VZCZCXYZ0002
RR RUEHWEB

DE RUEHPE #2347/01 1911341
ZNR UUUUU ZZH
R 101341Z JUL 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 6102
INFO RUEHBO/AMEMBASSY BOGOTA 4859
RUEHBR/AMEMBASSY BRASILIA 7454
RUEHBU/AMEMBASSY BUENOS AIRES 2976
RUEHCV/AMEMBASSY CARACAS 0544
RUEHLP/AMEMBASSY LA PAZ JUL QUITO 1337
RUEHSG/AMEMBASSY SANTIAGO 1377
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHDC

UNCLAS LIMA 002347

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
BankQs May 2007 poll of local financial institutions
and economists.  The GOP report notes PeruQs 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 nationQs negligible improvement in
major poverty indicators, the report attempts to re-
orient the focus of PeruQs economic policy goals by
introducing more social indicators into its forecasts.
The GOP now states that it aims to significantly
improve PeruQs key social indicators by the end of
President GarciaQs 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 GOPQs 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, PeruQs
Ministry of Economy and Finance (MEF) refers to PeruQs
current economic expansion as the countryQs 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 MEFQs 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 Consumption  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 demandincrease of 10.2
percent year-on-year (including a private gross fixed
investment increase of 19.5 percent year-on-year),
whch 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.
PeruQs 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 GOPQs aim to reduce
poverty and other indicators by 2011, the final year
of GarciaQs 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 GOPQs social programs.

Peru: Main Social ProgramsQGoals 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 PeruQs minimal poverty
reduction is the countryQs high unemployment.  The
official unemployment rate for Lima is nominally just
under 10 percent.  However, the countryQs 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 PeruQs 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 countryQs 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