION . 7 The North American Economy ...... 7 European Countries and Japan ...... 9

NATIONA ,PERSPECTIVE ...... 11 Background ...... 11 ALTERNATIVES ...... 12 From 1983 to 1985 ...... 12 FIRST ALTERNATIVE ...... 12 Approximative General Outlook, 1983-85 (First alternative . 13 DISAGGREGATED PROJECTION ...... 19 Production ...... 19 Prices, Remunerations and Exchange Rate ...... 25 Assumptions ...... 25 Consumer Prices ...... 26 Remunerations ...... 27 Rate of Exchange ...... 28 PUBLIC FINANCES ...... 29 MONETARY SITUATION ...... 32 EXTERNAL SECTOR ...... 34 Assumptions ...... 34 Provisions ...... 34 SECONDALTERNATIVE ...... 39 IMPLICATIONS FOR THE PRIVATE SECTOR ...... 41 Agriculture ...... 41 Fisheries ...... 42 Mining ...... 43 Industzy ...... 46 Measures, 1982-1983 ...... 48 Suggestions ...... 49 Fishmeal ...... 52 Page

Glass ...... 52 Industrial Chemistry ...... 53 Consumer's Goods ...... 53 Food Beverages ...... 54 Construction and housing ...... 54 Banking and Insurance ...... 56 Transportation ...... 57 The 1985-1990 period ...... 58 The Neo-Liberal Sceme ...... 59 INFRASTRUCTURE AND POSSIBILITIES OF THE PRIVATE SECTOR . . . 62 Energy ...... 62 Oil ...... 69 Foodstuffs ...... 69 CONCLUSIONS ...... 71 PERUVIAN ECONOMIC PERSPECTIVES:

1983 - 1985

INTRODUCTION

The purpose of this work is the study of perspectives for­ a sustained development of the domestic private sector (particularly the manufacturing sector) in the present decade. Likewise, alternative situations which may occur in the near and medium term future will be evaluaL I for the sector. Moreover, a listing has been .­onsidered for this sector's priority requirements in order to resume a stable and sustained growth -pace and to identify those features which in one way or another restrain such possibility.

THE VARIABLES

To have a more or less clear idea of the future outlook for the private sector in Peru, a set of variables compounded in a common scheme must be analysed for a clear understanding of which may be the main possible approach for the development of the sector. These variables which affect it in different ways and with diverse intensities have to be assessed taking into consideration the specific weight which each of them may assume in relation to the economic-political circumstances of the process. An initial set of variables is related to the international context. For countries like Peru which are not exporters of raw material and importers of secondary production, the analysis of the international context is an absolute must. The national economic history has repeatedly demonstrated how a critical international situation has a rebounding effect on our economic system while generating a domestic crisis. Instances as those of 1952-1953, 1957-1958, 1968, 1975-1976, 1982 are examples which explain these phenomena, and, conversely, no doubt the booms experienced in 1950, 1962-2.964., 1970, 1980 in Peru's economy where closely associated with situations of open economic expansion in the majority of the Western developed economies.

National context is at a second level. In this second plane a very meticulous analysis must be effected on what is called the development strategy or modelling as applied to the country. The effects and consequences on the private sector will be very distinct if the application of a neo-liberal-free scheme is attempted, or a secondary exporting scheme, or, if instead, the old populist scheme of import substitutes is restored. Each of these development schemes has its own dynamics, demands a specific ecoiomic policy and generates a series of consequences on the development and growth of the private sector. In the same manner, the application of eitlr scheme during a fixed period of time happens to have very concrete consequences on the overall economy and, particularly, on the private sector being, thus, worth studying with special thoroughness.

A third set of variables including the supply and resources required by the sector if the actual growth rates warranting positive macroeconomic effects for the country as a whole, must be taken in consideration at the time of evaluatit-g possibilities and requirements which should be provided to promote the development of the private sector in Peru. -6-

Finally, the most immediate solutions will be suggested to reinstate a period of sustained growth for the sector. - 7-

INTERNATIONAL SITUATION

The 1982 economic results in most third world countries has been strongly influenced by the development of the major economic variables of what has come to be selled "international context". However, this international context is none other than the behaviour of the developed economics of mainly the United States, Japan, the European Economic Community, etc. and the variables which such economies directly affect.

The North American Economy

Most economic analysts base their projections for 1983 on the economic policy's measures to be applied by the Federal Reserve Bank of the United States to offset the current recesion.

A rebate on interest rates. is expected together with a re­ a'ctivation of investments and consumption. Mr. Reagan's "supply side economics" approach has not reached its objectives. The radical monetaristic position in monitoring monetary supply was successful in reducing the inflation rate by 50 per cent, yearly reduction of 6 per cent from 12 per cent. However, this reduction has been highly costly: recession, unemployment-rates only comparable to the great depression, an excessively high number of bankruptcies, among others, and has already been discarded.

Facing these results, since last October, the North American monetary authority has modified its orientation. The money supply has increased in the United States since October at a -arly rate of 15 per cent reflected in a reduction of five points in the prime-rate. This reduction of the prime has given way to a slight year end recovery of raw material prices and basic production -8­

activities such as construction and automotive manufacturing.

It is expected that if this policy is maintained, prime may be reduced by two points more than that attained in the first six months of 1983.

The North American growth outlook includes a moderate growth that will not, at the most, exceed more than a 3 to 4 per cent increase DGP. North American authorities are particularly concerned in determining if the money injection can be rapidly absorbed by the ptoduction sectors, or if it will be oriented to merely speculative sectors. With regards to unemployment, a drop is expected in the current 10 per cent level to 6 or 7 per cent for the year.

Potential Output Real GNP 60 ......

40

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20

0Y0 Yea of Decaeoe Ycar of Decac -9­

Irdu.trial Production Stock of Homes si: 20

II

j ..Se Venti e3 610 -I I$ x i

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European Countries and Japan

Most European countries expect a recovery in their economics. They believe that the Q.6 per cent growth average for 1982 can be surpassed by a rate of no less than 4 per cent in 1983. Agriculture, the automotive industry and sofisticated consumer's good have the best perspectives, The electronics industry envisages the great possibility of an economic boom. There is a big demand for these items and massive sale computers, but for the Asiatic industry not the European.

In regards to Japan, a still further increase is expected. This country is the one that has best put up with the crisis and has thd best perspectives for 1283. - 10-

As can be seen in the following projections, North American economic growth will be slow, specially in the first half of the decade. The positive effects of this slow recovery will only be felt early in 1984 in countries like Peru. These projections suggest that any expectation of rapid recovery in the short term is not valid and, therefore, national economies must take a careful pace to avoid falling in a still more severe external crisis.

ECONOMIC PROJECTIONS:

DEVELOPED COUNTRIES

Canada Jaan England G a F _actaly Growth (actual DGP) 1R82 -0.4 3.2 1,7 1.3 2.5 0.1 1q83 3.8 5.Q 2,5 4.0 2.4 3.1

Infla tion CIPC) 1982 10,6 4.0 9.9 4.2 14.7 16.6 1983 8.0 6.0 9.7 2.9 i9.0 17.0

Source: CITIBANK ECONOMIC FORECAST SERVICE NATIONAL PERSPECTIVES

To understand the possible evolution of the economic policy that predictable would be applied in Peru during the forthcoming years, we should make an schematic summary of what has been applied in the last years.

Background

Beginning in 1978, Peruvian economy suffered a very important modification in its economic policy scheme. From 1963 through 1967, a development scheme oriented towards industrialization via import substitutes, based on populist economic policy schemes with a fixed view in the expansion of the domestic market as the acting element of economic growth, had been attempted. Following the 1967 crisis and the political exhaustion of the model, the old groups of primary exporters tried to apply a stabilization program which endangered the existence of the system itself. In the face of this situatj:n the armed formes took over and forced still more the populist model of import substitutes. In their effort, they benefited by the support received since 1970 on account of a strong improvement in international prices achieved by the strong escalade of the Viet Nam War. This scheme persisted until late in 1974, year in which again a typical external stranglement occurred in every import substitute model uniquely oriented towards the domestic market. Between 1975 and 1978, a set of stabilization programs failed one after the other, incapable of attaining their minimum prefixed targets as established by the adjustment plans. It was then that in 1978 a new development scheme oriented towards exports of non troditional manufactured goods was established. This strategy closed the country's serious problem of international reserves. A mini-devaluation system was established and a whole program was devised to incentivate the production and - 12 ­

exports of goods containing the highest possible aggregated value.

Starting in 1980, with the change of government, a reorient­ ation of the model was put in practice and'a new economic policy which emerged was on the opportunist neo-liberal line. The scheme introduced in 1978 was discarded and a move was made towards the "liberalization" of the different markets. Custom's tariffs were abated, the financial system was freed, export incentives were reduced and a price stabilization policy was designed. The recessive effects on the economics of the southern hemisphere cone which had assumed a similar model some years before, gave rise to the confusion as to which development strategy presently dominating the economic scene in the country should be followed. With regards to the existing disarray the question posed is which are the strategy alternatives that may be implemented in the short and medium terms for Peru.

ALTERNATIVES

Among a set of possible alternatives facing the country in a short and medium term, we have considered the following ones:

From 198$ to 1985

In the next three year period the following alternatives may be possible:

FIRST ALTERNAIVE

The government may decide to continue with the same policy of op enness which it has promoted until now with small shades of changes which would be associated to the results provided by the - 13 ­

main economic variables, specially th6se relevant to the external sector. In this case, *an acceleration in the devaluation rythm may be expected together with a raise in interest rates, limited contraction in fiscal outlays, reduction of credit to the private sector and a drop in he level of actual salaries. The difference with the current situation can be found in the shade but not in sustantial aspects.

The success of this first alternative lies in the assumption of the optimistic alternative forecasted in the analysis of the international context. Provided a slight improvement occu:s as expected in the devaloped economics and the subsequent but not too significant, reactivation in industrial production, and there­ fore, in the primary goods demand , prices included, takes place the open model would until now have certain possibilities of enforcement until.19 8 5, if no domestic political. development drastically modifies this outlook.

According to this alternative, the outlines of the present economic team would be basically oriented towards resolving the problem of the external sector applying both, the program of fiscal austerity and a rigid monetary discipline.

Approximative General Outlook, 1983-85 (First alternative)

The economic activity would experience the more critical recession in its history in 1983 (-2.5 per cent), extended into 1984 (0.7 per cent). In 1985, it would grow by 3.0 per cent and in 1986 it would conform to a new desaccelerative situation. The deterioration of the economic situation in 1983 would be the outcome of the implementation of a program of drastic monetary and fiscal rigidness. To achieve an equilibrium in the external sector, under the international adverse conditions, such program - 14 ­ would try to refrain the aggregated demand through monetary reserves. and credit contraction in a context of declining in Private consumption would be significantly constr~iined and the 1983, as an effect of the downfall in real salary and in elevated devaluation. In 1984, it would again fall, of 1985, elections year, it would pick up as a consequence of political an improvement of actual salaries accorded in reason interests.

Investment would contract in 1983 and in a smaller proportion: for such in 1984, reflecting its participation in the product main cause years by 17.0 per cent to 19.1 per cent in 1982. The devaluation, for this behaviour could be accounted for by high In slow growth and necessary cut-offs in public expenditure. in the devaluation 1985, the expansion of public works, the decrease raise iuvest­ rythm and the recovery of the economy would slightly year but ment in an upward trend extending into the following dependent on elections outcome.

level will A Dec/Dec 83.6 per cent is expected for 1983, this prices, be the consequence of important adjustment in controlled expectancy the heavy devaluation process and the high level of the registering thus generated. In 1984, inflation would desaccelerate, in the adjust­ 73.8 per cent. In 1985, elections year, contention a new desaccel­ ment process of controlled prices would account for per cent eration in the prices' dynamics, a variation of 60.4 process being observed for the year. Owing to a high inflationary in 1983, average and a low performance of the economic activity registering remuneration wculd fall by 10.7 per cent eventhough average an important upturn as compared to Dec 83/82. A yearly And a growth of growth of 2.6 per cent is expected for 1984. rythm 5.1 per cent Dec/Dec is expected for 1985. The devaluation - 15 ­ of 1983 will not attain a parity level, meaning a devaluation of 81.3 per cent with a dollar L.:hange rate for December (average) at 1,728.7 soles. Parity level would be maintained in the following years, with devaluation of 64.9 per cent ttnd 50.1 per cent for 1984 and 1985, respectively. With the purpose of posting a less negative actual interest rate, an adjustment of five points on nominal rates will be conceded in 1983. Sub­ sequently effective actual interest rates will be restored as an effect of inflation desacceleration.

Public finances will show permanent economic deficit:s bt.:­ ween 1983/85. Though lesser unbalances may be attained in the first years, these will still be significant becoming acute again in 1985. Nearly two thirds of the fiscal deficit would correspond in average to public enterprises.

The monetary situation in the projection period would be featured in its two first years by the monetary compression, particularly in 1983. A decrease of the actual credit, both public and private, would be observed for this year, together with a drop in international reserves. The monetary and credit tightness in 1984 would not be as strong as in the previous year with a reversal in the monetary policy for the last two years.

In 1983, the outstanding foreing zrade will be favorable by US$109 millions, improving to US$199 and 313 millions in the following years.

Evolution of exports is slow, even in 1985 where a certain significant upturn could be evidenced. The tendency of imports - 16 ­ would be contractive in the furecasted first years. - 17 -

FORECASTS SUMMARY

1982 1983 1984 1985 Actual Sector (Yearly actual % Var.)

1. DGP 0.7 -2.5 -0.7 3.0 2. Consumption -2.7 -3.1 -0.3 2.7 3. Investment 3.8 -9.3 -5.2 1.2 4. Agricultural 3.0 1.1 -2.5 2.9 5. Manufacturing -2.3 -4.7 -0.4 1.4

6. Services 0.6 -1.9 -0.7 2.8

Prices and Remunerations 1. Inflation a) T/N 64.5 87.2 71.1 66.4 I ) Dec/Dec 72.9 83.6 73.8 60.4 c) Fuel prices (% Var.) 87.5 119.9 10.1 60.1 d) Electricity prices (% Var.) 78.6 102.7 90.1 69.6

e) Water Prices (% Var.) 57.5 85.0 80.0 65.0

2. Type of exchange a) At period's end (Soles per dolar) 953.5 1,728.7 2,851.7 4,278.8 b) Period's devaluation (%) 91.1 81.3 64.9 50.1 c) Yearly average exchange delay S/.-US$ PTE 61 basis -5.0 -0.6 0.6 0.6

3. Remunerations (actual growth %) 8.0 -10.7 2.6 5.1 - 18 ­

1982 1983 1984 1985

4. a) Nominal interest rate (advanced) 47.5 52.5 52.5 52.5 b) Effective interest rate 53.9 60.4 60.4 60.4 c) Effective actual interest rate (averg.) -6.1 -15.7 -6.3 -3.9

Public Finances (% of DGP) 1. Central Government Deficit 2.0 2.5 0.7 1.9 2. Public Sector Deficit 6.6 J.1 .2 5.0

Money and Credit (% of actual Var. Dec/Dec)

I. Monetary Supply -6.9 -7.5 -3.6 3.6 2. Credit for Private Sector 19.3 -1.8 0.3 2.5

External Sector (US$ millions)

1. FOB Exports 3,248 3,529 3,701 4,110 2. FOB Imports 3,516 3,420 3,502 3,797 3. Trade Balance -268 109 199 313 4. Current Account Bal. -1,587 -1,314 -1,37- -1,502 5. Balance Payments 1,719 -165 -239 -50 6. RIN 132 739 500 450 - 19 -

DISAGGREGATED PROJECTION

Production

1. DGP per Type of Expenditure

In 1983, the economic activity of the country will experience the most critical recession in all its history, greater in magnitude than even 1970's. This decline will continue through 1984, reverting itself in 1985, year in which, however, an insufficient econromic growth may occur. The sensitive situation which our economy might experience in 1983, would be derived from the application of a rigid economic policy program in the monetary, fiscal and income fields, mainly, from the relatively permanent internationalteconomic situation which does not encourage a significant improvement of raw material prices or availability of foreing credit, and the existence of ad­ verse climatological and other situations which would affect the course of the agricultural and fisheries sector.

Private consumption would significantly fall in 1983, (-3.1%) and would do so again in 1984, although in a lesser proportion, as a consequence of the strong contraction of the actual salary and elevated devaluation, determinant factors for a decrease of imports. In 1985, elections year, the raise in salaries' purchasing power may result in an upturn of private consumption. Government consumption will follow a similar trend.

Fixed gross investment would present an unfavorable situation for the two year term 83/84, falling to 9.3 per cent and 5.2 per cent, respectively, by reason of a decrease in public investment attending budgetary raquirenents, and in private investment by - 20 ­ reason of the impaired general economic activity and the high cost which the adquisition of capital goods abroad will demand in a devaluation situation. Elections in 1985 will play an important role in the increase that would observe in investment, particularly public. The desacceleration of the devaluation process will also have a positive significance that year, as will the overall recovery of the economic activity.

The physical export of goods and services will slightly increase during 1983 (2.9 per cent), a desacceleration being per­ ceived in 1984 and incremented in 1985, as a consequence of the few possibilities of changes in foreign trade, foresseing too a scarcely significant increase in raw material prices and because during the period of the projection, important investments in mining and oil would still not be in their production phase.

Imports volumen will fall 10 per cent in 1983 and 3 per cent in 1984 as a consequence of the recessed production activity, the precarious level of international reserves, and devaluation acceleration, together this time, with an increase in custom tariffs. The relative recovery of economy and imports in the following years. )OP'PER 'TYPE OF EX11ENIJLTURE (thousands of million Soles of 1980)

1982 1983 1984 1985 1986

Value % Var. Value % Var. Value % Var. Value % Var. Vlue % Var

CONSUMPTION 274,988 -2.7 266,514 -3.1 265,591 -0.3 272,859 2.7 274,929 0.8

Private 236,390 -2.2 229,006 -3.1 228,608 -0.2 234,548 2.6 236,198 0.7 Public 38,598 -5.9 37,508 -2.8 36,983 -1.1 38,311 3.6 38,731 1.1

IBI 66,597 -3.8 60,398 -9.3 57,281 -5.2 57,946 1.2 62,065 7.1

IBF 03,573 1.0 55,902 -12.1 54,160 -3.1 55,946 3.3 61,503 9.9 Public 30,293 10.8 25,416 -16.1 25j650 0.9 27,795 8.4 29,392 5.7 Private 33,280 -6.4 30,486 - 8.4 28,510 -6.5 28,151 -1.3 32,111 14.1

VE 3,204 4,496 3,121 2,000 562 NET EXPORTS 7,200 13,053 14,813 17,011 15,039 Exports 58,297 8.7 60,004 2.9 60,350 0.6 63,413 5.2 63,876 0.7 Imports 51,997 -13.6 46,951 -9.7 45,537 -3.0 46,402 1.9 47,837 3.1

DGP 348,785 0.7 340,065 -2.5 337,695 -0.7 347,816 3.Q 353,033 1.5 - 22 ­

2. DGP by Sectors

Agricultural activity would still desaccelerate more in 1983 (1.1%), as a consequence of the climatological short­ comings in the first months of the year and the diminished actual credit provided for the sector by the rigid monetary program for the present year. In 1984, agricultural production will drop by 2.5% and will slightly pick up in the two year term 85/86 at an average rate of 2.8%. Fisheries production will drop even more sharply in 1983 (11.3%) by reason of the adverse impairing climatological factors which set in the last months af 1982. In 1984 a small asecending span of the fishing cycle would be initiated.

Mining dynamics in 1983 would have a better outlook than the previous year although no significant improvement of price prospects can be foressen and a slight decrease in oil production can be forecasted.

The industry's recessive process will aggravate in 1983 and will continue through 1984. 1983 would be a critical year for domestic manufacturing affected by the deliberate recessive economic policy which includes a contraction in the purchasing power, raises in financial costs, and inputs and capital goods. At the same time, the bulk of developed countries will continue with their protectionist schemes diminishing, therefore, the exporting possibilities of industrial products.

Construction will sharply fall in 1983 (-14.6%) as a conse­ quence of a reduction of public and private works which in turn would result i a program of substantial cut offs public invest­ ment. The effects of the public expenditure austerity would also be felt in the following year, although in a lessened magnitude, - 23 ­ and in 1985, elections year, public works would be relatively impelled.

The services activity would behave the same as the primary and secondary sectors. The services growth which desaccelerated significantly in 1982 as a cause of the reduced dynamism of the above mentioned sectors and the diminished rythm of foreign exchange, would be negative in 1983 (-1.9%) and 1984 (-9. 7%). In the 85/86 two year term this sector would recoid an upward trend as a result of the dynamizatin of the productive structure which would include the intensification of foreign trade. DGP PER, ECONOMIC SECTOPS

(thousands of million soles of 1970)

1985 1986 1982 1983 1984

Z Var. Value % Var. Value % Var. Value % Var. Value % Var. Value

-0.7 347,816 3.0 353,033 1.5 DGP 348,785 0.7 340,065 -2.5 337,685

AGRICILTUAL. 45,176 3.0 45,673 1.1 44,531 -2.5 45,822 2.9 47,013 2.6 3 282 7.2 3,696 12.6 3,811 3.1 FISHING 3,452 -2.0 3,062 -11.3 35,160 3.6 35,090 -0.2 MINING 32,116 4.9 33,208 3.4 33,939 2.2 7P -0.4 77,863 1.4 78,719 1.1 HANUFACT. 80,898 -2.3 77,096 -4.7 76, 16,091 -4.5 17,668 9.8 18,251 3.3 CONSTPUCTION 19,730 3.0 16,849 -14.6 C.4 -3,. 167,607 2.8 170,149 1.5 SERN.ICES 167,413 0.6 164,177 -1.9 163

73,303.9 123,435.3 DGP 13,871.5 25,277.7 42,S',i.U (Thousands of miilions in constant soles) I I - 25 -

Prices, Remunerations and Exchange Rate

Assumptions

The following basic premises have been assumed: As a consequence of the external sector situation, the devaluation process would maintain pace with the inflationary rythm in a manner that would not make it lose the parity level it has reached tending to improve it as possible. The evolution of controlled prices will be adjusted to the subsidies reduction plan, a central issue of the recently announced fiscal'program. The municipal electoral campaigns of the second semester of 1983' and the presidential campaigns of the first semester of 1985, have also been considered in the evolution of these prices.

Less negative levels are to be expected due to an adjustment of interest races during the first year of the forecast.

As a consequence of the stabilization process, actual remunerations will sharply drop in 1983, foreseeing a certain recovery in the following years.

Due to an exhaustion u. the Monetary Policy of the industrial­ ized countries a recurrence deriving in a gradual increase of foreign prices.

The expectancy factors will be a decesive element in the inflationary process of 1983, its share to the elevation of prices would diminish gradually in subsequent years.

No changes are assumed in the fiscal pressure on prices. - 26 -

Consumer Prices

The forecasted inflation Dec/Dec of 83.6% for 1983 would have been induced by the important adjustments in controlled prices, mainly in the first semester, and by the elevated devaluation; both factors in turn would encourage the expectancies' level a determinant element in the price evolution of the second semester.

Forecasted inflation for 1984 is 73.8%. The desacceleration of the inflationary process in this year is to a certain extent understood as a result of the stabilization program to be instituted during 1983 and of a slighter adjustment process of controlled prices both factors accounting for a lessened devaluation rythm and a re­ laxation of expectations.

A desacceleration in the evolution of prices is expected for 1985, presidential elections year. A contention will be observed in the dynamics of the contrrlled prices. The resultant inflation rate for this period is 60.4%.

CONSUMER PRICE INDEX - YEARLY

IPC % VAR. IPC %VAR December Average

1982 586.3 73.0 459.2 64.5 1983 1,076.22 83.6 859.7 87.2 1984 1,870.04 73.8 1,471.3 71.1 1985 2,998.76 60.4 2,448.7 66.4 - 27 -

Remunerations

Actual remuneration will be significantly depressed dvring the first semester of 1983 by reason of the elevated inflatLonary rythm and Stabilization Program and will subsequently recovetr somewhat in the second semester.

Although 1983 is an elections year (municipal elections) the economic crisis will make the yearly actual remunerations average fall by 10.7%, whereas the political factor will make the Dec/Dec comparative measure show a substantial upturn.

An actual increase of 2.6% is expected for 1984. For 1985, elections year, a Dec/Dec growth of 4.5% is expected for actual monthly average remunerations.

MONTHLY REMUNERATIONS AVERAGE -.SOLES

NOMINAL % VAR. REAL %,VAR.

1982 149,282 64.3 32,745 0.9 183 252,449 69.1 29,238 -10.7 1984 442,104 75.2 30,000 2.6 19.85 773,100 74.9 31,527 5.1 - 28 -

Rate of Exchange

The rate of exchange by the end of 1983 (Dec-Average) would be of 1,728.8 soles per dollar with a yearly average of 1,371.4 per dollar with a devaluation of Dec/Dec of 81.3% averaging 96.1%. The exchange delay at the close of 1983 will practically be null, as compared to 5% in 1982.

The devaluation Dec/Dec would be 65.0% for 1984 maintaining the parity level attained at the close of 1983. The dollar mean quotation for this year would be 2,295.3 soles, whereas in December it would reach 2,851.7 soles.

The desacceleration of domestic prices in 1985, would determine a lessened devaluation rythm. A Dec/Dec variation of 50.0% dollar quotation is expec.ted for this year.

EXCHANGE RATE % VAR. EXCHANGE RATE % VAR. December Average 1982 953.5 91.1 699.4 65.2 1983 1,728.8 81.3 1,371.4 96.1 1984 2,851.7 65.0 2,295.3 67.4 1985 4,278.8 50.0 3,586.3 56.2 -- 29 -

PUBLIC FINANCES

Considering the importance of the extertial sector on governmental income, the model considers exports and imports tax rates as current income on the DGP.

Current expenditures has been estimated taking in consider­ ation the average inflation rate and the growth in public consum=ption calculated in the actual sector.

Capital expenditure has been calculated as related to the average inflation and the public investment growth.

The results indicate that in 1983/86 public sector operations would show permanent economic deficits of 5.1%, 4.2% and 5.0% during the 1983/85 period, respectively, with a slight reduction in the fiscal unbalance as related to the product in the first three years.

About two thirds of the deficit would correspond in average public enterprises performance-which would fall in a proportion close to 3% of the DGP.

The magnitude of the Central Government's deficit as related to the DGP would be in the neighborhood of 1.5% as average for the years of the projection.

Fiscal pressure would show oscilations of approximately 17% of the DGP, primarily as the result of steering tax rates towards foreign trade. Tax rates on imports would be increased to 17% in 1983 and 17.1% in 1984, by reasons of a t'n,)oral increase in customs. - 30 -

Tax rates on exports in 1983 would be somewhat inferior to those in 1982, increasing slightly in 1984, to drop again in the last year to rates similar 'o those of 1982.

The Central Government's current expenditure would contract 9.3% in 1983 and 1.5% in 1984, in actual figures, and would show a positive growth of 5.3% for the forthcoming year.

Capital expenditure should also contract in 1983 due to a projected cut-off in public investment. Lowering again in 1984 although in a lesser proportion than the previous year, picking up in 1985. - 31 -

PUBLIC FINANCES

1982 1983 ­ 1984 1985 1986

1. Central Government income (thousands of million soles) Export taxes 116 181 362 520 851 (% of PnB exDorts) (4.1) (4.0) (4.6) (3.8) (3.8) Import taxes 476 796 1360 2111 3658 (% of DGP) (15.1) (17.0) (17.1) (15.7) (16.0) Other current income 1900 3235 5613 9603 16170 (% of DGP) (13.7) (12.8) (13.1) (13.1) (13.1) Total current income 2492 4212 7335 12234 20679 (%0of the DGP) (18.0) (16.7) (17.1) (16.7) (16.8)

2. Central Government disburse­ ments (thousands of soles) 18781 Current 2213 3752 6310 11038 (% of the DGP) (16.0) (14.8) (14.7) (15.1) (15.2) 4649 Capital 554 835 1322 2598 (% of the DGP) (4.0) (3.3) (3.1) (3.5) (3.8)

3. Sector's Economic Performance (thousands of million soles)

Central Government's deficit 275 375 297 1402 2751 (1.9) (2.2) (% of the DGP) (2.0) (1.5) (0.7) Deficit for the rest of the 2272 4937 Public Sector 643 902 1501 ( 3.1) ( 4.0) (% of the DGP) (4.6) ( 3.6) ( 3.5) Public Sector's Deficit 3674 7688 (% of the DGP) 913 1277 1798 ( 6.6) ( 5.1) ( 4.2) ( 5.0) ( 6.2) - 32 -

MONETARY SITUATION

One of the riost important characteristics of the. stabilization plan of the new economic team is the compression of the monetary aggregates, particularly in 1983.

The reduction of the monetary and credit variables would have its main support in the decrease of public and private credit, and primary issue, in a context of international reserves reduction.

The objective is the diminishing of presssure on domestic and foreign demand-which together with an arbitrary management and a temporal increase custom's tariffs will try to discourage imports and incentivate exports of raw materials in special.

A contraction of 7.5% in actual monetary supply is expected for 1983, resulting from a decrease in public and private credit added to a drop of US$204 million dollars in reserves.

Monetary tightness in 1984 would be less in magnitude than that of the previous year, foreseeing monetary growth in 1985 exceeding that of prices and a slight retraction in 1986.

Actual credit in the private sector would experience a contraction of -2% in 1983 (as compared to an increase of 19.3% in 119 82 1, retaining the same level in 1984. An upturn of 2.5% is expected in 1985. Actual credit for the public sector would substantially contract in 1983, falling again in the following years although in a lesser proportion. - 33 -

MONETARY SITUATION (Dec. each year, thousands of mnilion soles)

Credit for Credit for Private Public Other Monetary Period Rins Sector Sector Operations Supply 1982 896 3113 926 - 2601 2334 i983 1191 5589 1166 - 4000 3946 1984 1389 9710 1872 - 6384 6588 1985 1602 15934 2890 - 9498 10928

N0INAL VARIATION OF THE MONETARY SITUATION

(in percentages)

Credit for Credit for Monetary Period Private Sector Public Sector Supply 1982 96.3 25.9 53.2 1983 79.5 25.9 69.1 1984 73.7 60.6 67.0 1985 64.1 54.3 65.9

ACTUAL VARIATION OF THE MONETARY SITUATION (in percentage)

Credit for Credit for Monetary Period Private Sector Public Sector Supply

..1982 19.3 - 23.5 - 6.9 1983 - 1.8 - 31.2 - 7.5 1984 0.3 - 7.3 - 3.6 1985 2.5 - 3.6 3.6 - 34 -

EXTERNAL SECTOR

Assumptions

The following are the premises for thq projection of the external sector:

- Raw material prices will grow 2.5% during 1983 and 5% in the forecasted years. - Oil prices will maintain their stability in nominal figures (US$29/bar.) - A feeble growth in industrialized economies is to be expected. - International trada dynamics will be low, and besides protectionist policies will still applied. - If, as a matter of fact, the international financial system has recently given certain support to the country, the international outlook makes roreseenable a smaller flow of resources to Latin America. - A devaluation rythm which may take us to a parity level and which may maintain it, will be the main tool in the hands of the economic team for a control of the external sector. - Imports behaviour is consistent with consumption levels, investment and the economy's general dynamics as-it is too, with under of over exchange valuation and the net international reserves' level.

Provisions

The foreign trade balance in 1983 should exhibit a favorable US$109 millions, and this figure incremented to US$199 and 313 millions in subsequent years. - 35 -

Exports would grow in 19B3 by 8.7. per cent mainly as a consequence of prices since quanrums would do so by only 3.1 per cent. In 1984, 4.9 per cent exports growth would virtually be vegetative. A slight pick up may be forecasted for 1985 as a consequence of a recovered ltvel of sugar exports and greater availability of minerals, specially silver.

Imports, as a consequence of exchange adjustments and raises in custom's tariffs, and too, a decline of economic activity, would contract by 2.7 per cent in 1983, and would only increase by 2.4 per cent in 1984.

Relative raises in exports values are anticipated for 1985, as one cause of the evolution in external prices.

The guidelines set by the Central Reserve Bank have been followed for the other accounts of the external sector. Also the dynamics which are being observed in what concerns external debt and its service have been taken in consideration.

The balance of payments would show a negative outstanding balance of US$165 millions for 1983 expanding to US$239 in 1984. In 1985 due to a favorable upturn in exports, the external gap would amount to approximately US$50 millions. - 36 -

FOB IKCfnRTS (millions of dollars)

1982 1983 1984 1985

FOB Imports 3,516 3,420 3,502 3,797 FOB Consumption 76 767 743 750 Goods Imports FOB Intermediate 1,020 956 941 1,991 Goods Imports FOB Capital Goods 1,428 1,468 1,558 1,777 Imports

FOB Sundry Imports 300 250 260 270 - 37 -

BALANCE OF PAYMENTS (millions of dollars)

1982 1983 1984 1985

FOB Exports 3248 3529 3701 4110 FOB Imports - 3516 - 3420 - 3502 - 3797

Trade Balance - 268 109 199 313

Services Balance - 1319 - 1422 - 1573 - 1815

Current Account - 1587 - 1314 - 1374 - 1502

Capital Balance 1719 1149 1135 1452

Payment Balance 132 - 165 - 239 - 50

RIN 904 739 500 450 - 39 --

SECOND ALTERNATIVE

The failure of the previous scheme would mean a greater possibility that in a cabinet, change populist elements of the Accion Popular party may take control of the economic management. In which case, the current economic policy would be drastically modified.

The economic policy that would be applied by this second alternative policy would imply the fixation and control of speeially popular consumer's goods prices, a reduction of the minidevaluations rythm, the reconcentration of fiscal expenditure in the construction, health education and housing sectors. It would establish preferential interest rates, would raise and ban imports of a series of "luxury" products. It would establish subsidies on foodstuff and would imply a complete redifinition of the present scheme in which case a new renegotiation with the FMI would be required.

As we have already indicated, the failure of the first alternative is a requirement for the application of this scheme and in such case, a severe stabilization program must first be put in effect, particularly in the external sector. The latter implies a maxidevaluation of the exchange rate and a very severe renegotiation with the FMI to attract external resources in order to balance foreign accounts. Even then, the economic policy to be applied would pressure us towards increasingly overvalued ex­ change rates; negative actual interest rates; essential agricultural goods prices below the inflationary rythm, rent, transportation fares, electricity, public services and similars below the market's dynamic. - 40 -

This policy orientation would only revive Peru's economy of the period between 1975 and 1978, a time which saw the failure of successive stabilization programs which gave way to a lose of international reserves bordering -1,300 millions dollars and an overall devaluation of more than 400 per cent.

The only circumstances. that would make this alternative forceful is dependent of the external sector behaviour either through prices or indebtness associated to the possible projections of the international scenery. We may assure that its enforcement would be shortly outlived.

The,political effects of such an economic policy in circums­ tances in which the government has an accumulated wear out and a wholly unfavorable international context, takes us to think that the political stability of the regime is seriously jeopardize. - 41 -

IMLICATIONS FOR THE PRIVATE SECTOR

Development possibilities for the private sectcr are in general quite somber. The set'of macroeconcmic variables takes us to think that the perspective of a severe recession would take a so serious turn in many sectors hastening a considerable number of bankruptcies, specially in small and medium business that do not have a sufficiente financial support to cope with th. crisis. Let us look at the perspectives of the most important sectors:

Agriculture

In this sector the situation is less dramatic in the short term due to rainfalls which will be reflected in an upward trend. In the northern coastal zone-one rain stops and the situation returns to normal-cattle raising will pick up and new lands will benefit by the excess of water; what is important here is that the state be capable of channeling credits selectively to promote the most appropiate crops according to the type of soil and prevent the loss of efficiency and the salinization of the soil. Through­ out the coastal zone--specially the norther-managerial support must be given to incentivate the production of fast moving exportable goods which directly have a certain degree of industrial transform­ ation. The government's plans gave priority to this sector but as of this date it has not been sufficiently promoted. it is not enough to grant credits through some bureaucratic institutions such as the Agrarian Bank. More technical ente7prising support is required. The area with the greatest perspectives for agricultural development is the jungle brow region. That is, activities associated with the rational exploitation of lumber, tropical fruits, rice, sugar, yuca, pepper, cacao, coffee, oil palm, cattle, etc. have the greatest possibilities of development. Infrastructure is what is more needed: - 42 ­ roads, bridge- ,'4rehouses, silos, and services. The inmigrating inhabitants of this .gion have a well developed managerial capacity. However, a very sofisticated planification and advisory system must be instituted to prevent the errors in production techniques committed particularly by settlers' inmigrating from the Andean region which irreversibly affect the ecological equilibrium of the region. Also dispensable are the protection, utilization and diffusion of the native's techniques.

In the Andean region, small infrastructure works, mainly, the reconstruction of small watering channels, the mini-irrigations which would raise the productivity of the sector are fundamental.

Another fundamental element in the development of the area is the necessary improvement and liberalization of the marketing system. The biggest slice in earnings today goes not to the purchaser's pocket, but to the middleman; this makes it necesssary to break through the present rigid marketing schemes. Competition and the greatest concurrence of private firms in the marketing of agricultural products must be promoted, as well as the deconcentration of the wholeselling locations in Lima. There is where control and overpricing of agricultural goods takes place.

Fisheries

Because of ecoligical factors this sector will have to under­ go a long period of reconstruction. The fish canning industry is the cnly activity that still maitains its vegetative state; here however, a process of reconcentration must be inevitably be considered. One of the possible mitigating solutions which the government must contemplate is the aid that can be conceded through - 43 ­ what is known as joint purchase contracts to at least maintain its international market. By governmental purchases or salep, exports of the possible supluses should be promoted.

Mining

Mining perspectives are the best of the set because of expected improvement of the international prices for minerals. A special improvement will be observed in polymetallic enterprises (median mining) and in the big copper producers. What the sector needs in new investments and the amelioration of its productive capacity by introducing modern technology to reduce costs and be better prepared to resist with greater ease the following recessive period when this occurs. This is why it is important that the government encourage capitalization of the sector through concrete incentives. It is expected that the expeditive mechanism always resorted to of imposing new taxes to cover the government's current expenditures and postponing the necessary expansion of the sector, is not applied.

In the other hand, the mining sector should not discard invest­ ments that have been schedules for the 1980-1990 (see chart A). If a set of policy measures could be designed to incentivate by a tripartite participation (state, domestic private sector, and foreign capital), the exploitation of all these resourcej, a solid expansion of this vitally important sector's growth possibilities could be aLtained so that Peru's economy may this enlarge the productive basis of the export sector. This is the best sustenance for a development strategy that will not be affected by the continous tightness of the external sector usually generated Ly recurrent crisis of the balance of payments. With such expansion, new resources CHART A

MAIN MINING PROJECTS 1980-1 990

Investment Years millions of dollars 1981

1 4 1 ' J 1I 1 1

-200O1nl lmw Tamhh ,,..... _

8000.0 Muchi'ju~ll.,y ... .luclso

an esudico Allo Cit.,

400 Ait,,...... tt, -MUM 4 00 o( , .

30 Son Anloai,, . F_

en estudio Los

270

10 0 1W A mnp h i 6 ,t1 4 ,,-.,, . ..

290 wffC C ,,#-,,- /

15 lWf0 l. B-s ,.. - /

Boo .O v,:ci in sttucdy

4 n ) R ,ontipl o/ 75 MB Reline.r41 Iio1cJ - 44 ­ could be obtained to increment growth possibilities in sectors which at the beginning of their development are net importers and which need a determined period of maturiry and a number of special provisions to gain each time grater percentages of the foreign market demand..

A gradual recovery of the sector is expected for the 1983­ 1985 period. It is indispensable, thrcugh, that its expansion be encouraged. If the populist-cut al..native should be actually put into effect it would be expected that his sector would be the one to pay, via new taxation, the cost that the economic policy of this alternative would require for its viability. If the current ticieme is maintained, the sector will not be affected but at the same time, it will not either be expected that the present portfolio project be promoted due to the incapability of the government to manage portfolio investments with state participation in times of fiscal austerity and to the estrangement between the government--for lack of confidence-and the private sector which does not make short term investments, and besides, suggests strong pressure against a 100 per cent opening of mining to foreign capitals.

Anyway, it is a fact that mining needs to expand, technify, reduce iefficiencies and increase its proved probable reserves and production itself. CHART B

PERU: 'ANNUAL MINING PRODUCTION AND PROVED-PROBABLE RESERVES

COPPER LEAD ZINC SILVER MOLYBDENUN TUNGSTEN IRON ORE (TiF) (TMF) (TNF) (TIHF) (TnF) (TMF) (TMF)

Proven reserves (Mill.) 28'1 3'6 10'7 575' 242,000 85,000 321'000

Annual production 400,000 190,000 430,000 42' 900 900 6'000

Production years 70 19 25 14 269 94 54

Ln

Source: CENTROMIN - 46 -

Industry

This is one of the sectors that has most suffer by the reserves of the economic policy of the preset government. The situation is so difficult that the government itself has decided to bak up and reasses some provisions that some months ago was all out to defend.

The presente situation of the sector is as follows:

This industry did not show any growth during 1982 with a shortfall of -2.3% as compared to 1981, according to estimates of the CRB. And this in a sector which is contributing by 25% to the DGP, proviaing employment to 13% EAP and generating about 20% of the foreign exchange of the country with exports of a tenth of its production (90% of it,is for domestic consumption).

In the manufacturing sector, 19% of its production value corresponds to primary resources processing industries and the remainder 81% to industries generating a greater aggregate value.

Percentage of the Total Value

Primary resources processing 18.7 Non-ferrous metals refining 7.2 Sugar 4.0 Refined petroleum 3.8 Fishmeal 3.0 Other fishery transforming 0.7 Remainder of industry 81.3 TOTAL 100.0 - 47 -

The industry's structure can also be viewed through its weight in the different industrial groupings. The corresponding configuration and production evolution of each of these branches -in 1982 in shown in a chart.

The behaviour of the manufacturing sector in 1982 thus evidences that the economic policy, compunded with the effect of the external situation, has adversely affected industrial performance in a very significant manner.

If industries linked to the processing of primary resources (agricultural, fisheries and mining) are separated from those with a dynamic more marked by factors alien to the economic policy, we find that the rest of the sector is even more depressed than what an overall retraction of -2.3% can show.

The economic measures which with greater emphasis prompted the recessive effects in industry did not work isolatedly by rather feedbacking and thus multiplying their effects.

It is worth precising that last year's inliquidity has increasingly and drastically obstructed the procurement of the necessary working capital for the expansion of the activity. Industry in Peru is to a great extent dependent on credit, a phenomenon to which the different economic policies implemented since 1960 have contributed.

Obviously, a cut in credits of the magnitude and nature of that registered in 1982, could not be assimilated by the firms which had to adapt themselves to th1e circumstances refraining their activity. This, in matty instancei, compelled them to raise prices over the desired levels, thus contributing to a more dramatic dealine. - 4R -

Linked to unliquidity, industry was. affected by the decline of domestic demanda generated by a downturn of employment and actual salaries which had ensue bombined with a reduced manufact­ uring production rythm intensifying both results as this dynamic became more acute.

The presistent and increasing devaluation at a markedly higher rythm than the relative inflation (internal/External) was reflected in the higher cost of imported imputs generating an increase of prices well above salaries raises in domestic manufactures. This development contracted demanda and the adecuation of production to smaller orders.

In 1982, argumenting that domestic industry was to be made more efficient, liberalization of trade was put in effect, the maturity of its negative effects have been seen in 1982.

The free entry of imported products with drastically reduced tariffs and the inefficiency of smuggling controls undermined the attempted effective protection of industry.

Measures, 1982-1983

In May 1982, the New Industries General Law was promulgated in virtue of which fiscal incentives were granted on the basis of descentralization, disrggarding the priorization per type of industry of the previous law.

Such law also variated the situation of the small firm which do is defined commensurately to its annual sales, provided these not exceed 720 minimum vital wages. Participation in the firm's criteria earning management and ownership, was left to the workers' - 49 ­

a regime which had been modified in February 1977. During the following months, the bylaws were approved in a fractional manner; the majority of the communers chose to continue with their present status, prevailing the existence of the International Communities.

Spring initiated, a credit line of ten thousand million soles--insufficient to many entrepreneurs' judgement--was opened as working capital for the industrial sector; if such a line would have been substantially expanded, the effect would have been more encouraging.

A recent measure has permitted differed tax payment of outstanding installments as of December 31, in 20 monthly P.mortiz­ ations; as well as a reduction of tax on the surplus of the re­ valuation of fixed asset goods to a positive rate of 0.1%. Not so, with the recent modification on the custom's surcharge which will raise costs.

Suggestions

The economic policy is clearly recessive, it tries to contract liquidity, reduces purchasing power and, lastly has an effect, the reactivation of increments in costs and consequently accelerating inflation.

In this juncture and despite the still timid efforts to promote the sector, manufacturing will not grow, and it is even estimated that the manufacturing production wilJ significantly decline. - 50 -

A practicable measure which could alliviate Ljustry, would be a custom's restructuration oriented towards making imports of consumer's goods more expensive and inputs and capital goods more expensive and inputs and capital goods not domestically produced more inexpensive.

The positive effect of this suggestion would have to be accompanied by a serious and efficacious effort to control smuggling and insert underground industry in the formal market so that both may operate under the same set of rules. - 51 -

CHART C

1982: MANUFACTURING INDUSTRY BY BRANCHES

Growth Production Percentage­ 1982 Structure

TOTAL -2.3 100.0

Fishmeal 29.3 2.7 Glass 13.5 1.0 Chemical (industrial) 10.7 5.6 Non Ferrous basic metallic 6.1 11.0

Beverages 3.1 10.5 Printing 2.9 1.9 Refined Petroleum 1.4 4.2 Sundry -0.5 10.0

Food -3.5 11.8 Chemicals (sundry) -3.5 7.4 1.8 Rubber -5.5 Textile -6.3 9.8

2.9 Metallic products -7.0 2.2 Transport material -7.1 3.3 Non-metallic minerals -10.6 5.0 Machinery and electric appliances -18.6

Shoe -22.5 0.9 Paper -23.5 1.8 Basic metallic -24.8 2.9 Machinery and equipment -24.9 3.3

Source: BCR - 52 -

Perspectives for the main industrial sectors in the period 1983-85 are not far from those of 1981 and 1982 (see chart C).

If we disaggregate the chart we would see that there are brances which will confront even more dramatic situations.

Fishmeal

This sector will not grow in the next years due to ecological reasons, such as pointed out when analyzing the fisheries sector as a whole. Any government alternative will have to find a solution to unavoidable problem. In the event of a populist alternative it is to be expected that part of the fiscal expen­ diture will be directed via unrecoverable disbursements to alleviate the social strains that will appear in that sector. If the present alternative was to be maintained, a succesive number of brankruptcies may be anticipated with the subsequent discapitalization of the sector. Therefore, a strong reconcentration is expected in this sector which may finally be constituted by a very small number of firms that will survive only because of the financial support they may be able to levy.

Glass

This industry which had a strong expansion during the last years will be directly affected by the severe recession which already started in the construction sector (as we will further see). The great drop in glass will not recover until mid 1984 starting only then, a period of slight growth in 1985.

Since this industry is strongly associated to the most important economic-financial sectors, it may be able to face - 53 ­ the recessive period, but will have to incorporate new capitals to go through it during the next two years.

Unfortunately, this sector is a net impoiter and an open model as the one now upheld will affect it even more, The populist alternative will hardly protect it, but the final collapse that the second alternative could produce would be even still more harmful. In a very similar situation is tOe cement sub-sector and the rest of activities associateo to the construction industry.

Industrial Chemistry

This sector will also decline very sharply in the next three years, but is distinct from the others in that a percent­ age of its production is exported and this is the portion of the market that will let it confront the crisis with not very big problems. If the foreign portion of its market could be increased it will stand through the crisis with further case. If the populist alternative were to be implemented, this sector would be impaired as the overvaluation of the reate of exchange that will thus occur would make it uncompetitive in those markets.

Consumer's Goods

The sectors associated to this heading such as the shoe, textiles, paper, printing and confections industries, and even medicines, will drop their production levels even more due to the great retraction of the domeetic market. Futhermore, the textile sector which had a certain proportion of its production assigned to the foreign market and which was affected by the protectionist policy of the United States. should not expect - 54 ­

a sharp increase in demanda. The remaining sectors, specially those associated to the production of machinery and equipment, transportation, basic metallic, etc. will not recover until at least three more years. An improvement in these sectors will only occur if there is an actual recovery of the economy and this cannot be foreseen till beyond 1985 and dependent on the alternatives which may then exist in matter of development strategy for those years, an analysis of these scctors is attempted down below.

Food and Beverages

This heading is dealt separetely because it is expected that it will be one that will better put up with the projected situation for the next three years. The reason is very simple. The type of products with which they supply the market have a flexibility price of demand of less than one and, moreover, the structure of the market in which they operate is of a purely oligopolist cut. In addition, these products have proven in previous periods that they have a political weight not at all unesteemable receiving preferential treatment from the government. The possibility of the populist alternative will be the one to affect them most as a price control policy agains inflation normally tends to reduce their margins, but in turn, the typical policy subsidies and adjustments, normally preserved, will alliviate their problem. On previous crisis this sector produced the concentrations anticipated for the headings mentioned before.

Construction and housing

This sector gave an upturn to fiscal expenditure during the - 55 ­ first two years of the present government; nevertheless, it has been seriously affected by the current recessive situation since the private sector has not been incentivated to invest by a series of desincentives of a legal type, specifically the leasehold law. The only sector which had a *slight upturn within the private sub-sector was that of luxury apartments buildiag which experienced a raise directly associated to the previous inflationary period; however, it is estimated that currently in Lima and suburbs there are more than 8,000 units among offices and apartments which will not sell at their actual prices. This market w-ll in the short term drop sharply its actual prices and generate the bankruptcy of a number of construction and promoting firms.

The government has stopped a large part of its construction works and, besides, has outstanding debts since November for already executed works. These fir.,s have been paid with government bonds and their liquidity situation is ve y engaging. The perspective of this sector for the next years is difficult to outline. If the necessary modifications in the legal system of the leasehold law are established, house building for rent will recover its profitability in line with the margins currently allowed by the market in terms of cost of opportunity, thus probably producing a reactivation which although slow would still be significant. However, apparently, the political cost foreseen by the government withholds such a decision. If the economic sbheme shifts to the populist alternative there would not be possiblity of a favorable decision towards these measures.

The consequence. of this perspective for the sector as a whole are duplicated in the same or greater magnitude in those industries directly associated to this activity. Special attention - 56 ­ should be given to the activity associated to the production of construction inputs: iron, brick, sand, locksmizhing and, too, the unemployment problem should be highlighted since this is one of the sectors which provides more employment and has the greatest multiplying effects on economy, specially in regards to the domestic market.

Banking and Insurance

In this sector, due to continued shorfalls "inthe liquidity availability and the markedly increase of bad debts and excessive concentration of credits by some banks in firms controlled by the majority groups, a phenomenun of distrust and unstability in the national financial system, is producing the bankrupt­ intervention of two banks and the possiblity that seven more follow the same course. Under these circumstances and the remote possiblity of a modification of this tendency because of the weakenes position of both the public and private sectors for c-edit from foreign sources, %e are of the idea that this sector will not be able to overcome this juncture without a significant restructuration of the system. Subsequently. it is supposed that several institutions will be absorbed by the more solid ones and that the new ones will follow a very conservative policy depriving the other sectors of the lines and services they now provide.

In the insurance field, no problems of the magnitude expected in the banking system should occur as this type of institutions are duly protected and have an appropriate legal regime. HMost firms are protected either by real estate or by the overall international reinsurance system. However, the crisis impact has already been felt on the delayed coverage of the primes as well as in the amount of billings for new and old policies. The - 57 ­ degree of loss for damages or disasters has maintained its normal rate. The firms in an engaging situation are those associated to banks in a difficult position or to banks interved by the government.

Transportation

This sector has encountered serious difficulties for several reasons. In th first place, by the downfall of the economic activity which has reduced freight demanda, and in the second, by the effects of the liberalization of unit imports which resulted in overimports and an ecess in the supply capacity exposing the financial state of many firms which came inco existence as a result of.the not adequately calculated liberal­ ization incentives. The imported vehicles did not anser to the techinical requierements of the diffi,:ult national topography and, in additions, the rains, floods and landslides of the last three months have restrained even more the activity of this sector. It is thought too, that this sector will be restructed in the future, ultimately resulting in a concentration of these activities in a more reduced number of firms which will luckily survive via long term contracts that will assure a demanda in freight. The majority of these latter firms which grew out from collateral activities of others requiring this service permanently and which billing level ensures economic coundness even if their customers' portfolio is not diversified. Those firms which we could classify as independent or those not having the advantage of a constract-lease with the government or big enterprises will inevitably cease to operate. From this fact it can be assumed that the transport vehicle supply will increase affecting the potential demand of firms associated to the metal mechanic and transportation sectors already in a difficult situation. - 58 -

The 1985-1990 period

If there is no interruption in the continuity of the democratic system which cannot unfortunately be discared as desired, the following alternatives should be considered for the period on the basis of the present national political outllok.

The first possibility would be a regime which in matters of economics policy and development schemes, retakes the scheme outlined during 1978-80. The political group opting that scheme receive the enthusiasm of the industrial, financial, exporting sector and even too, that of the domestic goods-consuming middle class.

Among the industrial group, the sector which would more enthusiastically adhere to the aforementioned alternative is the one although producing for the domestic market would be attracted by the possibility of again orienting its production to the foreign market it the government actively backs them in this objective.

Among the presente schemes there are several political groups who would be ready to offer this scheme. On the one hand, are the most modern sectors of the APRA (leaded by Alan Garcia and re­ ceived support. from prominent members of the so called second phase period). Likewiese, there are certain economic groups which would favor this economic scheme but who do not trust the APRA because they still keep memory of the radical populist tendency of the earlier APRA, and of their silent conformity to most of the measures applied during the military junta's first - 59 ­ phase and which could be again reinstated once the People's Party is in power.

For the latter, general Francisco Morales Berm'dez' figure is most attractive. He is presently organizing a !Political front with that purpose.

Another major sector in Peru would take this alternative merged with a series of additional elements, such as concertation, agreements, prices, eages, production quotas, greater domestic market participation in consumption via a concerted and modern planification, would be the group which would readily conflomerate around the figure of the present labor ministir, Alfonso Grados, and which would have the greatest support from the big mass of independents which gave their vote to AP in the last elections. The social democratic alternative would be the solution for this group which does not exist at the time but which could be structured with relative swiftness. It would come out to compete with the two former ones in capturing via simpathy and serious­ ness the possibility of applying an economic scheme which is more or less common to the three, being that of Morales Bermudez the least attractive till now because of the political remanants and costs of his previous military government.

The Neo 'Liberal Scheme

This alternative would not be easily admitted by the 1985 electoral population. There are multiple reasons which go from the loss of prestige at an international level of regimes as those which Mrs. Tatcher of Reagan may post, till the collapse of counrtues like Argertina and Chile which applied them. Though it is said that they failed because they were misapplied, in Peru, it is unlikely that the electors will bRelieve in the - 60 ­ possibility of their correct application specially after the boastful mistakes of the teams, presently conducting the economic policies since they have been in office. This fact curtails the possibilities of any political grouping waving as a flag the excellence of the social market economy, the comparative advantage, the market as the single big efficient and so on assigner of costs and benefits. It is then that political parties as the Christian Popular are today needing serious reflection as to which new scheme must be assumed since the Chilean example put forth in 1979 will not be applicable in 1984-85. Via elections this scheme is very unlikely to succeeL and those who advocate it will not obtain anything more than 10 to 15% of the votes that their resources, image and advertising budgets will allow.

Unfortunately, the military recourse remains still open, specially if the present economic team continues reterating their errors and futhermore, if it fails and a populist alternative materializes in the time span left, it would be devastating in a few months under the given circumstances, specially in terms of the external and fiscal gap.

If an interruption of the democratic system occurs, the military alternative most likely would be easily attracted by the stabilizing canticels of Neo-Liberalism.

The result of this alternative will not be other than the repetition of the Chilean scheme which may have a period of prosperity in the short term but at the first reen on of the international system will sink in a crisis of the magnitude currently staged in the countries of the sourthern hemespheric cone. - 61 -

The populist alternative can hardly be proposed as s serious alternative, although it mist be kept in mind that the difficult domestic situation and the drastic drop in the salaries' level of the medium and low classes, could be good ground for some group or faction which may launch such a program. Perhaps the populist fraction of AP may be the one more easily inclined to offre an economic alternative of this kind, but their own political wear down accumulated during the last years of government make this alternative more impossible. - 62 -

INFRASTRUCTURE AND POSSIBLITIES OF THE PRIVATE SECTOR

Even if a favorable international atmosphere was achieved and a development scheme or model consistent with a promotion strategy for the private sector adopted, there are a series of bottle necks to cope with the next years. Some of these "bottlenecks" will narrow more the faster our economy grows. To achieve a balanced and harmonious growth, not only should the private sector be promoted, but a complete global strategy has to be outlined to reduce this type of proble-ns or to confront them in the foreseen time and in the necessary magnitude. Among this set of structural variables, the following can be mentioned:

Energy

Any economic policy alternative pretending to increase the industrialDGP of the country has to face the serious problem of the lack of sufficient energy. Sixty-four percent of Peru's population has no electric power and the future situation of the city of Lima--main industrial center of the country-exhibits since 1983 a supply deficit Csee following chart); The non implementation of the projects listed in the following chart, will severely curtail the possibilities of economic growth of the sector as a whole. Tbis program requires financing which if not obtained-even in part- would reduce the possibilities of the private sector!s development.

Based on data from the Ministry of Energy and Mines, an investment of 8,500 million dollars is required for the 1982-1990 period. If the execution of these projects was to be achieved, the population percentage acceding to electric power would be 55% in 1990. - 63 -

ELECTRIC POWER DEMAND) SUPPLY IN THE GREAT LIMA AREA (thousands of kilowats)

SUPPLY Year Demand Electrolima Electropery. , .

1973 488 485 200 785 297 1974 516 485 204 889 173 1975 569 485 204 689 120 1976 587 485 204 689 102 1977 597 485 Z04 689 92 1978 S09 485 204 689 80 1979 645 485 432' 917 272 )980 700 485 525" 1.010 310 .1981 868 485 493 978 110 1982 920 485 452 937 !7 1983 975 485 438 923 i 52i 1984 1.034 485 423 908 (126) 1985 1,078 485 583 (3) 1,068 ( 30) 1986 1.166 485 545 1,038 (136) 1987 1.238 485 526 1,011 (227) 1988 1,316 485 1.106 (4) 1,641 325 1989 1.379 485 T,084 1.619 220 1990 1.487 485 1,010 1,545 57

(1) Supnly to the north, 76 MW starting 1981. (2) Includes the Mantaro, Restituci'On and Sheque Hydroelectric Power Plants. (3) Operation starting in the Restituci6n Hydroelectric Power Plant (4) Operation starting in the Sheque Hydroelectric Power Plant. Transmission restricted because of line capacity.

Source: Electrolima, Electroperu MW ELECTRIC SUPPLY PROGRAM 1982-199.6 CENTER-NORTHERN INTERCONNECTED SYSTEM

INSTALLED

,°-, ? . _ - " "CAPACITY

WARRANTED CAPACITY

______sL.Row r_4~arL.to be. defined 15omw power planat _nb.edef ined OLMOS 300 MW

SHIOUE IV ISO0u4 ON

SIEOUE III 130MW CANUA V 131 uw cuLou, 20MW Huinco Rrea 'Kpansion

PAMPA 5L.UCA 03 MW

POCCHOS aw CUrUtPUUguw T.V. Wo MW "-"-T~ 17u1.wC-- T Ull fEW" M15W:

CA,. '.UAOUERO 71 MW DEIV. OUITARACS9A

MANTARO_tA.. 2BMW IIITEn.CEHTROMIN 17M .

ate ail Composito o e projects gu 0 " pre9ently199diesn y . "1921990 1996 MAIN HIDROELECTRIC P! OJFCTS 1980-1990

Investment MW Years

1-illions of dollars All 4 I I, 1981 201 Poachos 8 -- 09 Culqui 20

__22_ Curumuy 9

158O-M Carhuaquero 75

"Q. Gallito Clego 26 - L­

5.QJ= Caiidn del Palo 50

70Q Pampa Blanca 63

262MMwE um Yunc6n 126

170 W Cahuall 130

"30 Ampliac. Huinco 60

540 y Sheque (1-4) 600

?20.W Restiluci6n 217

150Macchu Plcchu 70

._... .- , : .- Oula 1 280

1B0~. Chrcani V '135 MAIN HYDROELECTRIC uPOJECTS 2000

MW

Investment. Years Millions of dollars 1981 600mo, 600 1600,, . _.. . . M arali6n .1 0 - §t u"""y; ;, , ,,.s-. ~ Moro~idn.1700 6 . ,m Huolag a90 :'700 " ....

34__m__ _ Chancay 600 NEW '

an estudio Huouro in study

ISO- Eno (1-4) 2600

_ _ _ _ Callahuanca. 70 6?N Apur 25 33 ... ' .ty

jig Lluta 11 70. / MAIN THERMOELECTRIC PROJECTS 1980-1990

Investment , .Years .Millions of Dollars I of 1981

.iqullos ; F,w..'.

6 PIurc 4,

4 Chiclayo 'ditl'

38.4 I Pucalilpa 20

27.4______Lima "100

8. Arequipa , W -68- .0•7' .... C

,-4r .'r

.7'

r-4 __ 0

-A 0 4.

i , .

,-,-, ! . ,1, ,:­ m~"", -- 0

,,..,. . c * a.,,.' --

0 ...... U--.,

oo 41 w CL P-

Z H - 69 -

Oil

The other great restriction, if reserves are not to be increased, is that associated to the oil production. If the tendency shown in the chart were not modified, perspectives for this sector are negative. Any future oil raises--if occurring-­ in the next yeats, would be regrettable and even with current and reduced prices, in 1985, Peru will be forced to import petroleum and the effects of this circumstance on the balance of payments will be sensibly evident.

Foodstuff

In this field, Peru requires a rapid resturcturation of its policy since any industrial growth-normally if urban location-­ demands a strong supply of food to cover the city's requirements. The non-existence of this support would tend to an overrating of hand labor and the channeling towards imports as has been the case until now.

Among the animal raising activity, aviculture is the more dynamic one, mainl, including poultry production which represents 80 per cent of the overall production.

Agricultural production, besides not supplying present requirements in uncapable of satisfying the feeding needs which the population growth demands. Industrial crops among the total production of the coastal area which is only reflected in the employment level (although low) is worth special mentioning. Conversely, the poultry activity is capable of satisfying the market's increasing demand for its propension to increment its production volumes. Poultry production (fowl and eggs) is a good alternative to attain medium term targets. - 70 -

A projection of the food requirements, only for Metropolitan Lima already shows the great increments in production and product­ ivity that will be required to cover the demand with a supply of adequate food resources.

"OJECTION OF NORMAL FOOD REQUIREMENTS

Foodstuff 1980 1985 1900 1995 2000

Fresh Milk 750 955 1,216 1,544 1,949 Meat and Fish 131 116 211 268 344 Eggs 32 41 51 65 83 Vegetables 451 574 731 918 1,192 Fruits 313 397 507 526 818 Potatoes & 579 737 939 1,193 1,526 Others Cereals 418 533 679 862 1,109 Dried Beans & 66 84 105 134 174 Others Sugars 121 153 195 249 317 Oil & Greases 121 156 198 251 322 - 71 -

CONCLUSIONS

In the light of the above conditions, we can conclude that the private sector would have to confront a very difficult period in the next three or four years. The concentration process which the crisis itself is expected to produce, will significantly affect the small and median enterprise. Any support policy for this sec­ tor either from the government of international institutions,. should be oriented to it whatever the nature of tis activity. What Peru needs is the expansion of the private sector's productive basis, but not through an irordinate growth of a few big techno­ logically highly sofisticated firms, but rather through technical, financial, managerial, marketing, etc. advice to the great number of small and median entrepreneurs who are not sufficiently protected to stand through the crisis and the stabilization programs, and too, the drastic changes in the economic policies' orientations.

A concrete feature would be the establishment of a private non lucrative institution to provide support-without the state's excessive bureaucracy-to the median, small and micro firms which should be the actual basis on which any serious attempt of economic development having as a conerstone the private sector's promotion, should rest.

The preparation and training ot small entrepreneurs to qualify them to deal with iinancial, marketing--exports-imports in particular-­ credit, legal, labor, accounting, economic, etc. problematic issues is fundamentally important; the lack of training leaves them vulnerable to the recurrent recessive cycles of our economy. It should not be forgotten that market, employment, and the foundations of the big enterprise, base their activity in the existence of a median and small sector sufficiently sold to ensure the country's development.