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Peru has been a regional good news story for some time now, enjoying sustained, solid economic growth, burgeoning trade and foreign investment and a sense of promise and possibility unparalleled in the memory of most living Peruvians. But stellar macroeconomic numbers masked a remarkably unequal distribution of the gains from growth. Lima and the main cities along the coast reaped the gains from growth, but Perus interior remained neglected.

The perspective of a Peru on the march over the last decade - successfully climbing out of the trench into which it had fallen in its years of economic and political crisis when quadruple-digit inflation and encroaching terrorism threatened the very integrity of the state - remains palpable. Many observers also insist that the statistics don't lie, that economic growth has benefited more than a select few, that poverty is noticeably down and that, whatever the structural challenges.

Peru remains one of the best performing economies in Latin America, with solid macroeconomic policies and fundamentals and visible gains in poverty reduction. Peru has been one of the fastest growing Latin American economies over the past decade. Between 2003 and 2013 the Peruvian economy grew an average of 6% per year. Though the trend did not continue in 2014, Perus 2.35% growth was still higher than the 2.0% average growth in Latin America.

Like most of the region, Peru faced a challenging external environment in 2014. At the same time, domestic supply disruptions and a drop in subnational public investment compounded external shocks, resulting in a sharp slowdown in growth. Growth was expected to recover in 2015 and over the medium-term, contingent on production at new mines approaching capacity and priority infrastructure projects unfolding according to plan.

With the end of the commodity boom, a push to deepen structural reforms will be necessary to sustain potential growth and continue to make progress in social inclusion. As the economy has grown, poverty in Peru has steadily decreased falling by half from 56% in 2005 to 23.9% in 2013 according to the World Bank. HSBC describes Peru could eventually be a bigger economy than Chile, Colombia, or even South Africa in the long term.

The steady economic growth began with the pro-market policies enacted by former President Alberto Fujimori in the 1990s. Peru's economic growth was strong over the 7 years up to 2010, averaging 7.0% a year (including 2009, the year the economy grew only 0.9% as a consequence of the global financial crisis). This growth resulted largely from market-oriented economic reforms (which included measures to promote trade and attract investment) and privatizations in the 1990s, aided by high international prices for Perus largest commodity exports.

Peru weathered the 2008 global financial crisis well and was one of the few Latin American countries that had a positive growth rate in 2009. Annual average inflation receded to 2.9% in 2009 and 1.5% in 2010 after jumping to 5.8% in 2008 due mostly to substantial global food and oil price increases. Three consecutive years of fiscal surplus turned into deficits of 1.6% of GDP in 2009 and 0.5% in 2010, but a 1% surplus is projected for 2011. Thanks to pre-payments and lower borrowing, public external debt in 2010 dropped to $19.9 billion or 12.9% of GDP (compared to 70.9% at the end of 1988). Foreign reserves were a historic $44.1 billion at the end of 2010 and $48 billion at the end of September 2011.

Real GDP grew 8.9% in 2007, 9.8% in 2008, 0.9% in 2009, and 8.8% in 2010. Economic expansion in recent years has been driven by construction, private investment (mainly in mining and oil and gas projects), and domestic consumption. Peru's economy is well managed, and better tax collection has been increasing revenues, with expenditures keeping pace. Private investment is rising and becoming more broad-based. Peru obtained investment grade status in 2008.

From 2009 to 2013, Peru experienced a period of sustained economic expansion. The economy expanded by 0.9% in 2009, 8.8% in 2010, 6.9% in 2011, 6.3% in 2012 and 5.0% in 2013. Provided below is a discussion of the key trends and events affecting economic results during this period.

In 2009, GDP expanded by 0.9%, as compared to 2008. The deceleration of economic growth was due primarily to weak private consumption and a decrease in private investment, which resulted in a 2.8% decline in domestic demand during 2009. Exports decreased 13.1% to U.S.$27.0 billion in 2009, compared to U.S.$31.0 billion in 2008. The current account posted a deficit equivalent to 0.6% of GDP.

During 2010, GDP grew by 8.8%, compared to 2009. The sectors that experienced growth were agriculture and livestock, hydrocarbons, construction, utilities and other services. The expansion of 24.0% in the hydrocarbons sector in 2010 was due primarily to oil extraction, especially that of natural gas. The dynamic development of the natural gas market in the country was driven by an increased use of this resource in the electric power market, and in mechanic transportation, as well as in industrial, commercial and residential consumption. The expansion in the utilities sector was due to increased production in the electric power sector/industry. Growth in the construction sector resulted in a greater local consumption of concrete and in increased investment in construction works. The livestock and agriculture sectors grew, primarily driven by increased production of products destined for the domestic market. Finally, the commerce sector grew as a result of the increase in the commerce of motor vehicles, construction and hardware materials.

In 2011, GDP expanded by 6.9% compared to 2010. The deceleration of economic growth was primarily due to a moderation in the domestic demand dynamic, as a result of a decrease in public expenditures during the year. This decrease in public expenditures was principally caused by the issuance, in March 2011, of Supreme Decree No. 012-2011 which sought to increase public savings in order to withstand the adverse effects of a downturn in the international economy after the 2009 crisis and a decrease in private investment. Exports increased by 30.1%, to U.S.$46.3 billion, compared to U.S.$35.6 billion in 2010. The current account posted a deficit equivalent to 1.3% of GDP.

By the 2011 election, the lessons to be learned from the visible results of the different economic model spursued in South America were too obvious to overlook. The battle among the different varieties of leftism in Latin America management, with Chavez and Lula as the standard bearers of two distinct models of economic management yielded a striking contrast in terms of outcomes that had become impossible to ignore. Economic pragmatism with a leftist cast had undeniably yielded much better results.

In 2012, GDP expanded by 6.3% compared to 2011. The deceleration of economic growth as compared to 2011 was primarily due to a decrease in net exports and an increase in international economic uncertainty. The trade balance recorded a surplus of U.S.$5.1 billion compared to U.S.$9.3 billion in 2011, while the current account posted a deficit of U.S.$6.5 billion, or 3.6% of GDP. In 2013, GDP expanded by 5.0% compared to 2012, due largely to public sector investment and public and private consumption. The trade balance recorded a deficit of U.S. $0.4 billion compared to a U.S. $5.1 billion surplus in 2012, while the current account posted a deficit of U.S. $10.2 billion or 4.9% of GDP.

Peru and the U.S. signed the U.S.-Peru Trade Promotion Agreement in April 2006 in Washington, DC. The PTPA was ratified by the Peruvian Congress in June 2006 and by the U.S. Congress in December 2007. The Peruvian Government passed several changes to its environmental and intellectual property laws in order to allow the PTPA to enter into force on February 1, 2009.

Perus exports of goods reached $35.1 billion in 2010, partly as a result of recovering mineral prices. Peru's major trading partners are the U.S., China, EU, Switzerland, Canada, and Japan. According to U.S. Government statistics, after 9 years of deficits, the United States registered 3 years in a row of trade surpluses with Peru during 2008-2010, with Peru exporting $5.1 billion and importing $6.8 billion in 2010. Perus exports include gold, copper, crude oil and petroleum products, coffee, asparagus, apparel, molybdenum concentrates, and others. Imports include machinery, chemicals, computer and electronic products, petroleum products, electrical machinery, plastics, vehicles, steel, and cereals.

Peru belongs to the Andean Community, the Asia-Pacific Economic Cooperation (APEC) forum, and the World Trade Organization (WTO). Peru has trade agreements with Chile, Mexico, Canada, Singapore, China, the European Union, South Korea, and the European Free Trade Association (EFTA), and is negotiating with Japan. Peru is also a participant in efforts begun in early 2010 to negotiate a regional trade agreement under the Trans-Pacific Partnership, which also includes the United States.

The Peruvian Government actively seeks to attract both foreign and domestic investment in all sectors of the economy. Perus Central Bank estimates that the stock of foreign direct investment (FDI) amounted to $41.8 billion at the end of 2010, while the U.S. Department of Commerce reported that U.S. investment in Peru on a historical-cost basis reached $7.9 billion in 2010, making the United States Perus largest foreign investor. Spain and Chile are also leading investors. FDI is concentrated in oil and gas, telecommunications, mining, manufacturing, finance, and electricity.

Peru is a source of both natural gas and petroleum. In August 2004, Peru inaugurated operations of the Camisea natural gas project. Camisea gas has transformed Perus energy matrix, reducing the countrys dependence on imported diesel and power rationing in drought times. The $3.8 billion Peru LNG project, commissioned in June 2010, has become the largest investment in a single project ever made in Peru. The plant liquefies natural gas for export to Mexico and other countries, converting Peru into a net energy exporter in 2010.

For several years, Peru has maintained its position as the world's top producer of silver, second in zinc, third in copper and tin, fourth in lead, and sixth in gold. Mineral exports have consistently accounted for the most significant portion of Peru's export revenue, comprising 60% in 2010. Mining projects worth $50 billion are either in construction or undergoing the permitting phase, though many have been subject to delays due to local community opposition.

Background

Between 1930 and the mid-1960s, Peru had one of the most successful economies in Latin America. During this time, Peru generally deviated from the import-substitution model adopted by other countries in the region. Peru adhered, except for brief intervening periods, to laissez-faire, non-interventionist economic policies. The Government encouraged foreign investment through tax incentives and legislation guaranteeing equal treatment of foreign and domestic investors. Aided by its main exports, consisting of fish, fish products, copper, petroleum and agricultural products, Perus economy grew steadily during this period.

Beginning in the mid-1960s, the Peruvian economy experienced a series of setbacks. Public sentiment began to turn resolutely against foreign investment. Pressure for change in economic policies increased as a result of:

  • class and social conflicts, characterized by populist resentment against the economic elite that ruled Peru and against the presence of foreign companies in industries related to Perus national resources, such as petroleum and mining, and in other prominent sectors of the economy;
  • an economic slowdown brought about by a reduction in production and exports due principally to a sudden drop in fish catch and reduced mining and metal processing following the exhaustion of a number of the principal copper and other mines; and
  • the increased cost of living that resulted from higher domestic food prices.

In 1968, the military government headed by General Juan Velasco Alvarado nationalized numerous private enterprises and conducted a campaign against foreign participation in the Peruvian economy. In 1969, the Velasco administration enacted the Ley de Reforma Agraria, or the Agrarian Reform Law, which confiscated large estates from wealthy owners in exchange for long-term bonds issued by Peru, turning the estates into cooperatives run by the former workers of the estates, and adopted high tariffs to shield local industry and manufacturing from foreign competition.

Perus currency became overvalued, making exports less competitive, and its debt grew sharply during the 1970s. Peru experienced large current account deficits and the Velasco administration borrowed abroad to finance these deficits rather than change its policies. Many cooperative farms, operated by people with little management experience, went bankrupt and agricultural production decreased.

In 1975, General Francisco Morales-Bermdez Cerruti implemented an economic austerity program designed to correct the economic disequilibrium reflected in Perus fiscal and current account deficits and high external debt burden. The Government implemented fiscal and monetary restraints and devalued the currency. These measures coincided with increases in international prices of Perus main exports. The fiscal deficit narrowed and by 1979 Peru had achieved a significant current account surplus.

In 1980, the civilian government led by Fernando Belande reinstituted high spending and borrowing but was forced to adopt more restrained spending policies in later years. The policies adopted by President Alan Garca Prez, who assumed the presidency in 1985, brought Peru to a deepening economic crisis. The Garca administration increased spending, declared a debt moratorium and attempted to nationalize the banking system and other key industries. Private investment collapsed, the public sector deficit increased and exports dwindled. By 1990, the annual inflation rate had increased to 7,650%, net international reserves had been completely depleted and the economy had entered its third year of recession. The Garca administration was also had to confront terrorist activities by the Shining Path and Tupac Amaru.

In 1990, Alberto Fujimori, a university professor, won the presidential election on a platform that emphasized his outsider status and his opposition to traditional politicians. President Fujimori inherited an economy beset by recession, hyperinflation and high levels of external debt. President Fujimori immediately moved to cut public spending, increase taxes, tame inflation and open the economy to foreign investment.

Within the first few years of his presidency, President Fujimori dismantled protectionist and interventionist laws and policies to create a liberal economy dominated by private sector and market forces. In order to encourage foreign investment, the Fujimori administration undertook an ambitious privatization program, strengthened and simplified Perus tax system, opened the economy to foreign investment and lifted exchange controls and restrictions on remittances of profits, dividends and royalties. Although the Fujimori administration successfully privatized many state entities, the privatization program waned in the later years of the administration because of adverse market conditions and Fujimoris adoption of a more populist stance prior to the 2000 elections.

As time went on, the Fujimori administration became increasingly authoritarian, as evidenced by the dissolution of Congress in 1992, his consolidation of power in the executive branch following adoption of the 1993 Constitution and his alliance with Vladimiro Montesinos, an intelligence advisor. President Fujimoris authoritarianism exacted a price on Perus political system, although it had little effect on the successes of his economic program.

On November 20, 2000, Congress removed President Fujimori from office and Valentn Paniagua assumed the presidency on a transition basis. The Paniagua administration adopted fiscal policies to reduce spending, restore confidence, reform the tax system and stabilize the economy.

The Peruvian agriculture and livestock sector is dominated by small-scale producers. The sector represented 9.7% and 9.0%, respectively, of total exports in 2011 and 2012, and 10.0% in 2013. Approximately 16.8% of Perus land area is devoted to arable production and permanent crops. Subsistence farming predominates and productivity is low due to drainage and salinity problems, although productivity increased during the 1990s. The agriculture and livestock sector in recent years grew at a rate lower than growth in GDP, except in 2009, when its contribution to GDP increased from 7.7% in 2008 to 7.8% in 2009, then decreased to 7.5% in 2010, 7.3% in 2011, 7.3% in 2012 and 7.1% in 2013.

Perus main agricultural products are potatoes, corn, rice, coffee, fruits and vegetables, which together accounted for approximately 61.2% of agricultural production in 2012 and 61.1% in 2013. Perus traditional agricultural products include cotton, sugar, coffee and rice. Agricultural production has increasingly focused on non-traditional export products destined primarily for the winter markets of Europe and the United States. The northern coast of Peru is the main area for cultivation of non-traditional export crops such as asparagus, mangos, passion fruit and oranges. Animal husbandry sheep, poultry and cattle is predominant in the south.

Perus main agricultural export products are coffee, cotton and sugar, which together accounted for approximately 2.9% of agricultural traditional exports in 2012 and 2.3% in 2013. Other important export crops include cochineal, cocoa, carmine and marigold flour. In recent years, production of fruit, particularly mangos, grapes and avocados, for the export market has increased. Cotton, rice and sugar are produced for both the domestic and the export markets.

The west coast of South America off Peru and Chile was once the location of the world's largest fishery. Catches of a type of anchovy called anchoveta were above 10 million tons in the late 1960s to 1971 off northern and central Peru. The Peruvian anchovetta population was heavily fished and collapsed during the warming of the 1972 El Nio. The fishery shifted to sardine from 1977 to 1985, and expanded farther south off Chile. Anchovetta off Peru became dominant again in 1986 as waters cooled and sardine declined, but anchovetta started to decline after 1994 and dropped sharply during the 1998 El Nio.

These fisheries have a common pattern of producing huge catches and then collapsing and reappearing 10 to 30 years later. They appear to be inherently unstable populations that expand rapidly in numbers and area when feeding and spawning conditions are favorable, but collapse even more rapidly when ocean conditions change. The change in locations of the fish populations can have important economic consequences for a country when the fish move out of its territorial waters.

Peru is a leading producer in Latin America of gold, silver, tin, copper, lead and zinc. Although mining constitutes a small part of the countrys GDP, contributing on average 3.9% to GDP between 2009 to 2013, mineral products are Perus main export and they accounted for 56.8% of total exports by value in 2012 and 55.1% in 2013. Gold and copper accounted for 20.8% (U.S.$9.6 billion) and 23.2% (U.S.$10.7 billion) of total exports by value, respectively, during 2012 and 18.8% (U.S.$7.8 billion) and 23.5% (U.S.$9.8 billion) of total exports by value, respectively, during 2013. In addition, copper accounted for 40.8% of total mining exports in 2012 and 42.6% in 2013.

In 2013, Peru ranked third among the worlds leading producers of copper, silver, tin, and zinc; fourth among the worlds leading producers of molybdenum and lead; and fifth among the worlds leading producers of gold. The countrys world rankings for reserves of mineral commodities were as follows: second for silver; third for copper and zinc; fourth for lead and molybdenum; and ninth for gold. Peru ranked first in Latin America for reserves of silver, lead, and zinc and second for copper, gold, and molybdenum. According to the Ministerio de Energa y Minas (MEM), in 2013, Peru was Latin Americas leading producer of gold, lead, tin, and zinc; the second-ranked producer of cadmium, copper, molybdenum, selenium, and silver; and the fifth-ranked producer of iron ore.



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