VZCZCXYZ0007
RR RUEHWEB

DE RUEHPE #2345/01 1902216
ZNR UUUUU ZZH
R 092216Z JUL 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 6099
INFO RUEHBO/AMEMBASSY BOGOTA 4856
RUEHBR/AMEMBASSY BRASILIA 7451
RUEHBU/AMEMBASSY BUENOS AIRES 2972
RUEHCV/AMEMBASSY CARACAS 0541
RUEHLP/AMEMBASSY LA PAZ JUL QUITO 1334
RUEHSG/AMEMBASSY SANTIAGO 1374
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHDC

UNCLAS LIMA 002345 
 
SIPDIS 
 
SIPDIS 
 
USTR FOR BHARMAN AND MCARRILLO 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USEU FOR DCM 
 
E.O. 12958: N/A 
TAGS: ECON SOCI PGOV ETRD PE
SUBJECT: PERU FORECASTS 7% GDP GROWTH FOR 2007, SHIFTS 
POLICY FOCUS TO SOCIAL ISSUES 
 
 
SUMMARY 
------- 
 
¶1.  In its latest medium-term economic report, the GOP 
raised its forecasted GDP growth rate for 2007 to 7.0 
percent from its August 2006 forecast of 5.5 percent. 
This reviewed increase is in line with the Central 
Bank's May 2007 poll of local financial institutions 
and economists.  The GOP report notes Peru's vigorous 
growth over the last six years, and its success in 
minimizing its vulnerability by substantially reducing 
the fiscal deficit and the foreign debt to GDP ratio. 
Responding to the nation's negligible improvement in 
major poverty indicators, the report attempts to re- 
orient the focus of Peru's economic policy goals by 
introducing more social indicators into its forecasts. 
The GOP now states that it aims to significantly 
improve Peru's key social indicators by the end of 
President Garcia's term in 2011.  These indicators 
include total poverty, rural poverty, chronic 
malnutrition, and education, among others.  While 
continued economic growth in the next few years seems 
likely, meeting the GOP's social goals will provide a 
special challenge.  End Summary. 
 
LONGEST EXPANSION CYCLE 
----------------------- 
 
¶2.  In its 2008-2010 Multi-Annual Macroeconomic 
Framework report, released on June 2, 2007, Peru's 
Ministry of Economy and Finance (MEF) refers to Peru's 
current economic expansion as the country's longest. 
The report notes that expansion from the second half 
of 2001 through the second half of 2006 has lasted 22 
quarters.  This is far longer than the average 14 
quarter duration Peru had previously experienced.  The 
growth is also slightly stronger at 5.5 percent versus 
the average of 5.4 percent GDP increase of the 1972- 
1975 expansion.  Peru saw a real GDP increase of 33 
percent during the 2001-2005 period. 
 
VIGOROUS GROWTH TO CONTINUE 
--------------------------- 
 
¶3.  The report increased the MEF's medium-term GDP 
forecast for the 2007-2011 period.  In August 2006, 
the MEF forecasted an average GDP increase of 5.2 
percent in the 2007-2009 period.  It now predicts GDP 
growth will average 7.0 percent in the 2007-2010 
period, as shown in the table below.  The MEF expects 
private investment to remain strong, with exports 
increasing in 2007, while inflation will stay low. 
 
Peru Forecast: Main Macroeconomic Indicators 2006-10 
--------------------------------------------- ---- 
                    2006   2007   2008   2009   2010 
 
- Gross Domestic Product 
Nominal GDP(bns USD) 93.5  104.0  112.2  120.9  130.9 
Per Capita GDP (USD) 3,394  3,732  3,981  4,242  4,544 
- Population (mln)   27.5   27.9   28.2   28.5   28.8 
- Annual chg, real terms (pct) 
GDP                  8.0    7.0    6.5    7.0    7.5 
Private Consumpion  6.5    6.0    5.0    5.2    5.2 
Public Consumption   8.7    4.0    3.2    2.9    2.7 
Private Fixed Invest.20.2   15.5   12.0   12.5   12.6 
Exports (volume)     0.3    8.1    8.1    8.2   11.6 
Imports (volume)     12.3   14.0   11.5   11.0   10.0 
Inflation (ann.avg.) 2.0    0.9    2.0    2.0    2.0 
- Percent of GDP 
Fiscal Balance       2.0    0.0   -0.5   -0.5   -0.2 
Current Acct Balance 2.8    1.5    0.6   -0.2   -0.4 
Public Ext.   Debt   23.5   20.9   18.8   17.5   15.9 
- Million USD 
Exports             23,800 26,131 28,100 29,906 33,119 
Imports             14,866 17,799 20,377 23,310 26,392 
 
--------------------------------------------- --------- 
http://www.mef.gob.pe/ESPEC/MMM2008underscore 2010/MMMu 
nderscore2008underscore2010.pdf 
 
¶4.  After a far better macroeconomic performance in 
2006 than expected, local observers anticipated the 
GOP would review and increase its 2007 and medium-term 
forecasts for August 2006, the first forecast of the 
then incoming Garcia Administration.  In August 2006 
the MEF had forecasted a real GDP increase of 6.6 
percent in 2006 and 5.5 percent in 2007.  However, 
2006 brought a real GDP increase of 8.0 percent, low 
inflation of 2.0 percent, a fiscal surplus of 2.0 
percent of GDP, and a surplus in the Balance of 
Payments current account of 2.8 percent of GDP. 
 
¶5.  The first quarter of 2007 was also strong, with a 
GDP increase of 7.5 percent year-on-year.  This was 
fueled by a robust domestic demand increase of 10.2 
percent year-on-year (including a private gross fixed 
investment increase of 19.5 percent year-on-year), 
which more than compensated for a weak 1.0 percent 
increase in exports.  Inflation stayed low at 0.4 
percent. 
 
POLICY SHIFT TOWARDS SOCIAL ISSUES 
---------------------------------- 
 
¶6.  For the first time, the government is setting 
poverty reduction and social goals.  The 2006 election 
made the Garcia government painfully aware that the 
universal public perception is that while the economy 
is booming, poverty is by no means disappearing. 
Peru's poverty has remained stubbornly high in spite 
of recent years' strong, sustained growth and 
moderately high social expenditures by the GOP. In 
order to avoid potential social unrest in the not too 
distant future, the GOP wants to maintain continued 
foreign and private investment and continue business- 
friendly policies.  But the government will also need 
to focus on making its anti-poverty programs more 
effective.  Several months ago, the government 
announced a series of rather timid administrative 
measures, consolidating and streamlining a few dozen 
agencies and programs. 
 
¶7.  The report highlights the GOP's aim to reduce 
poverty and other indicators by 2011, the final year 
of Garcia's presidential term.  The GOP plan is to 
reduce overall poverty from about 50 percent to 40 
percent; to cut rural poverty from about 70 percent to 
50 percent; and to improve several other social 
variables.  The table below lists some of the main 
goals of the GOP's social programs. 
 
Peru: Main Social Programs' Goals by 2011 
----------------------------------------- 
- Rural poverty: To be reduced by 20 percentage points 
(from 72 percent currently) 
- Chronic malnutrition of children under five years 
old in rural areas: To be reduced by ten percentage 
points (from 39.0 percent currently) 
- Drinking water supply in rural areas: To be 
increased by 20 percentage points (currently 63.2 
percent have no access to drinking water supply) 
- Elementary education of children under six years old 
in rural areas: To be increased by 20 percentage 
points (from 41.3 percent who attend Elementary 
Schools currently) 
 
POVERTY AND UNDEREMPLOYMENT 
--------------------------- 
 
¶8.  The report discusses wide ranging reforms and 
project changes the GOP will need to undertake in 
order to substantially improve the effectiveness of 
its poverty-fighting programs.  Although the expansion 
 
has created many jobs, particularly in the sectors of 
farming and apparel, poverty remains around 50 percent 
(the last official figure is from 2004 at 51.6 
percent). 
 
¶9.  One reason explaining Peru's minimal poverty 
reduction is the country's high unemployment.  The 
official unemployment rate for Lima is nominally just 
under 10 percent.  However, the country's reality 
includes significant rural unemployment and a 
considerable "underemployed" population, including 
part-time vendors, taxi drivers, and household 
laborers.  There are about 300,000 underemployed 
workers in Lima alone, according to the Ministry of 
Labor.  The underemployed in Lima have gone from 56.2 
percent in 2003 to 54.1 percent in 2006.  To continue 
reducing this high level of underemployment, analysts 
say the economy would need to grow much faster than 
the 7 percent the MEF forecasts from 2007 to 2010, and 
sustain that growth for a longer period. 
 
COMMENT 
------- 
 
¶10.  Continued high metal prices, stronger export and 
import growth through the U.S. Peru Trade Promotion 
Agreement (PTPA), surging domestic demand, and 
increased private investment are all elements that 
will help Peru's economy maintain the impressive 
growth it has seen over the past five years.  But in 
order to improve the stubborn poverty indicators, more 
is needed.  By introducing key social indicators as 
measurements of policy goals, the GOP has only 
formalized what most voters had realized in 2006, i.e. 
that the country's superb macroeconomic growth has not 
managed to sufficiently reduce poverty.  If poverty, 
malnutrition and government services are to be reduced 
further, the government will have to tackle the issue 
separately through more effective government programs, 
better coordinated spending plans with the regions, 
judicious oversight of the extractive industry funds 
(canons), and intelligent use of the proposed 
Millennium Challenge Account threshold program. 
STRUBLE