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Andean Group - July 2014 (ISSN 1741-4466)

ECONOMIC OVERVIEW

Reacting to weak growth data. On 15 July Peru's prime minister, René Cornejo, said that President Ollanta Humala will unveil a new economic diversification plan in his upcoming state-of-the-nation address on 28 July, including additional measures aimed at removing bureaucratic restrictions and official red tape in a bid to stimulate private investment. The Humala government has only just sent down a similar ‘urgent’ package to the national congress. However, Cornejo said that economic stimulus package, which included plans to cut back on red tape constraining investment in mining, hydrocarbons and telecommunications and the rolling back of environmental regulations for oil and gas projects, might not be enough to mitigate the sharp decline in Peru’s exports observed this year. The Humala government is clearly scrambling to react to weaker-than-expected economic data as Peru is hit by slower external demand – principally from China – for its main mining exports. Economic growth was 1.84% year-on-year in May, according to the national statistics institute (Inei), the weakest monthly result since October 2009 (1.56%). The country’s key mining & hydrocarbons sector, which accounts for 14.3% of GDP, contracted by 4.5% in May; while manufacturing output (16.5% of GDP) was down 2.5%. Fisheries fell 9.3%. In contrast, retail activity (10.1% of GDP) rose 3.4%, with construction up 4.8% (thanks to public infrastructure schemes). Meanwhile gas & electricity output, a good indicator of domestic economic activity, rose 5%, with the main service sectors, including financial services, hotels & restaurants and telecoms & information technology (IT), still posting growth rates of over 5%. The latest Inei data means that overall growth in the first five months of the year was 3.6%, while the rolling 12-month figure was 5.1%. As the head of the Inei, Alejandro Vílchez, noted, Peru has registered positive growth for 58 consecutive months. More positively for the Humala government, the domestic economy is still creating jobs, with 102,400 new posts created in metropolitan Lima in the latest (April-June) rolling quarter, on Inei data. Peru’s slowdown is relatively benign and the Humala government has fiscal capacity to deal with it. In addition in response to the slowdown, the central bank (BCRP) has also lowered the overnight lending interest rate by a quarter-percentage point to 3.75% this month. Private sector confidence is weak, however, partly because of the government’s shifting economic policy stances. As President Humala moves into the third year of his five-year term, the nominally leftist government is making a big effort to reinforce the message that Peru is a business-friendly country. As part of these efforts President Humala has also made changes to his ministerial cabinet team designed to give it a stronger economic profile. Thus a mini-cabinet re-shuffle conducted on 23 June saw José David Gallardo Ku, a former BCRP director, coming in to head the transport & communications ministry. In addition President Humala has also taken it upon himself to reassure investors in a series of interviews with international news outlets that the current economic slowdown is but “temporary” (see sidebar)

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