COUNTRY REPORT - iuj.ac.jp · 8 Review 8 The political scene ... candidature for a third term in the elections in 2000. ... Border talks with Ecuador make some progress. Peru leaves

COUNTRY REPORT

Peru

2nd quarter 1997

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1997-98

8 Review8 The political scene

12 Economic policy14 The economy16 Agriculture and fishing18 Mining and energy21 Manufacturing and telecommunications22 Foreign trade and payments

26 Quarterly indicators and trade data

List of tables7 Forecast summary

14 Trade with Andean group countries, 199616 Consumer price inflation23 Stock of foreign direct investment24 Breakdown of public debt, by creditor26 Quarterly indicators of economic activity27 Foreign trade

List of figures7 Gross domestic product7 Neuvo sol real exchange rate

15 Employment by sector16 Consumer price inflation23 Imports, fob24 Debt-service payments

Peru 1

EIU Country Report 2nd quarter 1997 © The Economist Intelligence Unit Limited 1997

May 7, 1997 Summary

2nd quarter 1997

Outlook for 1997-98: The recent hostage rescue will strengthen the positionof the president, Alberto Fujimori, in the short run. Obstacles still remain to hiscandidature for a third term in the elections in 2000. Guerrilla groups willattempt to regroup after their recent defeat. Economic policy will remain cau-tious and GDP growth will move upwards gradually in 1997 and 1998. Tradeand current-account deficits will narrow. Inflation will ease downwards andthe exchange rate will remain steady in real terms.

The political scene: The hostage crisis is ended by a military rescue afterpeace talks fail. Mr Fujimori’s popularity is boosted, but questions are asked.Two security chiefs resign and 19 police officers are charged with negligence.The security services now face allegations of torture, murder and harassment.The mayor of Lima, Mr Andrade, remains popular and the economy minister,Mr Camet, is not. Border talks with Ecuador make some progress. Peru leavesthe Andean Community.

Economic policy: The restoration of internal and external balance remainsthe central priority. Government revenue is rising in real terms. Tax and tariffreforms are announced. Minimum wages rise. Monetary policy has eased a bit.Policy differences cause the rift with the Andean Community. The Brady dealis closed.

The economy: GDP growth rates rise and employment levels improveslightly. Inflation eases. The real exchange rate depreciates a little.

Sectoral trends: Agriculture leads GDP growth. Relief for tax arrears apply toagricultural communities and cooperatives. Fishing output ebbs and flows.Overall growth in mining is moderate, but copper, gold and zinc perform well.Privatisations, concessions and exploration contracts proceed in mining andenergy. Manufacturing growth still lags, but there are signs of improvement.

Foreign trade and payments: The trade deficit is shrinking as a result ofhealthy export growth and flat imports. The current-account deficit remainshigh but is narrowing. Official estimates put debt service payments at $1.4bnin 1997, rising to $1.9bn in 2004 and falling thereafter.

Editor:All queries:

Emily MorrisTel: (44.171) 830 1007 Fax: (44.171) 830 1023

Peru 3


Political structure

Official name Republic of Peru

Form of state Presidential democracy

The executive The president is directly elected for a five-year term and may be re-elected under thenew constitution approved by referendum in October 1993; he appoints a Council ofMinisters

Head of state Elected president

National legislature A 120-member single chamber which can be dissolved only once during a presidentialterm

Legal system Courts of first instance are in provincial capitals; the Supreme Court sits in Lima

National elections April 9, 1995 (presidential and congressional) and November 12, 1995 (municipal);next elections due in November 1998 (municipal) and April 2000 (presidential andcongressional)

National government Alberto Fujimori became president on July 28, 1990, and was re-elected onApril 9, 1995

Main political organisations Government—Cambio 90-Nueva Mayoría (C-90/NM); opposition—Alianza PopularRevolucionaria Americana (APRA), Solidaridad y Democracia (Sode), Acción Popular (AP), Partido Popular Cristiano (PPC), Unión por el Perú (UPP), Renovación,CODE-País Posible

President Alberto FujimoriPresident of the Council of Ministers (prime minister) Alberto Pandolfi ArbulúPresident of Congress Victor Joy Way

Key ministers Agriculture Rodolfo Muñante SanguinettiDefence General Tomás Castillo MezaEconomy & finance Jorge Camet DickmanEducation Domingo Palermo CabrejosEnergy & mining Alberto Pandolfi ArbulúForeign affairs Francisco Tudela van Breugel-DouglasHealth Marino Costa BauerIndustry, commerce, tourism & integration Gustavo CaillauxInterior General Cesar SaucedoJustice Carlos Hermoza MoyaLabour & social development Jorge González IzquierdoPresidency Daniel Hokama TokashikiTransport, communications, housing & construction Elsa Carrera de Escalante

Central Bank president German Suárez

4 Peru


Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996

GDP at market prices Ns m 52,800 81,498 109,689 132,066 151,953

Real GDP growth % –1.8 5.9 12.8 7.0 2.8

Consumer price inflation % (av) 71.6 48.6 23.6 11.2 11.5

Population m (mid-year) 22.4 22.7 23.1 23.5 23.9a

Merchandise exports fob $ m 3,661 3,523 4,574 5,576 5,897

Merchandise imports cif $ m 4,861 4,901 6,794 9,224 9,472

Current account $ m –1,922 –2,170 –2,544 –4,223 –3,557

Reserves excl gold $ m 2,849 3,408 6,992 8,222 10,579

Total external debt $ bn 20.3 20.4 22.6 29.5 31.6

Debt-service ratio % 21.2 59.5 17.5 25.6 19.4

Exchange rate (av) Ns:$ 1.25 2.00 2.19 2.25 2.47

May 2, 1997 Ns2.66:$1

Origins of gross domestic product 1995 % of total Components of gross domestic product 1995 % of total

Agriculture 11.5 Private consumption 73.1

Fisheries 0.7 Government consumption 8.2

Mining 2.4 Fixed investment 23.8

Construction 13.4 Exports of goods & services 11.6

Manufacturing 23.5 Imports of goods & services –16.7

Services 48.5 GDP at current market prices 100.0

Total 100.0

Principal merchandise exports 1995 $ m Principal imports fob 1995 $ m

Copper 1,200 Intermediate goods 3,226

Fish & fish products 1,008 Capital goods 2,363

Agricultural products 623 Consumer goods 1,755

Gold 463 Total incl others 7,688

Textiles 438

Zinc 325

Coffee 286

Lead 258

Total incl others 5,572

Main destinations of exports 1996 % of total Main origins of imports 1995 % of total

USA 21.2 USA 26.7

Japan 7.1 Colombia 7.8

China 6.5 Chile 7.5

Netherlands 5.9 Brazil 5.4

UK 5.2 Japan 5.1

Italy 4.3 Argentina 4.2

Germany 4.2 Spain 4.2

a EIU estimate.

Peru 5


Outlook for 1997-98

The hostage rescue willstrengthen Mr Fujimori’s

position—

The successful military assault to rescue 72 hostages held by left-wing guerrillasin the Japanese ambassador’s residence in Lima (see The political scene) hastransformed the political scene. At home and abroad, the president, AlbertoFujimori, has been praised for his refusal to yield to terrorism. After months offlagging popularity, the rescue appears to have restored support for Mr Fujimori.In the short term, this will increase his ability to rule decisively. His opponents,who had begun to appear more confident than they had been since Mr Fujimorifirst came to power in 1990, will be set back.

—but a third term is nomore likely—

Mr Fujimori’s buoyant popularity after the rescue is not necessarily an endorse-ment for a third term. Before the hostage crisis occurred, the opposition hadbeen preparing to organise a referendum to repudiate a law which had inter-preted the constitution to allow for his reelection; now that the crisis is overthey will revive these efforts. Even if a referendum were not held, or if itproduced a vote in favour of Mr Fujimori’s right to stand for a third term, hewould face further obstacles. A Constitutional Tribunal ruling that the disputedlaw was inadmissible means that if Mr Fujimori were to decide to present hiscandidacy, the National Electoral Board would have to decide whether hecould run. With these legal battles yet to be fought, the outcome is veryuncertain. And although his popularity has surged in the immediate aftermathof the heroic assault on the residence, reservations about Mr Fujimori’s style ofleadership, about the activities of the security services and the lack of improve-ment in living standards linger in the minds of the electorate.

—and guerrillamovements are not

quite dead

The hostage rescue was undoubtedly a victory against terrorism. However, thereis some danger that guerrilla groups will attempt to retaliate. Although thegroups have only a weak base of support from the population, remaining cellswill not be placated by the violent end to the affair. Guerrillas who might havebeen persuaded to lay down arms and enter peaceful politics will be confirmedin their view that the government only understands violence. Mr Fujimori haslaid down the gauntlet: he has shown that he aims to defeat the guerrillasmilitarily. This strategy has its risks at a time when unemployment is high andfaith in the future under current policies has been weakened.

The economy willremain key—

Mr Fujimori’s political fortunes are going to remain largely determined byeconomic performance. Recent reported reductions in official unemploymentare not likely to be followed by any rapid rise in the availability of work.Underemployment, officially estimated at almost 50% of the workforce, willremain a serious social problem.

—as policy will remaincautious—

Monetary policy will be relaxed only cautiously, after the sharp tightening in1996. Government policy will aim to close the non-financial public-sector def-icit through improved tax collection rather than spending cuts, but spendingwill need to be restrained if the current-account gap is to be closed further.

—aiming for sustainablegrowth—

As a result of this cautious macroeconomic stance, GDP growth is expected torecover gradually but steadily after the slowdown in 1996. The rate of export

6 Peru


growth will determine the growth rate possible for the economy as a whole.The EIU expects growth to increase to 4.5% in 1997, and to rise again, to 5.2%in 1998. This relatively modest rate of growth will be compatible with animprovement in the external balance. The trade deficit is forecast to fall from$3.6bn in 1996 to $3.3bn in 1998. This will contribute to the narrowing of thecurrent-account deficit from 5.8% of GDP in 1996 to 4.4% in 1998. These ratiosare calculated using current official GDP figures. In the second half of this yearthe government will revise the national accounts. This is expected to reduceGDP by some 15%, raising the current-account deficit to GDP ratio to 6.8% in1996 and 5.2% in 1998.

—with inflation driftingdownwards

There are signs that inflationary pressures, which built up at the beginning of1996, have receded. Although recent tariff increases for food products will pushup some prices in the coming months, the trend in 1997 is expected to bedownwards. The exchange rate is forecast to remain generally stable, with aslight devaluation in real terms, so that it will have a negligible impact oninflation. Levels of international reserves will continue to rise, providing anincreasingly comfortable cushion against shocks.

Forecast summary($ m unless otherwise indicated)

1995a 1996a 1997b 1998b

Real GDP growth (%) 7.0 2.8 4.5 5.2

Consumer price inflation (year-end; %) 10.2 11.4 9.0 8.2

Merchandise exports fob 5,576 5,897 6,199 7,143

Merchandise imports cif 9,224 9,472 9,621 10,480

Current-account balance –4,245 –3,557 –3,082 –2,966

Exchange rate (year-end; Ns:$) 2.33 2.60 2.86 3.07

a Actual. b EIU forecasts.

0

2

4

6

8

10

12

14

1994 95 96 97(a) 98(a)

Peru

Latin America

Gross domestic product % change, year on year

(a) EIU forecasts. (b) Nominal exchange rates adjusted for changesin relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

100

150

200

250

300

350

1990 91 92 93 94 95 96 97(a) 98(a)

Nuevo sol real exchange rate (b)1990=100

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Peru 7


Review

The political scene

The hostage crisis endswith a military assault—

In a dramatic, surprise attack, elite Peruvian commandos stormed the Japaneseambassador’s residence in Lima on April 22 to rescue 72 hostages held by TúpacAmaru Revolutionary Movement (MRTA) rebels. The hostages had been heldcaptive for 126 days. Two members of the elite force and all of the 14 rebelsdied in the fighting that lasted about 30 minutes. One of the hostages, formersupreme court justice, Carlos Guisti, died later from heart failure. The foreignminister, Franscisco Tudela van Breugel-Douglas, and another high courtjustice were wounded.

—after peace talks fail On February 2 Mr Fujimori and the Japanese prime minister, Mr RyuhartoHashimoto, had pledged that their governments would make every effort to finda peaceful solution but would not yield to terrorism. In March, followingrequests from the Japanese and Peruvian governments, Cuba and the DominicanRepublic offered asylum to the rebels. Ten rounds of talks between the govern-ment negotiator, Domingo Palermo, and rebel leaders in the presence of theguarantors appeared to be making progress until mid-March, when the rebelcommander, Nestor Cerpa, accused the government of digging a tunnel underthe residence. Mr Fujimori neither confirmed nor denied the tunnel’s existence.From that time on, direct talks were suspended, although the guarantors heldtalks separately with both sides. Discussions appeared to centre on asylum,improvement of prison conditions for MRTA inmates and the possible release ofsome rebel prisoners. The failure to reach a peaceful solution was attributed tothe rebels’ refusal to back down on their demand for the release of MRTA pris-oners. Mr Fujimori would not accept any releases. He reported afterwards thathis decision to take the residence by storm was reached when Mr Cerpa an-nounced that medical visits would be limited to one a week. The assault waslaunched one week later. Mr Fujimori said that his decision was based on anassessment that the restriction on medical visits could threaten the lives of thehostages.

Mr Fujimori’s popularityis boosted—

Mr Fujimori’s approval rating rose by nearly 30 percentage points after therescue. A poll taken by Apoyo on April 23 showed that 84% of those surveyedapproved of the surprise assault, 10% disapproved and 6% had no opinion.Mr Fujimori’s approval rating reached 67% in the poll, while his disapprovalrating fell to 22%. A poll taken only a week earlier had shown that just 38% ofthose surveyed approved of Mr Fujimori while 47% disapproved. The interpre-tation of these polls is open to question. Before the rescue a clear majority hadfavoured a peaceful solution. Although many people will have been persuadedto favour the violent solution after seeing that most of the hostages emergedunscathed, temporary euphoria and relief may account for part of the swing.

—although questionsremain concerning

Mr Fujimori’s decision—

The four-member team of guarantors, which had worked untiringly to bridgethe differences between the sides, said it had made every possible effort to finda peaceful solution. Details of the discussions are not known, but Mr Fujimori

8 Peru


reported that the rebels had insisted on the release of 20 of their imprisonedcomrades. Since Mr Cerpa had been completely inflexible on this demand,Mr Fujimori has claimed that it was impossible to reach agreement. However,once the plans for the assault had been drawn up and the order to start workon the tunnels had been given, maybe as early as January, Mr Fujimori mayhave been less interested in compromise. Although he had claimed throughoutthe crisis that violence would only be used as a last resort, the attack waslaunched at a time when the hostages’ lives did not appear in great danger. Itseems that the refusal of medical visits was used to justify a decision that hadalready been taken.

—and his style Although the atmosphere in the wake of the assault was one of celebration,reports that some of the teenage hostage-takers had been shot while trying tosurrender, and Mr Fujimori’s decision to allow a television reporter to accom-pany him into the residence where the corpses of Mr Cerpa and another rebelwere still lying where they had fallen, have aroused some disquiet. Apart frommisgivings over Mr Fujimori’s bloodthirstiness, there is concern that the guerril-las will be spurred into retaliatory action. A chance of persuading the MRTA torenounce violence and join the political mainstream has been lost. The pres-ident appears to have calculated that the danger of making martyrs of the rebelsis outweighed by the benefit of reinforcing his reputation as a strong man.

In the same way, despite the undisputed need for secrecy in negotiations andfirmness in taking a stand against terrorists, Mr Fujimori’s conduct of negoti-ations has attracted criticism. Neither the guarantors nor the Japanese govern-ment were informed of the plans for the attack. Mr Hashimoto gave a mutedresponse to the rescue, welcoming the release of the hostages but lamentingthe loss of life. About a week before the attack, the Peruvian governmentremoved Jean-Pierre Shaerer from the Red Cross delegation and sent him out ofthe country. The Red Cross had played a key humanitarian role in the crisis.Mr Fujimori later explained that Mr Shaerer was not considered to have main-tained the neutrality expected of a Red Cross representative. A secret camerahad shown Mr Shaerer sharing a joke with Mr Cerpa.

Scapegoats are found forsecurity failures—

On April 19 the police chief, Antonio Vidal, and the interior minister, GeneralJuan Briones Dávila, resigned. The resignations were attributed to the securityfailures that made the hostage-taking possible. Mr Vidal, who became a nationalhero in 1992 when his anti-terrorism police team captured Peru’s most-wantedguerrilla, Abimael Guzmán, said that he considered it was his moral obligationto resign. In the months since the residence was taken in December 1996, therehad been much discussion of the failure of the police not only to prevent thehostage- taking but also to tackle the increasing problem of crime in Lima. Therehad also been some rivalry between Mr Vidal and Mr Fujimori’s intelligenceadviser, Vladimiro Montesinos, in the past, and Mr Vidal’s resignation sparkedspeculation that there were disagreements over the approach to the hostagecrisis. General Briones Dávila said he had offered to quit shortly after the hos-tages had been taken, but his offer had not been accepted at that time.

On April 30 a military court charged 19 members of the police force withnegligence in connection with the security failures at the Japanese residence. It

Peru 9


is alleged that information had been passed to them by intelligence sources,but they failed to take appropriate action. Five of those charged are seniorofficers. The regional chief of police, Luis Malásquez, who faced a possiblesentence of up to 20 years if found guilty, has since fled the country.

—while attention switchesto torture andmurder cases—

The fall in Mr Fujimori’s ratings in the year to March was not only due to theunresolved hostage crisis. Accusations of torture and murder of agents of thearmy’s intelligence service had contributed to growing discontent withthe government’s human rights record. In early April an army intelligenceagent, Leonor La Rosa Bustamante, spoke from a military hospital claimingthat she had been tortured by four officers of the military intelligence service.She named the four officers. She claimed that she had been subjected to torturebecause she had been suspected of leaking information on intelligence oper-ations to the press. The four accused officers are now are under investigation bya military court.

Ms La Rosa also claimed that her colleague, Mariella Barreto, had beenmurdered by army intelligence officers. Ms Barreto’s body was found in earlyApril in woods north of Lima, her head and arms severed in an apparentattempt to make identification difficult. She had also been suspected of leakinginformation to the press. It seems that she had had a brief relationship andconceived a child by a retired army major, Santiago Martín Rivas. He was oneof several officers convicted for the 1992 killings of nine students and a lecturerfrom La Cantuta University. The La Cantuta case has been one of Peru’s mosthigh-profile human rights cases. The officers who were eventually convicted ofthe murders were later released from prison in a controversial general amnestylaw in June 1995.

Both General Briones Dávila and the defence minister, General Tomás CastilloMeza, have been called before Congress to explain the torture and murder ofMs Barreto. Mr Martín Rivas, who has denied involvement, was alsoquestioned at the national police service’s homicide division.

—and alleged harassmentby the security services

The opposition has become increasingly concerned about allegations of possibleintimidation of government critics by the security services. In March andApril there were three assaults on government opponents. The car of the leftistcongressman, Javier Diez Canseco, was attacked by gunmen. Blanca Rosales, theeditor of La República, an opposition newspaper, was kidnapped by non-uniformed gunmen. They held her for two hours. Gustavo Saberdein, a formereconomy minister linked to the opposition APRA, was also assaulted.General Briones Dávila said investigations showed the assaults had been carriedout by common criminals.

The remaining securitychiefs are unscathed

Although the opposition called for the resignation of the entire cabinet in thewake of the hostage crisis, Mr Fujimori ratified his confidence in the rest of hisministers, including his defence chief, General Castillo Meza, and the armychief, Nicolás Hermoza. Mr Hermoza’s resignation had been called for in aleaked letter signed by 11 lieutenant-generals. The attack on the embassy resi-dence appears to have strengthened Mr Hermoza’s position as well as that ofMr Montesinos. The day after the attack Mr Montesinos made his second-ever

10 Peru


public appearance at the ambassador’s residence, accompanying Mr Hermozain an inspection of the grounds. In the days prior to the attack, Mr Montesinos’srole in the intelligence service had been questioned because of the tortureallegations. The same television programme which broke the story on the casesof the intelligence agents also obtained documents showing a sharp increase inMr Montesinos’s income between 1993-95. The leaking of the informationmight suggest that there are sectors within the intelligence service trying todamage his reputation.

Mr Andrade is outspoken— The popularity of the mayor of Lima, Alberto Andrade, remains high (around60%) although it has dipped from the levels achieved late last year. Mr Andradeis regarded as a potential rival to Mr Fujimori in the 2000 elections. In March healleged that the National Intelligence Service (SIN) had infiltrated a group ofstreet sellers and were acting as agents provocateurs. He claimed that when hisadministration tried to move the sellers to a new location, the SIN agents pro-voked violent disturbances. Mr Andrade also alleged that national police hadneglected to come to the aid of municipal officials in quelling the disturbances.

—and Mr Camet is an easytarget

Mr Andrade has also sharply attacked the economy minister, Jorge CametDickman. Mr Camet had refused to provide a guarantee from the centralgovernment for a loan sought from the Inter-American Development Bank torestore the colonial area of the capital. Mr Andrade suggested that this refusalwas politically motivated, as central government was trying to deprive theLima government of resources. Mr Camet’s popularity has been at a low pointdue to the slowdown in economic growth and rising unemployment. Hisresponsibility for the decision to extend liability for payment of the 7%FONAVI contribution to independent professionals (see Economic policy) hasalso damaged his popularity.

Ecuador and Peru holdborder talks

It had appeared that the visit of Ecuardorean president, Abdalá Bucaram,(1st quarter 1997, page 12) would improve relations with Ecuador. Three weeksafter the visit, Mr Bucaram was removed from office by his own congress. Thenew president, Fabián Alarcón, asked for a further postponement of the talksbetween Peru and Ecuador in Brasilia over their border dispute. Talks had beenoriginally scheduled for mid-December, but were set back as a result of thehostage crisis. They finally got under way in mid-April. The countries agreed onthe order of discussion of their “impasses”, of which four had been proposed bythe Ecuadorean side and two by Peru. They discussed the first of these, whichconcerns the border area around the Napo river, in the north. The guarantorshave described the talks as satisfactory. Both sides agreed to meet again onMay 14.

Peru leaves the AndeanCommunity

The government has decided that Peru will withdraw from the AndeanCommunity (see Economic policy). In early April Mr Fujimori explained thatthe decision reflects the gap between the progress in trade liberalisation made byPeru and the unwillingness of the other Andean Community countries—-Venezuela, Colombia, Bolivia and Ecuador—to abandon outdated protectionistpolicies. Bilateral commercial agreements with member countries remain in oper-ation, however, so the pattern of trade is unlikely to be significantly affected.

Peru 11


Economic policy

The search for balancecontinues

Macroeconomic policy remains directed at the removal of internal and externalimbalances which were heightened in the boom which ended in late 1995.Fiscal spending has been restrained, and monetary growth has been moderated.Although inflation is now showing clear signs of abating and the trade gap hasbeen narrowed (see The economy), there has been no change in the cautiousmacroeconomic stance.

Revenue is rising inreal terms—

The government has given its assurance that their objective of reducing thebudget deficit would be achieved through improvements in tax collection ratherthan spending cuts or increases in tax rates. This claim is given credibility by thelatest revenue figures. The tax authority, Sunat, has reported that in the lastquarter of 1996, tax revenue increased by 8.6% and total government currentincome increased by 10.9% year on year. This brought the annual increase in taxincome to 15% and total current income to 17.9%. The increase in total incomein real terms is around 5%, an estimated 14.2% of GDP, up from 13.6% in 1995.These improvements have continued into 1997. In the first two months, totaltax income was Ns 3.4bn ($130m), 26% higher than the same period in 1996.

Sunat’s increasing ability to detect tax evasion through its modernised databasehas helped to improve tax compliance. The latest carrot-and-stick campaign isreported to have secured the voluntary declaration of Ns1.97bn in undeclaredtax arrears by 75,412 taxpayers. In return, the taxpayers will enjoy an amnestyfor the massive penalties accrued and the possibility of paying their arrears byinstalments, with a interest rate of only 22% (one-third lower than the currentcommercial rate).

—and reforms areannounced for taxes—

In response to calls by the private sector, the government has announced thereduction of the annual assets tax from 1.5% to 0.5%. The assets tax can beoffset against income tax, being in practice a minimum income tax.

Liability for payment of compulsory contributions to the national housingfund, Fondo National De Viviendas (FONAVI), has been extended to freelanceprofessionals, such as lawyers. This measure has been contentious. Its criticsargue that the fund has ceased to be solely used to finance housing projects forthe poor, and has been tapped by the government to pay for spending whichshould come out of general tax income. As a means of raising tax revenue, thecontributions amount to a tax on employment, and as such are a disincentiveto the creation of new jobs. The government made some concession to itscritics by setting a threshold for professionals’ liability for the contributions atan average monthly income of Ns1,400 ($525).

—and imports duties Special treatment for the agricultural sector was conceded in the tariff reduc-tions announced on April 14. Those products that had been subject to a 15%tariff will have the rate cut to 12% and those subject to a 25% tariff will havethe rate cut to 20%. The declared aim of the reductions is to cut the weightedaverage tariff rate from some 16% to 13%. In fact, the cut in the weightedaverage tariff rate will be closer to 2 percentage points than 3, because of theexceptions allowed in the agricultural sector. Some agricultural products will

12 Peru


enjoy increased protection by having their products transferred from the old15% tariff band to the list paying the new 20% tariff. Among the items whoseimport tariffs rose from 15% to 20% are wheat, meat, milk products and fruit.In addition, a temporary tariff surcharge of 5% will be added for agriculturalproducts (in both the 12% and 20% bands) which compete with nationalproduction. Products listed in the 12% band on which the temporary surchargewill be levied include wines and liquors and inputs for the food industry,including sugar. The higher tariffs on agricultural imports (which will increaseprices of imports) are designed to spur domestic production of these goods.

Minimum wages rise The monthly minimum wage was adjusted upwards in April, from Ns215 ($81)to Ns265 and then again in May, to Ns300. Between April 1994 and September1996 there had been no increases, so that the real value of the minimum wagehad fallen to 70% of its level in 1990. An increase from Ns132 to Ns215 inOctober 1996, together with these two recent adjustments, have raised it toalmost 50% above the real 1990 level. This concession to the lowest paidworkers in the formal sector may reflect both an increasing confidence in thedownward trend in inflation and a political decision to offer some concessionto the poor, after a year of falling living standards.

Monetary policy is notquite so tight

Growth in the monetary base slowed sharply in 1996, to 12.3%, less than halfthe rate in 1995. In real terms, with average inflation of 11.5%, the expansionwas marginal. The Banco Central de Reserva (the Central Bank, BCRP) had kepttight control of net domestic credit through issues of certificates of deposit(CDs). Since January, new issues of CDs have ceased. The last outstanding CDswere redeemed in March.

In recent months the BCRP has taken steps to stem the dollarisation of theeconomy. The requirement that banks should place 45% of dollar deposits atthe BCRP for prudential purposes is unchanged. But the BCRP reduced theinterest rate paid on these deposits by 1 percentage point in the last quarter of1996 and by a further 0.25 of a percentage point in April. In response tocommercial bankers’ complaints that the excessive size of these compulsorydeposits reduces profitability and so contributes to the large spread betweenlending and deposit rates, the BCRP agreed in April to pay interest on 38%,rather than 36%, of commercial banks’ total deposits. To encourage deposittaking in local currency, on April 1 the minimum reserve requirement forcommercial banks’ local currency deposits, on which no interest is paid, wascut from 9% to 7%.

Despite the changes in late 1996, dollar deposits have continued to grow fasterthan sol deposits even though rates on dollar deposits have fallen while rates ondomestic currency deposits have increased. Lending rates have followed similartrends and credit expansion in dollars has exceeded credit expansion in sols. Asa result, the share of domestic currency in M2 fell from 36.7% in the thirdquarter of 1996 to 35.7% in the first quarter of 1997. It remains to be seenwhether the April measures check the shift towards dollar deposits. The progres-sive dollarisation of the economy is difficult to hold back, as the government’spolicy of weakening the exchange rate will encourage the preference for dollars

Peru 13


despite the downward trend in inflation and the improvement in the externalaccounts.

Stark differences result inwithdrawal from the

Andean Community

In announcing Peru’s withdrawal from the Andean Community, the actingforeign minister, Jorge González Izquierdo, explained that there had been starkdifferences between Peru and the other members of the bloc (Bolivia, Colombia,Ecuador and Venezuela) over trade policy. Peru had wanted a greater commit-ment to trade liberalisation which the others were unwilling to give. The factthat Peru has a large deficit on trade with the bloc may have influenced itsdecision.

Trade with Andean group countries, 1996($ m)

Exports Imports Peru trade to: from: balance

Venezuela 125.66 588.53 –462.87

Colombia 120.15 676.14 –555.99

Bolivia 101.20 124.05 –22.85

Ecuador 70.27 44.43 25.84

Total 417.29 1,433.15 –1,015.87Source: Customs records.

Peru’s membership of the community had been nominal since 1993. It haddeclined to join the customs union established in February 1994 as it regardedit as excessively protectionist. The other members had required Peru to choosebetween full membership of the community and complete withdrawal by aMarch deadline. When Peru’s suggestion of an extension of its ambiguousstatus was rejected, the decision was taken to withdraw.

The withdrawal will not have a significant impact in the short term. Under theterms of membership, the benefits and obligations extend for a five-year periodafter a member leaves the bloc. This clause can be waived in response to aspecial application, but no such application has yet been lodged. Mr Gonzálezhas stressed that Peru will remain a member of the Andean DevelopmentCorporation, which finances development projects.

The Brady deal is closed The long-awaited closing of the Brady deal finally took place on March 8 (seeForeign trade and payments). Opposition politicians have complained that thedeal was cloaked in excessive secrecy, in particular the details of the debtbuy-back and the identity of the agent acting on the government’s behalf.Government spokesmen have responded by claiming that details could not begiven while the negotiations were in progress.

The economy

Growth rates rise— In the last quarter of 1996, the economy began to pick up again after theslowdown that began in the second half of 1995. Fourth quarter real GDPgrowth of 5.1% (year on year) was followed by growth of 4.8% in the firstquarter of 1997. The recovery is led by growth in agriculture, which reached14.4% in the first quarter. The rice, corn and potato harvests are particularly

14 Peru


good. Construction activity is picking up after a 5% contraction in 1996. Itended its decline in the fourth quarter of 1996, and grew by almost 10% in thefirst quarter of 1997, compared with the same period last year. Part of thisrecovery may come from the 11.6% upturn in public investment in the lastquarter of 1996, but it has also been stimulated by private investment in theproductive sectors. The performance of the fishing sector reflected a shift inthe dates of fishing activity more than changes in catch sizes: year-on-yeargrowth of 27% in the fourth quarter of 1996 due to an earlier start to the seasonwas followed by a contraction of 12% in the next three months, as the anchovyand sardine season ended earlier than the previous year, on January 30.

—while the level ofemployment picks up—

Official figures for industrial employment showed an improvement in the lastquarter of 1996, restoring the index level to that of the third quarter 1995, beforethe economic slowdown began. The indices for employment in commerce andservices have continued on their upward trend despite the slowdown. The em-ployment indices for industry, commerce and services are still respectively 25%,23% and 10% below their level in 1990. This reflects the narrow official defin-ition of unemployment. The official rate is currently 7.1% while the rate ofunderemployment is officially estimated at 47% of the workforce.

—and inflation eases Progress in reducing inflation now appears to have been renewed, after theupturn in the inflation rate in 1996. In February, the annual rate dipped below10% for the first time since before the hyperinflation of the 1980s, and in Aprilit fell below 9%. Average monthly inflation in the first four months has beenaround half the level of 1996 and accumulated inflation for the first threemonths of 1997 was 1.9%, compared with 5.1% in the first three months of1996. Some increase in inflationary pressures is expected in the second quarteras a result of an increase in import duties for some food products.

Figures for average monthly salary in urban areas for the first three quarters of1996 show that manual workers’ average nominal salaries rose by under 1%,from Ns660 ($280) to Ns664, while white-collar workers’ average salaries rose by4%, from Ns1,403 ($595) to Ns1,465. Real salaries were therefore falling. Averageexecutives’ salaries are shown to have held their real value, with a nominalincrease of 8%, from Ns5,557 ($2,358) to Ns5,998, over the same period.

60

70

80

90

100

Q1 . Q3 . Q1 . Q3 . Q1(a)

Industry

Commerce

Services

Employment by sector1990=100

(a) Jan-Feb.Source: Banco Central de Reserva, Nota Semanal.

199519951995199519951995199519951995199519951995199519951995199519951995199519951995 969696 97971995 961995 9696 979797971995 961995 961995 961995 961995 961995 961995 961995 961995 961995 96 9797971995 96 97

Peru 15


Consumer price inflation(%)

1995 1996 1997 Monthly Annual Monthly Annual Monthly Annual

Jan 0.4 13.8 1.2 11.1 0.5 11.0

Feb 1.1 13.0 1.5 11.5 0.1 9.4

Mar 1.4 12.0 1.4 11.5 1.3 9.3

Apr 1.0 11.5 0.9 11.4 0.4 8.8

May 0.8 11.6 0.7 11.3

Jun 0.8 11.2 0.5 11.0

Jul 0.6 10.9 1.4 11.8

Aug 1.0 10.4 0.9 11.7

Sep 0.4 10.2 0.3 11.6

Oct 0.5 10.4 0.7 11.8

Nov 1.2 10.3 0.5 11.0

Dec 0.5 10.2 1.2 11.8

The exchange rateweakens gradually from

its heights

The exchange rate has depreciated slightly in real terms in the first quarter,falling from Ns2.60:$1 at the end of December to Ns2.66:$1 on May 2. Thegovernment’s policy of using its primary fiscal surplus to purchase dollars onthe foreign exchange market has contributed to the gradual weakening of thecurrency. Although the exchange rate is widely considered to be overvalued inpurchasing power parity terms, continued strong inflows and high reservesmake a sharp devaluation unlikely.

Agriculture and fishing

Agriculture leads GDPgrowth

After rising by 5.7% in 1996, agricultural output increased by 14% in the firstthree months of 1997 compared with the same period a year earlier. Productionof arable products rose 21.4% in the period due to a 35.4% increase in domesticfood crops and a 14.4% rise in crops destined for industrial processing. In thelatter category, sorghum and soya crops are reported to have doubled, andthe coffee crop is up by one-third. These increases were offset by declines in

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

8

9

10

11

12

13

14

Jan . . . . . Jul . . . . . Jan . . . . . Jul . . . . . Jan . . Apr

Monthly—left scale Annual—right scale

Consumer price inflation%

Source: Banco Central de Reserva, Nota Semanal.

199519951995199519951995199519951995199519951995199519951995199519951995199519951995 969696 97971995 961995 9696 979797971995 961995 961995 961995 961995 961995 961995 961995 961995 961995 96 9797971995 96 97

16 Peru


cotton (19.8%) and cacao (17.6%). Poultry and livestock production increasedby 3.5% in the period due to a rise in poultry output (6.5%), and increases inproduction of lamb (6.5%) and milk (4.4%). Heavy rains in February damagedsome 14,000 ha of crops and affected a further 25,000 ha. The estimated valueof losses is $22m. In general, however, favourable climatic conditions areexpected to bring good harvests in 1997. A total area of 1.34m ha has beenplanted so far in the season which began in August, a 3% increase overthe same period of 1996. The government is projecting overall real growth inthe agricultural sector of 10.7%.

Rules for paying back taxdebts are set

The regulations for easing the burden of tax arrears for agricultural enterpriseswere published in April, following a law passed last year. The law stated thatagricultural firms owing tax arrears would be able to restructure them over aperiod of ten years, paying them back at an annual interest rate of around 20%.This concession was originally understood to apply only to individually-ownedand limited companies, but the regulations specify that agricultural communi-ties and cooperatives will also benefit.

Fishing output risesand falls—

1996 was a good year for Peru’s fishing industry, with the fleet landing9.6m tons of fish or 6.2% more than the previous year. Export revenue from fishproducts increased by 16% to $1.06bn from $875.2m the previous year. How-ever, in the first two months of the year, the catch was only 1.3m tons, 30%below its level in the first two months of 1996. This fall was due mainly torestrictions on anchovy and Pacific sardine fishing during the spawning seasonfrom the middle of January. Fishmeal plants in January and February produced302,100 tons of fishmeal and fishoil, down by 28% on the 1996 level. Foodprocessing plants produced 15,600 tons of canned fish, up by 42% and frozenfish was down by 21%, mainly due to lower catches of the giant squid processedin local plants.

Thanks to the high catch in the latter part of last year, however, revenue fromexports in January and February increased by almost half to $247.1mfrom $170.3m a year earlier. The biggest increase came from fishmeal exportsalthough revenue from canned fish exports also grew.

—and fisheriesmanagement measures are

introduced

The fisheries ministry has announced a new management plan for Pacific hakeresources. The controversial measures aim to tighten controls in the industry toassure sustainable fishing. The plan envisages a reduction in the capacity of theoversized industrial fleet. A fee has been introduced for fishing rights. In Marchthe ministry invited specialised inspection companies to compete for contractsto monitor the industrial fleet landing anchovy, Pacific sardine, jack mackereland Pacific mackerel. The companies will inspect and control landings 24 hoursa day at some 100 points to ensure that the fleet is meeting requirements on thesize, quality and quantity of fish. The companies will also check that they areoperating the hold capacity, fishing equipment and preservation system forwhich they were licensed.

Peru 17


Mining and energy

Overall growth ismoderate

Mining output grew by a modest 1.4% in the first quarter of this year after 3.1%in 1996. A breakdown of figures for the first two months show that growth incopper, gold, zinc and tin were offset by declines in lead, silver and iron.

Copper starts the year well After climbing 18.1% to 483,880 tons in 1996, Peru’s copper output in the firsttwo months of this year was 78,548 tons, compared with 71,234 tons a yearago—an increase of 10.3%. Higher output was reported both by the largestproducers, Southern Peru Copper Corp, Cerro Verde (both of the USA) and BHPTintaya, and by medium-scale producers. Year-on-year increases in productionin February at Southern Peru, Cerro Verde and BHP Tintaya were 21.5%, 44.9%and 13.5% respectively. Southern Peru, however, estimated that its first quarterproduction would be 2,000 tons lower than projected after torrential rain andfloods on March 3 damaged installations at the Toquepala and Cuajone minesand at the Ilo smelter and refinery. The company resumed normal operationson March 10.

Gold output continues torise—

Peru’s gold output rose to 350,088 ounces in the first two months of the yearcompared with 321,770 ounces in the same period a year earlier. This 8.8%increase follows 12.2% growth in 1996, when annual output came to 2,105,998ounces. Most of the rise has been due to sharply higher output by MineraYanacocha, Peru’s largest gold producer, which is owned by the USA-basedNewmont Mining Company and Compañía de Minas Buenaventura.

—as a dispute overYanacocha is settled

Lima’s Superior Court ruled in favour of Compañía de Minas Buenaventura andNewmont Mining Company in their case against Bureau de RecherchesGéologiques et Minières (BRGM) over ownership rights to Minera Yanacocha.The court ruled that Buenaventura and Newmont could exercise pre-emptiverights to acquire 24.7% of the shares of Minera Yanacocha owned by BRGM.BRGM had tried to sell the stake to Normandy Poseidon. The court did not,however, accept the Newmont and Buenaventura estimate of the value of theshares at $53m. It set a minimum purchase price of $109.3m. As a result ofthe ruling Newmont hold 51.4% and Buenaventura 43.6%. Although BRGMcan appeal, Newmont has pointed out that under Peru’s civil procedurescode, decisions by a superior court can be modified only in very limitedcircumstances.

Zinc progress continues— Peru’s zinc production increased by 11.9% in the first two months of the year,to 130,640 tons compared with 116,733 tons a year earlier. The rise was due tohigher output at the largest producer, Centromín Perú, as well as at CompañíaMinera Milpo, Empresa Minera Iscaycruz and other medium-sized mines. In1996, Peru’s zinc production had risen by 9.5% to 758,431 tons compared with692,290 tons in 1995.

Refinería de Cajamarquilla produced 105,450 tons of high-grade zinc last year,a rise of 14.6% compared with 1995 and the highest output ever for the refin-ery. Operations were uninterrupted last year. In 1995 when there had beenrepeated failures with three transformers. Cajamarquilla was privatised in 1994.It was acquired by Cominco of Canada and Marubeni of Japan.

18 Peru


—but lead and silver stall— Lead production fell by 6.4% in the first two months of the year to 38,480 tons.The fall was mostly due to lower production at Centromín and more moderatedeclines at medium-sized and small producers. In 1996 Peru’s lead output hadrisen by 4.6% to 248,477 tons compared with 237,597 tons a year earlier.

Peru’s silver production fell by 1.3% in the first two months of the year to10,158,656 ounces. The decline was due to a fall in output by Centromín andother large producers which offset higher output by medium-sized and smallproducers. Peru’s silver output had risen by only a modest 2.6% in 1996, alsodue mostly to increases by medium-sized producers.

—and iron output lags Production by Peru’s only iron firm, Shougang Hierro Perú, fell to 496,971 longtons in the first two months of the year, a 16.93% fall on the level in the samemonths in 1996. (The statistics are expressed in fine metal content.) The firm,which was acquired by China’s state-owned Shougang Corporation when itwas privatised in 1992, has had problems in marketing its products, whichhave a high sulphur content. It is seeking a $20m loan from Banco Sudamerisand ING Bank to restructure short-term obligations. A larger credit is likely tobe sought in the coming months to finance a $160m pellet plant due to comeon stream by 2000.

Minsur boosts tin output Peru’s sole tin producer, Minsur, increased output by 33% in the first twomonths of the year to 4,494 tons. Tin output rose by 16% in 1996. Minsur,which operates the San Rafael mine in south-eastern Peru, recently inaugurateda smelter and refinery in the coastal city of Pisco.

Centromín’s La Oroya isprivatised—

Mexico’s Industrias Peñoles beat two other international firms in bidding for LaOroya metallurgical complex with an offer of $185m for a 51% controllingshare. Centromín’s privatisation committee had set a reference price of $70mfor 100% of the shares in the firm. Following the bidding Centromín said thatPeñoles must decide in the coming days how much capital it will inject. Usingthe $185m figure as a reference, it must pay at least $193m.

—and more mines arecoming up—

Centromín Perú also announced it will auction off the San Cristóbal andAndaychaugua polymetallic mines and the Mahr Tunel concentrator in June.They will be sold off as a single unit called Empresa Mahr Tunel. The two minestogether produce roughly 2,700 tons of ore daily with proven and probablereserves of eight years and potential reserves of 30 years. After the sale ofEmpresa Mahr Tunel, the privatisation committee plans to offer Toromochaand Yauricocha, in the same region, together as options for exploration.Centromín tried without success to auction off Yauricocha, a polymetallicmine which has made losses in recent years.

—but Paranapanema losesYaulicyacu

Centromín Perú announced in March that Brazil’s Grupo Paranapanema hadlost the opportunity to acquire the Yauliyacu polymetallic mine, formerlyCentromín’s Casapalca mine. The reason given was that Paranapanema hadfailed to provide the required bank guarantees within the timetable agreed. Themine will be transferred instead to Compañía Minera Casapalca. Paranapanema,which had offered $12.7m and a commitment to invest $100m over five years,

Peru 19


has warned that it plans to take legal action against Centromín. It seems, how-ever, that Centromín is prepared to stand firm on its decision.

Antamina surveys arepromising

Rio Algom and Inmet Mining, the two Canadian companies that paidCentromín $20m for the option to explore the Antamina deposit in theNorthern Andes, have announced that early results from drilling at theAntamina polymetallic deposit in northern Peru showed proven and probablereserves of 200m tons. This was more than had been initially estimated.

Minero Peru delays sales— The privatisation committee of Minero Peru has announced that seven firmshave prequalified for bidding to develop the 20 concessions of the Michiquillaycopper deposit in the northern Andean department of Cajamarca. The conces-sions cover more than 18,000 ha, with copper reserves of 514m tons. Althoughthe bidding had originally been set for early 1997, the date now set for theauction is June. Minero Peru has postponed indefinitely the sale of the phos-phates deposit at Bayovar. Bidding had been due to take place in February.

—while Petroperúprivatisation is to

resume—

Petroperú, the oil regulatory company, has announced that the privatisation ofthe state oil firm will resume, with an auction of concessions for the operationof storage terminals later this year. It has still not announced plans for the saleof the Talara refinery, the only major refinery remaining in state hands sincethe company sold off a 60% stake in La Pampilla in June.

—and oil exploration anddevelopment contracts

are signed—

In late January, the Oklahoma-based Phillips Petroleum Company signed an oiland gas exploration contract and development licence contract with Petroperúfor Block 82. The 1.25m-ha block is located in the central southern Amazonjungle near the Brazilian border. Petroperú estimates that Phillips will spend$46.5m on a minimum work programme which includes six wells.

—and planned Petroperú expects to sign five more exploration contracts in the next fewmonths. They are: Block 73, under discussion with Houston-based CoastalCorp; Jungle block 86, under discussion with Atlantic Richfield of Dallas;Block 32, under discussion with Enterprise Oil of the UK; Jungle block 85 nearAguaytía, under discussion with Buenaventura Ingenieros in association withtwo US-based companies, PanEnergry and Mosbacher Energy; and Block XII onthe north coast, under discussion with Pluspetrol of Argentina.

Drilling begins onCamisea appraisal wells

Shell Prospecting and Development (Peru) moved into a new phase in thedevelopment of the Camisea natural gas fields in March as the company, inassociation with Mobil Oil Exploration and Producing Peru, began drilling itsfirst appraisal well. The well sits over the field with the largest of the two reservesdiscovered in the 1980s. Its completion is expected in May. Shell estimates thereserves at Camisea in the Ucayali basin at 11trn cu ft of natural gas and some600m barrels of natural gas liquids. It has also begun civil engineering work tosink the second appraisal well in June. In March, Shell and Mobil signed an oilexploration and development license agreement for Block 75, adjacent to theCamisea fields. Petroperú estimates the minimum work programme at $34m.

20 Peru


Southern sells electricityplant

Southern Peru Copper sold its electricity generating system to an independentproducer, Powerfin, for $44m. Powerfin is a subsidiary of Belgian-ownedTractabel. Southern Peru currently generates 130 kwh and will need moreelectricity for the expansion of its Cuajone mine and its Ilo smelter.

Electricity output rises— Total electricity production in the first two months of the year rose by about4.8% to 2,188 gwh, 80% of which was produced by firms with concessions and20% by self-generators. Electricity companies had total sales of $1.05bn in1996, of which 65% went to the public service and 35% to so-called free clients,whose consumption is at least 1 mw.

—and a new gas-fuelledplant is planned

Shell International Gas and Mobil Power plan to go ahead with developmentof a 300-mw power plant fired by gas from the Camisea fields in partnershipwith International Generating Company (Intergen). Intergen, part of the SanFrancisco-based Bechtel Group, earlier this year dissolved a partnership todevelop the project with Community Energy Alternatives. The two companieshad differences over plans to develop the plant.

Manufacturing and telecommunications

Manufacturing growthstill lags

After expanding by only 2.6% in 1996, manufacturing activity grew by a modest1.5% in the first two months of the year compared with a year earlier. However,the overall slow growth conceals some positive signs. Primary product process-ing, which accounts for around 30% of total manufacturing production, is heav-ily dependent on the fishmeal industry, which declined by 28.3% inJanuary-February compared with a year earlier. This, combined with a decline inthe refining of oil brought a 5.7% fall in overall primary production. The rest ofmanufacturing performed better, with a 4.5% growth in the first two months ofthe year.

Nestle buys D’Onfrio Nestle paid $67m for 98.7% of the shares of the D’Onfrio ice cream and confec-tionery firm, which was owned by the Gloria business group. Negotiations forthe sale of the firm, which controls 90% of the local ice cream and confectionerymarket, lasted more than a year.

Construction activity isbeginning to recover

After seeing a 4.6% downturn in 1996, the construction sector grew by 13.4%in January and February compared with the same period a year earlier.Increased cement sales and advances in highway and rural road constructionwere responsible for the improvement. Licences granted by the municipalcouncils of metropolitan Lima, however, were down as well as the tenders forpublic works projects.

Telefónica del Perú is toinvest $600m—

Telefónica is investing $600m, focusing on the development of the cellularmarket, cable television and corporate telecommunications. Of that, some$100m will be spent in the cellular market. Telefónica, which has a monopolyon fixed telephony until end-1998, projects its net earnings will increase by17% this year. Earnings increased by 15% in 1996 compared with a year earlier,reaching Ns902m.

Peru 21


—and Bell Southannounces

investment plans

Having paid $112m in January for 57% of the shares in the Tele 2000 cellulartelephone firm, Bell South will inject $50m in new capital. Its 1997 financialplan includes obtaining loans for $83m and the acquisition of equipment for$21m, to be financed by Citibank. Bell South now operates in six LatinAmerican countries.

Foreign trade and payments

The trade deficitcontinues to shrink—

Year-end trade figures show that the gap between exports and imports dimin-ished by 5.4% in 1996, to $2bn. In the first two months of 1997 the improvingtrend continued, with the deficit falling by a full 25% compared with the sameperiod in 1996, to $213m.

—with exports upencouragingly—

Total exports in 1996 were $5.9bn, 5.8% more than in 1995. The bulk of Peru’sexports—over 70%—are traditional products. Of these, minerals account for63%. Mineral exports volumes climbed strongly, led by a 14% growth in copperexports and 24% in gold, but earnings growth was only 1.7%, held back by a23% fall in copper prices. Of the other traditional exports, high catches in thefourth quarter brought annual growth of fishing earnings to 15.7%, while oiland derivatives earnings grew by 46% for the second year running. Exportearnings from traditional agriculture fell by 13.9%, due to low sugar and coffeeprices. The total increase in traditional exports was, at 5.8%, lower than theincrease in non-traditionals, which was 10.5%. Most of the growth in non-traditionals was accounted for by chemicals, non-traditional agriculture andothers (mainly jewellery and other crafts).

The share of Peru’s export markets accounted for by the USA, the largest tradingpartner, rose from 17.3% in 1995 to 21.2% in 1996. The second-largest exportmarket is Japan, whose share fell from 9.1% to 7.1%. The principal exportingcompanies were Southern Peru (with exports of $733.4m, or 12% of the total),Centromín Perú (with $454.6m, or 8%) and Minera Yanacocha (with $307.8m,or 5%).

Customs sources report that in January-February 1997 exports were $1bn,15.2% higher than in the same period of 1996. Most of the increase arises fromthe sharp upturn in earnings from fish, which were $112m higher than thesame period in 1996.

—and import growthcurtailed

Import growth remained modest in the last quarter of 1996, giving an annualtotal for 1996 of $7.9bn, only 1.7% up on 1995. Over the year, imports of bothcapital goods and intermediate goods were almost unchanged on their 1995levels, while consumer goods imports grew at a moderate 3.5%. However, in thelast quarter capital goods imports grew by 7.3% year on year while consumergoods imports fell by 3.3%. This suggests that the economy is moving into arecovery after the sharp slowdown of 1996, and that the policy adjustment hasbeen successful in reining in consumer imports. Results for the first two monthsof 1997 confirm this trend: consumer goods imports were 9.1% below their levelfor the same period in 1996, while capital goods imports were 24.4% higher.The 31.2% increase in imports of capital goods for manufacturing and 28.4%

22 Peru


increase in construction materials provide significant evidence of a return ofconfidence.

The balance-of-paymentsdeficit is on the

way down—

Balance-of-payments figures are now available to the end of 1996. They show acurrent-account deficit of $3.6bn, compared with a deficit of $4.3bn for 1995.The largest contribution to the improvement came from a reduction in netpublic-sector factor services outflows, which fell by over $500m. Other factorscontributing to the shrinking of the deficit were the $189m improvement in thetrade balance, $90m improvement in the services balance and $53m increase incurrent transfers. Foreign direct investment (FDI) flows rose from $2.1bn in 1995to $3.8bn in 1996.

Stock of foreign direct investment($ m; end-period)

1996 1997 New investmentsDec Mar Jan-Mar

Agriculture 7.14 7.14

Commerce 352.9 367.0 14.1

Communications 2,006.6 2,006.6

Construction 29.60 29.89 0.3

Energy 1,162.6 1,162.6

Finance 670.4 670.4

Industry 962.5 973.1 10.5

Mining 1,048.2 1,048.2

Fishing 0.6 0.6

Oil 59.3 59.3

Services 50.7 50.8 0.1

Silviculture 1.2 1.2

Transport 31.3 31.3

Tourism 29.1 29.1

Housing 6.7 6.7

Total registered 6,419.0 6,444.1 25.1Source: Ministry of Economy and Finance.

0

100

200

300

400

500

600

700

800

900

Q1 . Q3 . Q1 . Q3 . Q1 . Q3 .

Consumer goods

Intermediate goods

Capital goodsImports, fob$ m

Source: Banco Central de Reserva, Nota Semanal.

959595959595959595959595959595959595959595 96969619941994 95 9695 96961994199419941994 95 9695 9695 9695 9695 9695 9695 9695 9695 9695 96199419941994 95 9619941994

Peru 23


—and investment flowsare buoyant—

The stock of FDI reached $6.44bn at the end of March. This represents anincrease of $26m since the end of 1996. This expansion reflects to the regis-tration of new investment in the commercial sector.

—boosting internationalreserves further

International reserves increased by $633m in the first quarter, to reach $9.2bn.The main source of this growth was the expansion of public deposits by $757m.

The Brady Plan is finallyclosed—

The signature of the Brady Plan agreement between Peru and its commercialcreditor banks on March 7 has finally normalised relations between the countryand the international financial community. This will give Peruvian borrowersrenewed access to international credit markets. A total of $10.6bn in principaland interest arrears in commercial bank and supplier debt was restructured,reducing the sum outstanding by 51%. The debt was exchanged for past-dueinterest bonds ($2.4bn), front-loaded interest reduction bonds ($1.7bn),discount bonds ($560m) and par bonds ($182m). Peru also bought back $2.6bnof the debt in arrears paying $1.4bn (Japan’s Eximbank and the multilateralbanks contributed $800m and Peru $600m). The servicing of the Bradybonds will peak at $678m in the 20th year, while the Ministry of the Economyand Finance’s estimates for total public debt service predict that the highestpayment, of $1.9bn, will be in 2004. When the deal was signed, the total publicdebt was $19.4bn.

Breakdown of public debt, by creditor($ m)

Paris Club 8,836

Commercial banks 4,878

Multilateral organisations 4,279

Suppliers 982

Aladi 300

East European countries 140

Total 19,415

0.0

0.5

1.0

1.5

2.0

1997 1998 1999 2000 2001 2002 2003 2004 2005-09 2010-16

Other

Brady deal

Debt-service payments$ bn

(a) Estimates. Includes obligations with all external creditors.Source: Ministry of the Economy and Finance.

24 Peru


—and other debtagreements are signed

In January, the USA signed an agreement to refinance $768m of bilateral debt.This agreement was reached under the Paris Club framework formalised onJuly 20, 1996, and considers options such as the exchange of debt for poverty-alleviation programmes, alternative development in cocoa producing areasand environmental protection. The agreement incorporates debt to the USInternational Development Agency, Eximbank-USA, the Commodity CreditCorporation, Public Law 480, Housing Guaranty Programme and the USDefense Department.

Following a restructuring agreement last year, $1bn debt with Russian creditorswas settled. Mr Fujimori announced the settlement on April 6. He explainedthat, after some differences over the valuation of the debt, Peru agreed to payunder $200m.

In February the World Bank approved two loans worth $223m to support Peru’sdebt-reduction efforts in the framework of the Brady Plan, and to support reformof the national pension system. The World Bank has also agreed a $51m loan forpoverty-alleviation projects and natural resource management in the CentralAndes. Departments targeted to benefit from the loan programmes are Ancash,Apurimac, Ayacucho, Cajamarca Huancavelica and Junin. The IMF has agreed a$223m loan to support debt reduction efforts. In April the EU announced thatEcu2.8m ($3.2m) would be provided for non-governmental organisations tocarry out programmes for displaced people and victims of violence.

Peru 25


Quarterly indicators and trade data

Quarterly indicators of economic activity

1994 1995 1996 1997

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Exports: agriculture Annual totals

Sugar ’000 tons 67.5a ( 74.8a ) ( n/a ) n/a

Production Qtrly totals

Copper in concentrates ’000 tons 90 85 99 99 108 111 116 120 124 79b

Copper, refined “ 64 63 68 63 70 87 86 86 86 57b

Zinc orec ” 169 167 168 191 172 171 177 194 198 131b

Lead orec “ 57 51 58 61 59 58 60 62 43 29b

Prodn/day

Crude petroleum ’000 barrels 121.3 125.0 128.7 124.7 117.0 118.0 120.0 122.3 120.7 118.0d

Prices Monthly av

Consumer prices: 1990=100 1,695 1,736 1,790 1,830 1,869 1,935 1,993 2,046 2,086 2,118e

change year on year % 17 13 11 10 10 11 11 12 12 n/a

Share prices 1990=100 13,142 9,650 12,875 12,997 11,231 11,192 11,734 13,306 13,109 14,246e

Copper prices:

London spot $/ton 2,779 2,937 2,868 3,010 2,906 2,572 2,476 1,979 2,153 2,421

Money End-Qtr

M1, seasonally adj: NS m 5,261 6,085 6,420 6,810 7,084 7,651 7,964 8,197 8,567 12,071f

change year on year % 31 47 40 36 35 26 24 20 21 n/a

Foreign trade Qtrly totals

Exports fob $ m 1,219 1,292 1,358 1,489 1,437 1,427 1,459 1,494 1,517 n/a

Imports fob “ 1,678 1,781 1,890 2,007 2,008 1,791 2,008 2,038 2,056 n/a

Exchange holdings End-Qtr

Central Bank:

goldg $ m 322 317 325 322 323 335 327 322 315 293h

foreign exchange “ 6,992 7,031 7,501 7,710 8,221 8,360 8,808 10,417 10,579 10,648f

Exchange rate

Market rate Ns:$’ 000 2,180 2,260 2,240 2,250 2,310 2,360 2,440 2,510 2,600 2,650h

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Derived. b Total for January-February. c Metal content. d January only. e Average for January-February. f End-January. g End-quarter holdings atquarter’s average of London daily price less 25%. h End-February.

Sources: ISO, Statistical Bulletin; World Bureau of Metal Statistics, World Metal Statistics; Oil & Gas Journal; IMF, International Financial Statistics.

26 Peru


Foreign trade($ m)

Total USA Colombia Japan Brazil

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Food 856.4 909.7 216.1 255.7 54.5 49.3 0.3 0.2 14.2 5.5

of which:

cereals & products 428.0 469.6 143.8 189.4 1.9 3.5 0.0 0.0 0.0 0.0

Petroleum & products 308.9 595.6 116.2 47.9 0.3 306.0 0.2 0.1 2.6 1.8

Chemicals 760.4 998.8 222.4 276.7 86.4 119.3 8.2 8.5 46.6 43.8

Paper & manufactures 141.6 229.1 35.0 64.5 11.6 15.4 0.4 0.4 27.4 35.4

Textile yarn, cloth & mnfrs 128.2 148.2 29.0 28.7 12.8 15.9 2.7 2.4 4.3 3.9

Non-metallic mineral mnfrs 80.1 131.4 13.8 15.3 7.9 10.7 1.0 0.8 9.9 9.9

Iron & steel 195.2 316.4 28.5 46.9 1.3 3.7 7.1 6.9 45.7 44.5

Metal manufactures 145.7 112.8 44.9 59.7 8.3 9.0 2.5 2.5 15.7 22.2

Machinery & transport eqpt 2,198.9 2,974.6 674.9 867.7 19.5 22.5 435.1 472.6 166.8 209.8

of which

road vehicles 699.3 895.5 130.6 169.4 2.7 3.9 271.6 315.7 61.0 86.3

other transport 30.3 46.7 6.2 11.4 0.0 0.0 0.8 1.8 0.2 0.9

Scientific instruments etc 134.2 205.8 50.1 68.2 1.8 3.3 12.0 13.4 15.0 20.3

Total incl others 5,626.3 7,584.1 1,583.1 1,911.4 254.9 611.7 490.4 532.6 372.8 426.8

Total USA Japan UK China

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995

Food 1,350.0 1,482.4 222.9 240.0 112.6 90.4 10.9 11.7 202.3 235.9

of which:

fish & products 168.7 208.0 41.9 51.3 40.8 22.4 3.5 3.5 0.4 0.7

fruit, vegetables & prods 139.6 171.4 28.2 35.4 5.0 5.2 4.4 5.3 0.0 0.0

coffee 206.8 286.1 54.7 110.4 33.2 23.4 0.8 0.4 0.0 0.0

animal feeding stuffs 766.2 739.0 61.8 6.9 31.6 38.1 1.6 1.3 201.9 235.2

Metalliferous ores & scrap 666.3 872.4 4.8 7.2 82.9 145.9 17.2 15.3 75.7 66.0

Petroleum & products 177.1 268.2 74.8 190.5 0.0 0.0 0.0 0.0 0.0 0.1

Chemicals 97.1 119.3 11.7 16.1 3.7 4.0 3.5 5.1 0.0 0.0

Textile yarn, cloth & mnfrs 149.8 171.7 26.5 28.1 9.7 12.2 4.1 2.5 0.3 0.4

Non-ferrous metals 1,062.4 1,389.8 171.4 174.7 157.0 177.0 78.6 100.5 0.2 38.9

of which:

silver 100.2 111.0 55.0 66.2 9.7 0.0 0.2 0.2 0.0 0.0

copper 771.7 1,077.6 55.7 69.6 132.6 158.7 76.8 99.8 0.2 38.6

lead 40.5 53.3 14.7 16.6 6.0 7.8 0.0 0.3 0.0 0.0

zinc 141.2 140.1 44.0 21.3 7.8 9.6 0.0 0.0 0.0 0.0

Clothing 189.5 202.0 120.3 128.1 4.9 4.6 4.3 3.8 0.0 0.0

Total incl others 4,388.9 5,439.7 727.0 937.6 384.6 455.5 405.3 409.5 284.8 349.0

Source: UN, External Trade Statistics, series D.

Peru 27


COUNTRY REPORT - iuj.ac.jp · 8 Review 8 The political scene ... candidature for a third term in the elections in 2000. ... Border talks with Ecuador make some progress. Peru leaves

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