Peru: Country Forecast

Forecast
Mar 7th 2007
From the Economist Intelligence Unit
Source: Country Forecast

The president, Alan Garcia of the centre-left Partido Aprista Peruano (Apra), will continue to enjoy a comfortable level of popular support. Having gained the backing of the country’s business sector, unlike in his ruinous first term as president (1985-90), Mr Garcia will continue to implement the investor-friendly policies of the past decade. Mr Garcia has inherited a strong economy and is fortunate to be in power at a time of record-high mineral prices. The extra revenue provided by strong economic growth will provide scope for him to implement his social policies, but will also raise expectations. With over half of the population living in poverty, Mr Garcia will, within the constraints of maintaining hard-won fiscal stability, attempt to reduce inequalities by boosting public investment in basic infrastructure, such as water connections, sanitation and road construction. Economic growth will be driven by investment related to the Camisea natural-gas project, as well as by growing exports of minerals, textiles and agricultural produce. Vigilant monetary policy and a stable currency will help to keep inflation anchored around the 2% Central Bank target. The current-account surplus will narrow in 2007-08, as softening commodity prices contribute to an erosion of the trade surplus.

Key changes from last update

Political outlook

The Garcia administration suffered its first major setback in February with the resignation of the interior minister, Pilar Mazzetti, after a controversy stemming from the purchase of police vehicles at inflated prices. An Apra congressman, Luis Alva Castro, will replace her in the post.

Economic policy outlook

In February Peru swapped and bought back US$2.3bn of old Brady bonds and a global 2012 paper as part of its debt management strategy.

Economic forecast

After revising up the Economist Intelligence Unit’s forecasts for private consumption and fixed investment, we expect GDP growth to reach 6.8% in 2007.