Hot spots: Peru. (International Section).(agriculture-and resource-based economy wound up with results in 2002 that surpassed most initial estimates)

Peru's agriculture-and resource-based economy wound up with results in 2002 that surpassed most initial estimates. One of its broadest measures, domestic demand, which comprises private as well as government consumption and investment, powered 4.7% higher after a 0.3% decline in 2001. In the fourth quarter alone, demand increased by as much as compared to a rise of 1.6% in October-December of the preceding year. Capital spending was not the main driver. Private investment gained by only 0.7% in 2002 and public investment declined by 8.9%. But this does not change the fact that the economy is in the midst of a fairly brisk expansion after a four-year downturn.

Real gross domestic product expanded by 5.2% in 2002. The fastest-growing sector was mining and hydrocarbons, propelled by surging output at the giant new Antamina copper-zinc mine. But construction proved to be buoyant as well, thanks largely to a government-sponsored low-income housing program. Manufacturing also gathered momentum, in the most recent months primarily owing to a trade deal signed in 2002 with the United States, the so-called Andean Trade Preference and Drug Eradication Act (ATPDEA) which allows thousands of products duty-free entry into the U.S. The deal has proven to be especially beneficial for the local garment industry, which did well even before the newly gained privileges.

The official housing program is being continued and the Ministry of Housing, Construction and Sanitation predicts, not unreasonably, that the construction sector will advance by 5.5% in 2003. This would be a good showing, even though it would not match last year's. The Central Bank projects a 5.4% rise in private investment for all of 2003, and the Treasury Department recently forecast a 10.4% advance for the first quarter, followed by increments of 45% in April-June, 3.6% in the third quarter and 3.5% in October December.

Given these trends, real GDP should advance this year by more than the 4.0% the government is targeting. We would not be surprised to see the economy gain by 4.5%-5.0%. Growth on this order would soak up some of the unemployment, which by end-2002 had climbed to 8.9% of the labor force from 7.9% twelve months before. Inflation will not be a problem, since consumer prices in February were just 2.80% higher than a year earlier (monetary erosion in 2002 was 152%). In other words, the Central Bank will not be forced to start running a growth-stunted tight monetary policy.

There is a risk that the weather phenomenon El Nino, which caused so much devastation in 1998/99, could turn out worse this year than is generally anticipated at present. But for this contingency Peru has a special deal with the IMF, a "precautionary accord" under which it could run up this year's fiscal deficit to 23% of GDP from the 1.9% envisaged by the authorities. The Fund leaves this possibility open if the country feels a need to ask for it in the face of a problem with El Nino or any circumstances of external shock which cannot be managed by the local economy" Conceivably this could even include fallout from the impending war against Iraq, although it is unlikely that Peru would be hard hit by such a development.

For the time being, the financing gap faced by the country is quite manageable. According to the 2003 budget plan, the government is authorized to issue up to USD 1 billion in debt abroad. It sold USD 500 million in 12-year global bonds on January 31 at a country risk premium of 5-77 percentage points (over the comparable 12-year U.S. Treasury bond) with a ...