The Economist 2015

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Country Report

Peru

Generated on March 5th 2015

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Peru

ForecastHighlights

Outlook for 2015-19 Political stability

Election watch

International relations

Democracy index: Peru

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth

Inflation

Exchange rates

External sector

Forecast summary

Data and charts Annual data and forecast

Quarterly data

Monthly data

Annual trends charts

Monthly trends charts

Comparative economic indicators

Summary Basic data

Political structure

Recent analysisPolitics Forecast updates

Analysis

Economy Forecast updates

Analysis

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Country Report February 2015 www.eiu.com EconomistIntelligenceUnitLimited2015

HighlightsEditor: Rodrigo Aguilera

Forecast Closing Date: February 6, 2015

Outlook for 2015-19Sluggish economic growth and a spate of chronic political scandals will addto the challenges facing the president, Ollanta Humala, including a fall in hispopularity. But risks to governability will be contained.The Economist Intelligence Unit expects the current government (whoseterm ends in 2016) and its successor to retain the prudent policy frameworkthathasunderpinnedPerusrapiddevelopmentoverthepastdecade.After reaching just 2.4% in 2014, GDP growth will pick up in 2015-19,underpinned by ambitious infrastructure projects and rising copper output,but a waning commodity super-cycle poses risks.We expect the public finances, bolstered by a series of fiscal responsibilitymeasures, to be prudently managed, leading to a further reduction in thepublic debt/GDP ratio, to just 14% of GDP by 2019.With wage demands in the private sector set to remain subdued, annualinflation will average 2.7% in 2015, before picking up in 2016-19 to anaverage of 3.1% as economic growth gathers momentum.Barring a sharp rise in risk-aversion towards emerging markets, the exchangerate will depreciate gradually in 2015-19, supported by strong reserves andsteady long-term capital inflows.Falling export receipts will keep the current-account deficit wide in 2015, at4.8% of GDP. A gradual pick-up in mining exports and a falling income deficitwill narrow the current-account deficit to 3% of GDP by 2019.

ReviewA money laundering investigation had been launched into the first lady,NadineHeredia,andherbrother,IlnHeredia.Theinvestigationwillbecarried out by the prosecutor's office for money laundering.On January 26th the Peruvian Congress voted to repeal a controversiallabour law, just over a month after it was first approved. The law removedseveral worker benefits in order to encourage employers to hire youngerworkers.BolivianauthoritiesruledthatfugitivePeruvianbusinessmanMartnBelaunde Lossio is not eligible for political asylum in the country, paving theway for his extradition to Peru.Annual inflation in the Lima metropolitan area (taken as the basis formonetary policy) reached 3.07% in January, the lowest level since September2014, suggesting that inflation will stay within the 1-3% target range thisyear.TheBancoCentraldeReservadelPer(BCRP,theCentralBank)lowereditsreferential interest rate by 25 basis points, to 3.25% on January 15th, andlater announced further measures to boost liquidity amid weak growth.

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Outlook for 2015-19Political stability

Thepresident,OllantaHumalaoftherulingcentreleftGanaPercoalition,continues to struggle with poor approval ratings, a divided Congress andwidespreadpublicdisillusionmentwithPeruspoliticalclass,whichhasintensifiedfollowing a string of corruption scandals that have dominated the political sceneover the past few months. The first relates to the ongoing investigation of the"Centralita" corruption case, involving alleged political espionage and money-launderingbytheregionalgovernmentofncash.InearlyJanuary,afugitivebusinessman(andformeradvisertoMrHumala),MartnBelaundeLossiobelievedtobeoneoftheringleadersinthe"Centralita"casewasdeniedasyluminBolivia,opening the door for his extradition to Peru. Given Mr Belaunde's links to MrHumala, the government has faced criticism over the handling of the case, whichhas led to friction with the judiciary. A more recent complication is the launching ofan investigation into alleged money laundering involving the first lady, NadineHeredia. These two scandals, coupled with weak economic performance in theshort-term, could dent the president's approval further.

BickeringbetweentherulingGanaPercoalitionandoppositionpartieshasintensified over the past year as a result of policy blunders, cabinet changes andpolitical manoeuvring ahead of the April 2016 general election. The coalition alsosuffers from having just one more seat in Congress (36) than the main oppositionparty, Fuerza Popular. Complications in passing the government's agenda wereevidenced in late January following the defeat of a youth employment bill thatwould have stripped workers of certain benefits. Nevertheless, risks of a seriouspolitical crisis are contained by divisions among the opposition and the absence ofany significant or destabilising social conflicts or protests, although these couldemerge over large-scale energy projects. However, a wide urban-rural divide willpersistasthestatesinfluenceremainsabsentinremoteregions,whichwillhelptofuel a proliferation of radical local leaders. These have seen their influence rise inrecent local elections and continue to fuel social unrest, disrupting business. Theweakness of Peru's institutions will also foster corruption and mismanagement in therest of Mr Humala's term and beyond, particularly at lower levels of government,where there is less accountability.

Security issues will remain a source of concern in 2015-19, undermining bothinstitutionalstabilityandthegovernmentspopularity.Thesewillfocusonurbancrime, police corruption and weaknesses within the legal system, as well as the illicitdrugstrade,whichiswellestablishedintheEne,ApurmacandMantarorivervalleys (known as the VRAEM), an area that still suffers from the presence ofremnants of the Sendero Luminoso (Shining Path, a Maoist guerrilla group thatterrorised Peru in 1980-2000). Constant changes to security policy will makesignificant progress difficult in the short to medium term.

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Election watchThe next presidential and legislative elections are due in April 2016. Candidates forthe presidential election are expected to include a conservative populist,KeikoFujimoriofFuerzaPopularaformerpresident,AlanGarca(198590and200611)andaformereconomyminister,PedroPabloKuczynski.TherulingGanaPerhas yet to choose a candidate, as both Mr Humala and Ms Heredia (who would beoneofGanaPersstrongestcandidates),arelegallybarredfromstanding.Although Ms Fujimori continues to lead in opinion polls, there is a small possibilitythatapopulistoutsiderwilljointherace,challengingthecountrysfewremainingnational parties. Victory for such a candidate cannot be ruled out, particularly asthere is a high level of discontent among the political left, which feels increasinglydisappointedbyMrHumalasmoderatepolicies.However,thecentristshiftsadopted by many Peruvian presidents after being elected reduces the risk that apopulist successor to Mr Humala would undo the country's generally orthodoxeconomic management and take a more combative stance against the opposition.

International relationsPeru continues to support regional integration efforts, such as the Alianza delPacfico(PacificAlliance,aneconomicintegrationpactbetweenColombia,Chile,MexicoandPeru)andothersimplementedundertheUnindeNacionesSuramericanas (Unasur, the Union of South American Nations). Furthermore, thegovernment will continue to pursue bilateral free-trade agreements (FTAs),particularlywithAsiancountries.RelationswiththeUSandChinaPerusmaintradingpartnerswillremainanchoredbyFTAsinoperationsince2009and2010respectively, while relations with Brazil will remain strong, given growing bilateraltrade and investment flows, and an energy integration pact. Relations with Chilehave been tense in the past due to border disputes, but the two countries willprioritise their economic and political relationship in 2015-19, which will reduce thepossibility of friction.

Democracy index: PeruThe Economist Intelligence Unit's democracy index 2014 ranks Peru joint-63rd of 167countries, and among the countries considered to be "flawed democracies".Although Peru's score was the same as in 2013, the country fell three positions inthe rankings. Peru ranks 13th of 24 countries in Latin America and the Caribbean,behind Chile (32nd), Brazil (44th), Argentina (52nd), Mexico (57th) and Colombia(62nd). Among South American nations it outperformed only Paraguay (71st) andthree hybrid regimes: Ecuador (79th), Bolivia (83rd) and Venezuela (100th). Peruscored highest in the category of electoral process and pluralism thanks to itsdemocratic continuity and unchallenged elections. It also did well with respect tocivil liberties, which have improved substantially compared with previous decades.Peru performed worst in terms of functioning of government (largely the result of aweak institutional framework) and political culture, where it scored below theregional average. Both of these categories reflect the main risks to democracy goingforward

Democracy index Regime type Overall score Overall rank2014 Flawed democracy 6.54 out of 10 63 out of 1672013 Flawed democracy 6.54 out of 10 =60 out of 1672012 Flawed democracy 6.47 out of 10 =61 out of 167

Corruption and a weak state remain endemicPeru's democracy index ranking is consistently hindered by poor performance in thefunctioning of government category. This is mainly due to the country's strong

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presidency, which has tended to weaken the system of checks and balances withinthe political system. Corruption, an inefficient civil service and a lack oftransparency reduce accountability, hampering democracy. Corruption and a weakstate have been endemic throughout Peru's history, but the public's perception ofcorruption increased significantly under the second government of the formerpresident,AlanGarca(198590and200611),andhasintensifiedinthesecondhalfof Ollanta Humala's government. Mr Humala's has been beset by near-chronicscandals involving close associates and the first lady, Nadine Heredia (who iswidely seen as being a potential presidential contender). Although the countryboasts relatively credible independent prosecutors, this has yet to translate into aneffective reduction in corruption, which is particularly flagrant in sub-nationalgovernments where transparency and accountability are less well established.

An authoritarian political culture remainsevident, as does the appeal of populismPeru ranks poorly in terms of political culture and political participation. Given thatthe latter is enforced by mandatory voting, there are few efforts to promoteengagement with political parties or to forge a general interest in politics amongcitizens. As a result, the political culture is not supportive of democracy. AroundonethirdofPeruviansfavourmilitaryruleasignificantsharecontinuetohaveapreferenceforstrongleaderswhobypassparliamentandelectionsandmanystillbelieve that democracy is not successful at maintaining order. This is reflected inthefactthataformerpresident,AlbertoFujimori(19902000)whoiswidelycredited with defeating the Sendero Luminoso (Shining Path, a Maoist guerrillagroupthatterrorisedPeruin1980 2000)stillenjoyshighpopularityfromcertainsegments of the population, despite currently serving a 25-year sentence for human-rights violations. Mr Fujimori's daughter, Keiko Fujimori, is a perennial presidentialcontender. The political scene is also prone to capture by populism. This wasevident during Mr Fujimori's term in office and has remained a hallmark of politicalengagement ever since. Mr Humala, for example, largely ran on a somewhat radicalleft-wing platform, although this was later toned down. Provincial leaders alsofrequently run on populist platforms, seeking to drum up opposition to foreigninvestment.

Democracy index 2014 by category(On a scale of 0 to 10)

Electoralprocess

Functioning of government Political participation Political culture Civil liberties

9.17 5.00 5.00 5.00 8.53

A free white paper containing the full index and detailed methodology can bedownloaded from www.eiu.com/democracy2014

Note on methodologyThere is no consensus on how to measure democracy, and definitions of democracyare contested. Having free and fair competitive elections, and satisfying relatedaspects of political freedom, is the sine qua non of all definitions. However, ourindex is based on the view that measures of democracy that reflect the state ofpolitical freedom and civil liberties are not "thick" enough: they do not encompasssufficiently some crucial features that determine the quality and substance ofdemocracy. Our index therefore also includes measures of political participation,political culture and functioning of government, which are, at best, marginalised byother measures.

Our index of democracy covers 167 countries and territories. The index, on a 0-10scale, is based on the ratings (0, 0.5 or 1) for 60 indicators grouped in fivecategories: electoral process and pluralism; civil liberties; functioning ofgovernment; political participation; and political culture. Each category has a ratingon a 0-10 scale, and the overall index of democracy is the simple average of the fivecategory indices.

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The category indices are based on the sum of the indicator scores in the category,converted to a 0-10 scale. Adjustments to the category scores are made if countriesdo not score a 1 in the following critical areas for democracy:

whether national elections are free and fair;the security of voters;the influence of foreign powers on government; andthe capability of the civil service to implement policies.

If the scores for the first three questions are 0 (or 0.5), one point (0.5 point) isdeducted from the index in the relevant category (either the electoral process andpluralism or the functioning of government). If the score for 4 is 0, one point isdeducted from the functioning of government category index.

The index values are used to place countries within one of four types of regime:

fulldemocraciesscoresof8to10flaweddemocraciesscoresof6to7.9hybridregimesscoresof4to5.9authoritarianregimesscoresbelow4.

Thresholds for regime types depend on overall scores that are rounded to onedecimal point.

Policy trendsPeru will retain its prudent and business-friendly policy framework in 2015-19.Although there is a lingering risk that a populist leader could take office aspresident in July 2016 and radically alter the policy framework, the pledges bysuccessiveadministrationstomaintainanorthodoxapproachinadditiontocommitmentsmadebyPeruinitsvastnumberofFTAssubstantiallyreducetheprospect of such an outcome. Nonetheless, a pronounced slowdown in growth(reflecting weak external demand and a softening of investment) is creatingimportant challenges for the government. Despite the Humala administrationannouncing a series of measures to boost aggregate demand and improve thebusinessenvironmentintheshorttermincludinghighertransferstoregionalgovernments, a reduction in cost overheads for firms, and a simplification andstreamliningofadministrativeproceduresGDPgrowthwillbeweakerin2015 19than in the past decade (it averaged 7.9% at the peak of the commodities boom in2005-08), although it will still be the fastest among the largest Latin Americaneconomies.

Now that the commodities super-cycle is fading away, there are rising questionsover the ability of policymakers to sustain either long-term growth similar to today'sstructural rates of 4-5% or further gains in poverty reduction. Given a dividedlegislature and political bickering, it will be a challenge for the next administration toaddress key structural deficiencies that limit productivity, such as ineffectiveinstitutions, a complex tax regime, a rigid labour market, a low-skilled workforce,inadequate infrastructure and widespread corruption. A lack of progress in theseareas will leave the economy vulnerable to a sustained decline in commodity pricesand deteriorating terms of trade.

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Fiscal policyPerusfiscaloutlookwilldeterioratemodestlyintheshortterm,mainlyreflectingapronounced fall in global metal prices that is negatively affecting revenue.Combined with an expected increase in expenditure (the result of successivestimulus measures by Mr Humala), The Economist Intelligence Unit expects thenon-financial public sector (NFPS) deficit to widen slightly in 2015, after reaching anestimated 0.2% of GDP in full-year 2014, only the third time since 2006 that the fiscalaccounts have dipped into negative territory. Although full-year NFPS figures havenot yet been released, the central government recorded a deficit of 0.4% for the year,after a 5.9% increase in revenue was offset by an 11% increase in spending (mainlyon the current side). Downside risks remain, mainly if the projected rise in mineraloutput fails to materialise, but we expect revenue collection to improve gradually in2016 19astheeconomygathersmomentum.However,arecentproposaltocutincome and corporate taxes could backfire if the economy remains weak, leading toeven lower revenue. By contrast, expenditure is likely to decrease over the mediumterm as stimulus measures are rolled back and election-related expenses are cut backafter 2016.

The return to surplus of the NFPS balance in 2016-19 will lead to a more rapidimprovement in the public debt/GDP ratio compared with 2014-15, falling to 14% by2019. Throughout 2015-19 Peru will retain good access to voluntary financing fromdomestic and international markets and, even in the event that external conditionsdeteriorate sharply, the country would be able to access multilateral funding withrelative ease, given its good recent track record on servicing debt, as well asmacroeconomic and monetary stability. Further supporting the outlook is astructural fiscal balance rule based on historical commodity prices that helps to capexpenditure and debt accumulation. In the event that counter-cyclical spendingneeds to be extended for a longer period, the government will be able to tap into thesubstantial savings held in its fiscal stabilisation fund (which stood at US$8.6bn, or1.4% of GDP, at end-2013) to prevent a deterioration in the public accounts.

Monetary policyTheBancoCentraldeReservadelPer(BCRP,theCentralBank)cutitsmainpolicyinterest rate to 3.25% in January after keeping it at 3.5% since October 2014. The cutwas unsurprising, given weak growth and a favourable inflationary outlook that hasgiven monetary authorities more leeway in boosting liquidity. Aside from theinterest-rate cut, the BCRP also lowered reserve and deposit requirements. Amodest rebound in economic performance, with inflation firmly within the CentralBanks13%targetrangeinrecentmonths,suggeststhattheBCRPwillmaintainthe3.25% rate into 2015, (although there is still a possibility of a further cut if theeconomy does not pick up as expected), after which a tightening cycle should beginin late 2015 or early 2016, in line with an expected raising of interests rates in late bythe Federal Reserve (the US central bank). Rising incomes and growing trust in thebanking sector will gradually lift banking penetration rates and sustain strong creditgrowth in 2015-19. This will boost the effectiveness of monetary policy, along withan ongoing process of financial de-dollarisation, which authorities are activelyencouraging.

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International assumptions 2014 2015 2016 2017 2018 2019Economic growth (%)US GDP 2.4 3.4 2.5 2.4 2.5 1.4OECD GDP 1.9 2.4 2.3 2.3 2.4 2.0World GDP 3.1 3.8 3.7 3.8 3.9 3.6World trade 3.4 5.1 5.3 5.4 5.5 5.6Inflation indicators (% unless otherwise indicated)US CPI 1.6 0.4 2.2 2.3 2.5 2.0OECD CPI 1.6 1.5 1.9 2.2 2.2 2.0Manufactures (measured in US$) -0.3 0.4 1.5 1.9 1.2 1.4Oil (Brent; US$/b) 98.9 54.4 71.4 86.1 93.8 92.4Non-oil commodities (measured in US$) -5.3 -3.7 4.4 2.6 3.4 3.1Financial variablesUS$ 3-month commercial paper rate (av; %) 0.1 0.4 1.4 2.4 2.9 3.0Ns:US$ (av) 2.84 3.05 3.11 3.17 3.22 3.27

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Economic growthAfter estimated growth of just 2.4% in 2014 (down from our previous estimate of2.7% in the light of poor October-November figures), the weakest since the 2009global crisis, we expect a rebound in 2015 to 4.7%. Less favourable globalconditions in the short term (notwithstanding a more positive outlook for the US)will continue to weigh on exports, as well as consumer and investor confidence. Inaddition, stimulus measures announced by Mr Humala (equivalent to 1.7% of GDPover the rest of his term) are unlikely to have more than a modest positive impact onaggregate demand. Nonetheless, growth should recover considerably after 2015,during which the economy will be boosted by the gradual implementation of hugenew infrastructure and mining projects (including the Toromocho and Las Bambascopper mines). This will lift GDP growth to a high of 5.3% in 2016, before it losessomemomentumin2017 19,averaging4.8%.Downsideriskstoourforecastwillpersist,particularlyifpricesforPerusmaincommoditiescollapseforaprolongedperiod, which, in turn, would severely affect consumer and investor demand.

Increased access to credit, falling poverty and inequality, and a rise in governmentconditional cash transfers will sustain private consumption growth. However,private consumption growth will be significantly lower than in the past decade, asthere will be limited progress in addressing very high levels of labour informality(some of the highest in the region). Similarly, investment in roads, utilities andindustrial projects will only partly offset weaker foreign private investment in largemining and energy projects. Although we still expect some mining investment tosustain production and allow completion of the projects already under way, thereare significant risks that key projects could be halted owing to social conflicts.Notwithstanding these risks, we expect gross fixed investment to expand solidly inthe light of the continued attractiveness of the mining sector. Meanwhile, exportgrowth is set to gain momentum slowly, helped by rising copper output, which willhelpPerutobecometheworldssecondlargestexporterofthemineralbytheendofthe forecast period. Externally, import growth will outpace that of exports in 2015-19,acting as a drag on overall GDP.

Onthesupplyside,Peruseconomywillremaindominatedbytheminingsector,butthe main productivity gains will come from agro-industrial sectors, which have seenvery strong growth in recent years. Public infrastructure projects and large privateprojects in the energy and retail sectors will help to sustain growth in theconstruction sector, while services will be supported by the expanding retail,tourism and transport sectors. Although a weaker currency will be supportive,manufacturing will face constraints related to fluctuations in global demand and thelow quality of the labour force.

Economic growth% 2014a 2015b 2016b 2017b 2018b 2019b

GDP 2.4 4.7 5.3 5.1 4.6 4.5Private consumption 4.1 4.3 4.6 4.8 4.8 4.8Government consumption 7.8 9.0 7.5 6.0 6.0 6.0Gross fixed investment -1.5 4.0 6.0 6.5 6.0 5.5Exports of goods & services -2.8 3.0 5.0 5.1 4.2 4.0Imports of goods & services -2.0 2.6 4.7 6.5 6.6 6.3Domestic demand 2.4 4.6 5.3 5.4 5.2 5.0Agriculture 1.5 2.0 3.0 3.5 3.0 3.0Industry 4.2 3.8 4.3 4.3 4.0 4.0Services 1.8 5.3 6.0 5.5 5.0 4.8a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

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InflationInflation in the capital, Lima (used as the BCRP's benchmark for inflation targeting),fell further in January, to 3.1%, indicating that it will fall back into the 1-3% targetrange in coming months. Inflationary expectations should ease in the short term as aresult of the economic slowdown, as well as low oil prices and subdued wagedemands in the private sector. As a result, we expect annual inflation to average2.7% in 2015, after which it will pick up slightly in 2016-19, to an average of 3.1%, aseconomic growth gathers momentum. There are several upside risks to this forecast,including adverse weather, which would drive up food prices, and a pronouncedcurrency depreciation, which would lead to higher import costs. However, these arenot a part of our baseline scenario.

Exchange ratesAs with many emerging-market currencies, the nuevo sol has depreciated in linewith a stronger US dollar, although, at around 10% since last September, this hasbeen less pronounced than that of other regional currencies, such as the Colombianpeso and the Brazilian Real. A weaker external position, concerns about lowergrowth than in the past and further strengthening of the US dollar will continue toapply depreciation pressure to the nuevo sol throughout 2015-19, but ongoingcapital inflows will provide some support for the currency. Moreover, the BCRP isexpected to continue to intervene in currency markets in order to smooth volatility,not least as the financial sector is somewhat exposed to currency risk. Overall, weexpect the exchange rate to depreciate gradually, to Ns3.27:US$1 by 2019, supportedby confidence in the monetary policy framework, strong reserves and steady long-term capital inflows. The real exchange rate is also expected to depreciate mildlyover2015 19but,giventhepreponderanceofgloballypricedcommoditiesamongPeru's exports, this will have little effect in raising competitiveness.

External sectorLower copper and gold prices will constrain exports in the short term and keep thecountryscurrentaccountdeficitrelativelylargein201516,atanaverageof4.7%ofGDP (equal to the estimated level of 4.7% in 2014). Export earnings should begin tostrengthen in the medium term as new mining projects come on stream, but the tradebalance is expected to return to surplus only after 2018. The services deficit and thesecondary income (transfers) surplus will remain broadly stable in historical terms,the latter being the largest positive contributor to the current account, owing tolarge levels of remittances. By contrast, we expect the primary income deficit toremain well below the average of the past decade as profit repatriations by foreigncompanies lose some momentum (mainly reflecting the gradual end of the miningboom). As a result, the current-account deficit will narrow gradually, to 3% of GDPby 2019.

Persistent current-account deficits will be financed by strong inward foreign directinvestment (FDI), which will also support a continued comfortable foreign-reservesposition. FDI inflows came in at US$5.5bn in the first three quarters of 2014, butportfolio flows have been much weaker, at just US$1.9bn. However, theaccumulation of reserves will slow as the authorities use these to support thecurrency and, as a result, average import cover will fall from an estimated 15.9months in 2014 to a still-high 11.6 months in 2019.

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Forecast summaryForecast summary(% unless otherwise indicated) 2014a 2015b 2016b 2017b 2018b 2019b

Real GDP growth 2.4 4.7 5.3 5.1 4.6 4.5Industrial production growth 0.5 1.8 3.3 4.3 3.5 3.5Gross fixed investment growth -1.5 4.0 6.0 6.5 6.0 5.5

Unemployment rate (av)c 6.6 6.1 5.9 5.5 5.5 5.6

Consumer price inflation (av) 3.2 2.7 3.0 3.1 3.1 3.0Consumer price inflation (end-period) 3.2 2.7 3.2 3.1 3.1 2.9Lending interest rate 15.7 15.8 16.9 17.8 18.5 19.0

NFPS balance (% of GDP)d -0.2 -0.5 0.1 0.2 0.2 0.2

Exports of goods fob (US$ bn) 35.0 35.1 41.2 47.6 52.3 58.4Imports of goods fob (US$ bn) 38.1 37.8 44.2 48.4 52.2 57.5Current-account balance (US$ bn) -9.7 -9.9 -10.0 -9.4 -8.5 -8.1Current-account balance (% of GDP) -4.7 -4.8 -4.6 -4.0 -3.4 -3.0External debt (end-period; US$ bn) 58.6 60.0 61.8 64.0 65.6 67.2Exchange rate Ns:US$ (av) 2.84 3.05 3.11 3.17 3.22 3.27Exchange rate Ns:US$ (end-period) 2.99 3.08 3.14 3.19 3.25 3.29ExchangerateNs:100(av) 2.68 2.46 2.45 2.56 2.64 2.72Exchange rate Ns:R (av) 4.27 4.35 4.36 4.47 4.57 4.68a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Non seasonally adjusted. d

Non-financial public sector, excluding privatisation receipts.

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Data and chartsAnnual data and forecast

2010a 2011a 2012a 2013a 2014b 2015c 2016c

GDP Nominal GDP (US$ bn) 153.8 176.5 199.6 206.5 205.4 205.6 218.4Nominal GDP (Ns bn) 435 486 526 558 583 626 679Real GDP growth (%) 8.4 6.5 5.9 5.7 2.4 4.7 5.3Expenditure on GDP (% real change) Private consumption 8.7 6.0 6.1 5.3 4.1 4.3 4.6Government consumption 5.4 4.8 8.1 6.8 7.8 9.0 7.5Gross fixed investment 24.1 5.1 16.8 8.1 -1.5 4.0 6.0Exports of goods & services 1.2 7.1 3.6 -1.0 -2.8 3.0 5.0Imports of goods & services 26.0 12.7 10.7 3.5 -2.0 2.6 4.7Origin of GDP (% real change) Agriculture 4.9 4.2 5.1 3.1 1.5 2.0 3.0Industry 11.1 4.3 4.5 4.6 4.2 3.8 4.3Services 8.2 8.3 7.1 5.6 1.8 5.3 6.0Population and income Population (m) 29.5 29.8 30.1 30.5 30.8 31.2 31.5

GDP per head (US$ at PPP) 9,189b 9,875b 10,531b 11,176b 11,474 12,070 12,809

Recorded unemployment (av; %) 6.6 7.9 5.2 6.5 6.6 6.1 5.9Fiscal indicators (% of GDP)

Public-sector balanced -0.4 2.0 2.2 0.9 -0.2 -0.5 0.1

Public-sector debt interest payments 1.2 1.1 1.1 1.1 0.9 0.9 0.9Net public debt 22.0 19.9 17.9 16.3 16.1 15.8 15.1Prices and financial indicators Exchange rate Ns:US$ (end-period) 2.81 2.70 2.55 2.80 2.99 3.08 3.14Exchangerate:Ns(endperiod) 29.40 29.05 34.03 36.35 39.11 41.44 39.99Consumer prices (av; % change) 1.5 3.4 3.7 2.8 3.2 2.7 3.0Producer prices (av; % change) 1.8 6.3 1.8 0.4 1.8 2.6 2.6Stock of money M1 (% change) 21.2 11.7 22.6 9.5 7.2 9.5 9.3Stock of money M2 (% change) 21.7 9.6 13.8 18.8 11.9 14.3 14.9Lending interest rate (av; %) 19.0 18.7 19.2 18.2 15.7 15.8 16.9Current account (US$ m) Trade balance 6,988 9,225 5,232 -39 -3,157 -2,702 -2,989 Goods: exports fob 35,803 46,376 46,367 42,177 34,981 35,133 41,189 Goods: imports fob -28,815 -37,152 -41,135 -42,218 -38,138 -37,835 -44,178Services balance -2,353 -2,244 -2,420 -1,801 -1,251 -1,258 -1,179Primary income balance -11,212 -13,710 -12,399 -10,631 -8,978 -9,828 -9,955Secondary income balance 3,027 3,200 3,307 3,346 3,697 3,906 4,149Current-account balance -3,545 -3,177 -6,282 -9,126 -9,690 -9,882 -9,974External debt (US$ m)

Debt stock 42,154 45,012 54,150 56,661b 58,646 59,955 61,770

Debt service paid 6,685 4,018 5,862 6,806b 5,216 5,668 6,411

Principal repayments 4,060 2,128 2,758 5,130b 3,634 3,943 4,226International reserves (US$ m) Total international reserves 44,213 48,929 64,167 65,762 60,513 57,601 62,739a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Non-financial publicsector, excluding privatisation receipts.Source: IMF, International Financial Statistics.

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Quarterly data 2013 2014 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 QtrNon-financial public sector finance (Nsm )

Central government revenue 25,302 26,558 24,725 26,617 28,039 27,922 25,97327,584Central government expenditure 15,303 16,742 20,698 23,139 17,211 19,708 21,59926,600Capital revenue 317 347 84 155 75 180 0 0Capital expenditure 4,009 5,340 7,738 8,621 5,107 5,434 0 0Overall balance 6,307 4,822 -3,626 -4,987 5,796 2,961 0 0Overall balance (% of GDP) 4.8 3.4 -2.6 -3.5 n/a n/a n/a n/aOutput Manufacturing production index (1994=100) 95.5 107.9 103.2 113.6 99.7 104.4 100.0 n/aManufacturing production index (% change,year on year)

0.1 4.7 2.9 12.3 4.4 -3.3 -3.2 n/a

GDP at constant 1994 prices (Ns m) 111,134113,070114,778116,779115,965116,167116,743 n/aGDP at constant 1994 prices (% change,year on year)

5.2 5.7 5.1 6.9 4.3 2.7 1.7 n/a

Employment, wages and prices Unemployment rate (% of the labour force) 6.4 5.8 5.9 5.7 6.9 5.7 5.6 5.5Consumer prices (Dec 2001=100) 110.3 111.4 112.7 113.0 114.0 115.3 116.0 116.5Consumer prices (% change, year on year) 2.6 2.5 3.1 3.0 3.4 3.5 2.9 3.2Wholesale prices (1994=100) 97.9 98.2 100.3 100.2 100.3 100.7 101.1 101.7Wholesale prices (% change, year on year) -1.0 -1.0 1.9 1.6 2.5 2.6 0.8 1.5Financial indicators Exchange rate Ns:US$ (av) 2.57 2.66 2.79 2.78 2.81 2.79 2.82 n/aExchange rate Ns:US$ (end-period) 2.59 2.78 2.78 2.80 2.81 2.80 2.89 n/aDeposit rate (av; %) 2.4 2.3 2.3 2.3 2.3 2.3 2.3 n/aLending rate (av; %) 19.3 19.0 18.1 16.3 15.8 15.7 15.8 n/aM1 (end-period; Ns m) 85,456 86,361 87,398 91,077 90,465 90,336 92,985 n/aM1 (% change, year on year) 20.5 18.0 13.1 9.5 5.9 4.6 6.4 n/aM2 (end-period; Ns m) 206,490213,818225,094235,046237,623236,528238,912 n/aM2 (% change, year on year) 14.9 16.6 19.1 18.8 15.1 10.6 6.1 n/aIGBVL stockmarket index (end-period;1991=100)

19,859 15,550 15,920 15,754 14,299 16,662 16,22714,794

IGBVL stockmarket index (% change, yearon year)

-15.9 -23.0 -26.6 -23.6 -28.0 7.2 1.9 -6.1

Foreign trade & payments (US$) Exports fob 10,278 10,004 11,143 10,752 9,360 9,041 9,655 n/a Gold 2,399 2,182 2,648 2,585 2,036 2,175 2,274 n/a Copper 2,228 2,086 1,985 1,762 1,331 1,210 1,401 n/a Fishmeal 217 233 630 284 313 255 n/a n/aImports fob 10,230 10,529 11,128 10,331 9,958 10,391 10,536 n/aMerchandise trade balance fob-fob 48 -525 15 421 -598 -1,350 -881 n/aServices balance -498 -450 -406 -447 -488 -364 -439 n/aPrimary income balance -3,022 -2,439 -3,156 -2,014 -2,444 -2,536 -2,358 n/aNet transfers payments 776 821 804 945 891 871 1,362 n/aCurrent-account balance -2,696 -2,593 -2,742 -1,095 -2,639 -3,379 -2,316 n/aReserves excl gold (end-period) 66,263 65,441 65,448 64,423 63,635 63,288 63,271 n/aSources:IMF,InternationalFinancialStatisticsBancoCentraldeReservadelPerBolsadeValoresdeLima.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecExchange rate Ns:US$ (av)2012 2.69 2.68 2.67 2.66 2.67 2.67 2.64 2.62 2.60 2.59 2.60 2.572013 2.55 2.58 2.59 2.60 2.64 2.75 2.78 2.80 2.78 2.77 2.80 2.792014 2.81 2.81 2.81 2.79 2.79 2.79 2.79 2.81 2.86 2.91 2.93 2.96Exchange rate Ns:US$ (end-period)2012 2.69 2.68 2.67 2.64 2.71 2.67 2.63 2.61 2.60 2.59 2.58 2.552013 2.58 2.59 2.59 2.65 2.73 2.78 2.79 2.81 2.78 2.77 2.80 2.802014 2.82 2.80 2.81 2.81 2.80 2.80 2.80 2.84 2.89 2.92 n/a n/a

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Budget revenue (Ns bn)2012 8.9 6.7 8.5 10.4 8.4 7.5 7.7 7.5 7.7 7.7 7.8 8.52013 9.0 7.5 8.7 10.7 8.2 7.7 8.0 8.4 8.3 8.4 8.8 9.42014 9.8 8.2 10.0 11.5 8.3 8.1 8.3 8.9 8.7 8.5 10.0 9.1Budget expenditure (Ns bn)2012 4.2 5.3 4.7 4.5 5.2 4.5 9.2 5.7 5.0 5.5 5.6 9.22013 4.7 5.2 5.4 5.8 5.8 5.1 8.8 6.4 5.5 5.9 5.8 11.42014 5.3 6.4 5.4 5.6 6.0 8.1 7.8 7.7 6.1 7.1 6.8 12.7Budget balance (Ns bn)2012 4.7 1.4 3.7 5.9 3.2 3.0 -1.4 1.8 2.7 2.2 2.2 -0.72013 4.4 2.3 3.3 4.9 2.4 2.6 -0.8 2.0 2.9 2.5 3.0 -2.02014 4.5 1.8 4.6 5.9 2.3 0.0 0.5 1.2 2.6 1.4 3.1 -3.6M1 (% change, year on year)2012 15.8 16.5 16.9 17.7 22.0 21.3 23.3 20.6 20.9 22.0 23.2 22.62013 22.5 24.5 20.5 20.6 16.7 18.0 15.7 15.3 13.1 10.6 10.6 9.52014 6.0 3.8 5.9 4.3 3.9 4.6 4.8 4.0 6.4 5.3 n/a n/aM2 (% change, year on year)2012 12.5 13.3 12.4 11.4 13.7 13.9 12.9 13.9 14.1 14.1 14.5 13.82013 14.4 15.0 14.9 15.8 14.8 16.6 20.0 20.0 19.1 18.3 19.0 18.82014 16.9 16.1 15.1 13.4 11.1 10.6 7.3 5.4 6.1 6.9 n/a n/aUnemployment rate (% of the labour force)2012 9.2 7.8 8.9 7.4 5.3 6.2 7.1 6.7 6.0 6.0 5.7 5.22013 7.5 6.5 5.2 5.1 6.7 5.5 5.9 5.3 6.6 5.3 5.2 6.52014 7.4 7.0 6.4 5.5 5.6 5.9 5.6 6.1 5.1 5.9 5.2 5.5Manufacturing production (% change, year on year)2012 -1.2 -1.4 -9.5 -8.8 8.6 5.4 7.3 -2.8 -3.8 0.2 -1.3 -4.02013 3.4 -1.8 -1.4 7.4 0.5 6.6 -0.3 1.9 7.4 9.2 15.1 12.72014 1.0 4.6 7.9 2.1 -3.0 -8.3 -5.0 -2.6 -1.8 -3.1 n/a n/aConsumer prices (av; % change, year on year)2012 4.2 4.2 4.2 4.1 4.1 4.0 3.3 3.5 3.7 3.2 2.7 2.62013 2.9 2.4 2.6 2.3 2.5 2.8 3.2 3.3 2.8 3.0 3.0 2.92014 3.1 3.8 3.4 3.5 3.6 3.4 3.3 2.7 2.7 3.1 3.2 3.2Producer prices (av; % change, year on year)2012 4.7 4.2 4.1 3.1 2.4 2.0 0.9 0.7 0.4 0.2 -0.4 -0.62013 -0.8 -0.9 -1.2 -1.3 -1.3 -0.4 1.4 2.1 2.2 1.7 1.6 1.62014 2.4 2.5 2.6 2.6 3.1 2.1 1.2 0.6 0.4 1.3 1.7 1.5Deposit rate (av; %)2012 2.5 2.5 2.5 2.4 2.5 2.5 2.5 2.4 2.5 2.5 2.4 2.42013 2.4 2.4 2.3 2.3 2.3 2.3 2.3 2.3 2.4 2.3 2.3 2.32014 2.3 2.3 2.3 2.3 2.3 2.4 2.4 2.3 2.3 2.3 n/a n/aLending rate av; (%)2012 19.0 18.8 19.0 19.2 19.3 19.6 19.5 19.4 19.3 19.3 19.3 19.12013 19.4 19.3 19.1 19.1 19.0 18.8 18.5 18.1 17.6 16.7 16.4 15.92014 16.0 15.8 15.6 15.5 15.6 16.0 15.9 15.9 15.7 15.6 n/a n/aTotal exports fob (US$ m)2012 4,010 3,804 4,146 3,147 3,638 3,791 3,986 3,890 4,087 3,934 3,882 4,0512013 3,434 3,204 3,640 3,201 3,523 3,280 3,369 4,143 3,631 3,594 3,370 3,7882014 3,063 3,225 3,169 3,027 3,027 3,134 3,266 3,509 3,246 3,264 3,002 n/aTotal imports cif (US$ m)2012 3,305 2,867 3,403 3,204 3,562 3,238 3,732 3,796 3,493 3,798 3,599 3,1382013 3,764 3,186 3,280 3,526 3,795 3,208 3,761 3,951 3,415 3,779 3,392 3,1592014 3,616 2,970 3,372 3,588 3,507 3,296 3,575 3,593 3,378 3,560 3,255 n/aTrade balance fob-cif (US$ m)2012 704 937 744 -57 76 554 253 94 594 137 283 9132013 -330 17 360 -325 -272 72 -393 192 216 -185 -23 6292014 -553 256 -204 -561 -480 -162 -309 -84 -131 -296 -253 n/aForeign-exchange reserves excl gold (US$ m)2012 49,010 51,516 54,050 55,727 55,227 55,591 56,281 58,062 59,294 60,096 61,473 62,3002013 65,374 65,986 66,263 66,722 65,305 65,441 66,338 65,293 65,448 65,084 64,994 64,4232014 63,813 63,792 63,635 63,421 63,421 63,288 64,305 63,573 63,271 62,432 n/a n/aSources: IMF, International Financial Statistics; Haver Analytics.

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Annual trends charts

Peru 15


Monthly trends charts

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Comparative economic indicators

Basic dataLand area1,285,216 sq km

Population30m(2010InstitutoNacionaldeEstadsticaeInformtica)

Main towns

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Populationin000(2005census).ApartfromLima,thefollowingrefertopopulationof regional departments:

Lima (capital): 8,153

Cusco: 1,208

Piura: 1,679

Junn:1,182

La Libertad: 1,596

Arequipa: 1,173

Cajamarca: 1,412

Lambayeque: 1,122

Puno: 1,290

ncash:1,089

ClimateVaries by region and altitude. In general, temperate on the coast, tropical in thejungles, cool in the highlands; the western highlands have a dry climate, but there isheavy rainfall in the eastern and northern highlands between October and April

Weather in Lima (altitude 120 metres)Hottestmonth,February,1928C(averagedailyminimumandmaximum)coldestmonth,August,1319Cdriestmonths,February,March,1mmaveragemonthlyrainfall; wettest month, August, 8 mm average monthly rainfall

LanguagesSpanish is the principal language and the lingua franca for the large numbers ofQuechua and Aymara speakers; Quechua and Aymara also have official status

MeasuresMetric system; also old Spanish measures, particularly in rural areas

CurrencyNuevosol(Ns).Thereare100cntimosinonenuevosol.Averageexchangeratesin2013:Ns2.7:US$1Ns3.59:1

Time5 hours behind GMT

Public holidaysJanuary 1st; Easter (half-day Maundy Thursday and all day Good Friday); May 1st(Labour Day); June 29th (Saint Peter and Saint Paul); July 28th (Independence Day);August 30th (Santa Rosa de Lima); October 8th (Battle of Angamos); November 1st(AllSaintsDay)December8th(ImmaculateConception)December25th(Christmas Day)

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Political structureOfficial nameRepublic of Peru

Form of government

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Presidential democracy

The executiveThe president, who is directly elected for a five-year term, may not be re-elected to asecond consecutive term. He appoints a Council of Ministers

Head of stateElected president, currently Ollanta Humala, who was inaugurated in July 2011

National legislatureCongress consists of a 130-member single chamber, which can be dissolved onceduring a presidential term

Legal systemCourts of first instance in the provincial capitals; the Supreme Court sits in Lima

National electionsRegional and local elections took place in October 2014. The next presidential andlegislative elections will take place in April 2016

National governmentMrHumalaleadsthegovernmenthisGanaPeralliancehas36ofthe130seatsin Congress

Main political organisationsGovernment:GanaPer

Opposition:FuerzaPopular(FP)PerPosible(PP)SomosPer(SP)AccinPopular (AP); Alianza por el Gran Cambio (APGC); Partido Solidaridad Nacional(PSN); Partido Aprista Peruano (APRA)

President: Ollanta Humala Tasso

President of the Council of Ministers & prime minister: Ana Jara

Key ministersAgriculture: Juan Benites

Culture:DianalvarezCaldern

Defence: Pedro Cateriano

Development&socialinclusion:PaolaBustamanteSurez

Economy & finance: Alonso Segura

Education:JaimeSaavedraChanduv

Energy & mines: Eleodoro Mayorga

Environment: Manuel Pulgar Vidal

Foreignrelations:GonzaloGutirrez

Health: Midori de Habich

Housing, construction & sanitation: Milton Von Hesse

Interior: Daniel Urresti

International trade & tourism: Magali Silva

Justice: Daniel Figallo

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Labour:FredyOtrola

Production: Piero Ghezzi

Transport&communications:JosGallardo

Women & social development: Carmen Omonte

Central Bank presidentJulio Velarde

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Recent analysisGenerated on March 5th 2015

The following articles were published on our website in the period between our previous forecast and this one, and serve here asa review of the developments that shaped our outlook.

PoliticsForecast updatesJanuary 28, 2015: Election watch

Controversial youth labour law shot down

EventOn January 26th the Peruvian Congress voted to repeal a controversial labour law,just over a month after it was first approved.

AnalysisKnownasthe"LeyPulpn",thelawwasfirstintroducedbythegovernmentofthepresident, Ollanta Humala, as part of a raft of pro-business reforms. Specifically, itaimed to boost youth employment, which, at 25%, was running considerably higherthan the overall national rate of 5.6%.

However, many of the provisions in the legislation proved controversial, as theyremoved several worker benefits in order to encourage employers to hire youngerworkers. In particular, the law halved the amount of state-mandated holiday time forworkers aged between 18 and 24, removed their right to bonuses and freedemployers from the requirement to contribute to unemployment insurance funds forthese workers. The legislation, although welcomed by many in the businesscommunity, sparked a fierce backlash, initially in Lima, but spreading to other citiesas the opposition gained broad popular support.

Mr Humala attempted to defend the legislation through a television address onJanuary 25th, but this did not appear to sway public or legislative opposition.Although the legislation passed with majority congressional approval in December2014, the motion to repeal the law received overwhelming support, securing91 votes, with 18 against and five abstentions. Notably, six representatives from therulingGanaPergroupingopposedthelawandvotedagainstthegovernment.

TherepealoftheLeyPulpnmarksamajordefeatforMrHumala.Notonlyhastheaffair damaged his already low popular support, with his popularity rating nowhovering at around 25%, but it has highlighted his administration's weakness withinCongress.AmemberofGanaPerwhodefectedfromthegroupingisthe18thtoleaveduringthelifeofthisgovernment.GanaPernowhasonly34deputiesinthe130-seat Congress, and is dependent on ad hoc support from opposition partiessuchasPerPosible.Withpresidentialandlegislativeelectionsnowlessthan18 months away, such opposition support is set to become increasingly rare asparties struggle to position themselves ahead of the vote, with negative implicationsfor the success of President Humala's pro-business legislative agenda.

Impact on the forecastOur view that Mr Humala will find it increasingly challenging to pass key legislationas the election approaches is unchanged.

Peru 22


January 30, 2015: Political stability

Bolivia denies asylum to fugitive Peruvian businessman

EventOnJanuary23rdBolivia'sComisinNacionaldelRefugiado(Conare,thenationalrefugeecommission)ruledthataPeruvianbusinessman,MartnBelande,isnoteligible for political asylum in the country, paving the way for his extradition to Perutofacecorruptioncharges.However,MrBelandehaslaunchedanappeal,whichmay delay his extradition for several months.

AnalysisMrBelandeiswantedinPeruinconnectionwithanongoinginvestigationintoamajor alleged corruption network with high-level political links. He fled Peru in May2014, when he was made subject to an 18-month preventative arrest order, andsurfaced in Bolivia in December 2014, declaring his intention to seek asylum. OnDecember 15th he formally applied for political asylum in Bolivia, on the groundsthat the corruption charges against him were politically motivated.

OnJanuary20thBolivia'sSupremeCourtissuedanorderforMrBelande'sdetention in the country pending the Conare ruling. Although Conare technicallyhad120daysinwhichtoconsiderMrBelande'sasylumrequest,itsspeedyrulingmay indicate a desire by the Bolivian government to expedite the process to avoidthe risk of it damaging bilateral relations. Indeed, the decision of the Peruvianpresident, Ollanta Humala, not to attend the inauguration for a third term of theBolivian president, Evo Morales, on January 22nd was widely linked to the casesurroundingMrBelande.TheMoralesgovernmentitselfhassoughttoappearconciliatory, with Mr Morales declaring that Bolivia would not be a "rubbish bin forthe corrupt". Although emphasising that due process must be observed, theBolivian government appears to be making efforts to reassure the Peruviangovernment of its willingness to assist.

AlthoughConaretechnicallyhasseveralmonthstoconsiderMrBelande'sappeal,the speed with which its initial ruling was reached suggests that its secondresponsewillcomewithinarelativelyshorttimeframe.MrBelandecouldthereforebe extradited to Peru by April or earlier. His return would have major politicalramifications for the Humala administration, as his role as a former campaignmanager to the president would likely become a central feature of any investigationand subsequent trial. With elections approaching in 2016, Mr Humala can ill affordan increase in negative publicity.

Impact on the forecastWeexpectMrBelandetoeventuallybeextradited,buttheconsequencescouldhave negative repercussions for Mr Humala. Our forecast of continued politicalfriction arising from this case is unchanged.

Peru 23


February 5, 2015: Political stability

Money-laundering probe launched against Nadine Heredia

EventOn February 1st the Peruvian press reported that a money-laundering investigationhadbeenlaunchedintothefirstlady,NadineHeredia,andherbrotherIlnHeredia.The investigation will be carried out by the prosecutor's office for money-laundering.

AnalysisThe investigation was sparked by a local newspaper, Correo, who reported thatundeclared funds had been deposited into Ms Heredia's accounts for campaignpurposes. The transfers are said to amount to US$92,000 and were made in 2008, twoyearsaftertheendofthe2006electioncampaign.ThebrotherofMartnBelaundeLossio, a Peruvian businessman now wanted for corruption charges is reported tohave made some of the deposits. Ms Heredia denies the allegations and claims thatthey are politically motivated.

A report was released by the Unidad de Inteligencia Financiera (UIF, the financialintelligence unit) on February 2nd, which stated that Ms Heredia had not been ableto account for US$215,000 that she received between 2006 and 2009. Of this, herbrother had deposited US$67,000. The deposits all consisted of US$4,000 or less, asum that the UIF noted would not have triggered unusual activity alerts. Theallegations against Ms Heredia are not new. An investigation was first opened in2009 and then shelved in 2010. However, the fresh accusations and the UIF reportappear to have reactivated the investigation.

This development comes at a bad time for the government of the president, OllantaHumala, which is already suffering from falling approval ratings. Even if theaccusations are dismissed again, the investigation will contribute to a negativepublic perception of the presidential couple. Furthermore, any future trialproceedings against Mr Belaunde, who is awaiting extradition from Bolivia, couldalso stir up allegations against the presidential couple. With the first lady widelybelieved to be considering a presidential run in 2016, corruption allegations mayundermine efforts to rally a broad support base.

Impact on the forecastOur baseline forecast continues to view the ongoing corruption scandals aspolitically damaging for both the ruling party and Ms Heredia.

AnalysisJanuary 14, 2015

Belaunde corruption scandal reaches new stagePeru's most high-profile corruption case has begun a new chapter following recentrevelationsthatMartnBelaundeLossoafugitivebusinessmanisinhidinginneighbouring Bolivia. Mr Belaunde has been on the run since May 2014, whencharges against him were first issued and he was made subject to an 18-monthpreventative arrest order. Since then, the investigation has gathered pace andInterpol has issued an international arrest alert for Mr Belaunde. The crisis hasthe potential to complicate relations between Peru and Bolivia, at a time when thepresident, Ollanta Humala is coming under increased pressure at home.

Mr Belaunde surfaced in Bolivia in December, and on December 15th applied forpoliticalasylumonthegroundsthathewasbeingpersecutedinPeru.TheComisin

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Nacional del Refugiado (Conare, the national refugee commission) now has120daystoruleonwhetherMrBelaundecanbegrantedasylumornotalthoughthere is conflicting evidence on whether he has officially applied for it yet.

The case has already led to several high-level exchanges, with the PeruvianMinistry of Foreign Relations having formally requested Mr Belaunde's extradition,and the foreign and justice ministers having denied that the investigation againstthe latter represents political persecution. The Bolivian response so far has beenconciliatory,withthevicepresident,lvaroGarcaLinerastatinginearlyJanuarythat Bolivia will not seek to protect those accused of corruption. However, both heand the Bolivia's president, Evo Morales, underlined the independence of Conare,indicating that the decision must be made by the relevant institution and not by thegovernment. While these statements may have represented an attempt todepoliticise the case, the controversial nature of the investigation into Mr Belaundehas ensured that it remains in the headlines in Peru.

A corruption scandal with a long historyThe accusations against Mr Belaunde are linked to a long-running investigationinto regional corruption, involving senior regional politicians and businessmen.Specifically, the allegations accuse Mr Belaunde of using one of his companies tohelpCsarlvarez,theformergovernoroftheAncashregion(2007 14),toembezzlemoneythatwasthenusedtofinancecriminalactivityledbyMrlvarez.InMay2014Mrlvarezwasarrestedinconnectionwiththemurder,inMarchofthatyear,of one of his political rivals. Since the former governor's arrest, the investigation hasbroadened to include an alleged corruption network centred around Ancash, withseveral arrests having followed. The Ancash case, known as "La Centralita", has hitthe headlines several times and is credited with sparking investigations into othercases of alleged regional corruption. Separately, Mr Belaunde is also beinginvestigated by Peru's Congress in connection with improper lobbying activities.

One of the reasons why Mr Belaunde's case has received so much attention isbecause of his connections to the president and his wife, Nadine Heredia. MrBelaunde served as a press advisor during Mr Humala's unsuccessful 2006presidential campaign and as campaign manager in his 2011 campaign. According topress reports in Peru, Mr Belaunde also hired Ms Heredia as a consultant for one ofhis companies prior to Mr Humala's election victory in 2011. Beyond these links tothe central government, Mr Belaunde is also the nephew of the recently re-electedmayorofLima(thecapital),LuisCastaeda,whoalsoservedasmayorbetween2003and 2010.

Both Mr Humala and his wife have publicly stated that they do not currentlymaintain links with Mr Belaunde and that they were not aware of his illicit activitieswhen they were working with him. Neither Mr Humala nor Ms Heredia are named inthe various investigations into Mr Belaunde, with the presidential office havingnoted this as a sign of its probity. However, the association with Mr Belaundeprovides a welcome topic of attack for Mr Humala's political opponents. With MrHumalaalreadyunderpressurehispopularityratingishoveringataround30%and with presidential elections due in 2016 (Ms Heredia is widely thought to beconsidering a bid) the Belaunde issue is likely to be used to publicly discredit thepresident and his wife.

Disillusionment with the political class is rifeBroadly speaking, the Belaunde case feeds into an increased perception amongPeruvians that high-level corruption is endemic. In the regional and municipalelections in October 2014, more than 100 candidates were revealed to have ties todrug-trafficking cases, which did not affect their ability to run for public office, or, inseveral cases, to win. Neither are corruption allegations restricted to certain politicalpartiestheformerpresident,AlanGarca(1985 90,2006 11),whomaywellrunagainin 2016, has also been investigated in connection with a case of payment forpardons.

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The net result of these high-level corruption allegations is the fostering of agrowing sense of disillusionment with the established political parties. This wasborne out by the elections in October 2014, in which an unprecedented number oflocal or single-issue parties won office at the expense of the established politicalgroupings. In the run-up to the 2016 presidential and legislative elections, the mainpolitical parties will try to win back this support, while also highlighting corruptionallegations against their political opponents. Although this may encourage a rise ofpolitical fringe groups, particularly on the left, where several factions accuseMr Humala of having betrayed his left-wing election platform of 2011, it will alsocontribute to political apathy. Voting is compulsory in Peru, but anecdotal reportssuggest that the proportion of spoiled or blank ballots is on the rise. With theHumala government already struggling to hold together a majority in Congress, theprospect of further political fragmentation in the 2016 elections does not bode wellfor long-term legislative stability.

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EconomyForecast updatesJanuary 12, 2015: Exchange rates

Nuevo sol weakened less than other currencies in 2014

EventPeru's nuevo sol depreciated less against the US dollar than other currencies in theregion in 2014, and authorities have already started adopting policies to ensure thatthere are no further losses in 2015.

AnalysisThe nuevo sol depreciated by 6.43% against the US dollar in 2014, according to theBancoCentraldeReservadelPer(BCRP,theCentralBank),whichrepresentstheweakest annual average since 2009. Furthermore, it traded at Ns2.98:US$1 on thefinal day of 2014 and remained just under the Ns3:US$1 mark after the first week ofJanuary.

The BCRP sold US$4.22bn in different operations throughout 2014 in order to keepthe exchange rate from fluctuating too rapidly. This helped the nuevo sol todepreciate less than currencies in similarly open economies in the region, with theChilean peso losing 12.78% against the dollar and the Colombian peso depreciatingby 24.2% last year, and the BCRP plans to keep it this way. The general consensusin the Central Bank's final survey in 2014 of financial firms, which was released onJanuary 9th, was that the nuevo sol would depreciate at a slower pace in 2015. Thesurvey revealed expectations that the exchange rate would stay at aroundNs3.10:US$1 in 2015, increasing to Ns3.15:US$1 in 2016.

The BCRP has announced a series of new rules in the past two weeks to slow thenuevo sol's depreciation by further de-dollarising the economy. Loans in dollars inthe country's financial system were 37% of total loans in November 2014, whichremains high, but is far below the 71% recovered ten years earlier. For example, theBCRP presented on December 31st 2014 a reduction in reserve requirements in localcurrency to 9% (from 9.5%) and changes in the reserve requirements in foreigncurrency. The BCRP will also make it more expensive for banks that do not lowertheir loan portfolios in dollars. Special reserve requirements will apply to banks thatdo not lower by 5% total loans in foreign currency at end-June when compared withthe amount in September 2013; this amount must be lowered by 10% by the end of2015. The BCRP did not specify the increase in the reserves requirements.

Impact on the forecastThe event supports our forecast of the nuevo sol averaging Ns3:US$1 in 2015 andNs3:05:US$1 in 2016, which therefore remains unchanged.

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January 14, 2015: External sector

Government introduces new mining regulations

EventOn January 6th the president, Ollanta Humala, approved a series of new miningregulations designed to speed up the process of setting up mining projects.

AnalysisDecretoSupremo(SupremeDecree)001 2015 EMwillbeappliedtoallrelevantprocedures from now on. The passage of the new regulations fulfils a pledge madeby the Humala government in mid-2014 when the president introduced the first in aseries of economic stimulus measures designed to prevent the slowing of Peru'seconomic growth. Mr Humala stated in early January that GDP growth had come inat between 2.6% and 2.7% in 2014, well below the 5.8% rate registered in 2013. Thisgrowth slowdown was sparked by reduced demand (particularly from China) forminerals, Peru's core export.

The aim of the revised mining regulations is to simplify procedures and reduce thetime taken to apply for and receive construction and operating permits. As well asspeeding up projects already underway, the streamlined procedures should alsoencourage new investors to undertake projects. The government is confident thatthese measures will pay off, with the finance minister, Alonso Segura, expectingGDP to grow by close to 5% in 2015, a rate approaching growth levels enjoyed overthe past five years.

Although the measure may reap dividends in terms of increased investment, it couldreceive some negative reactions domestically; environmental groups have arguedthat streamlined timeframes for permits will reduce the amount of time given toenvironmental impact assessments. Nevertheless, the government is likely tocalculate that the drawbacks represented by domestic opposition will beoutweighed by the potential electoral benefits if the economy picks up again in2015, especially with presidential and legislative elections due in 2016.

Impact on the forecastOur forecast sees a stream of new investments boosting GDP to an average of 4.9%in2015 16,andmaybeslightlyraisedinthelightoftheimportanceoftheminingsector as a driver of growth.

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January 14, 2015: International assumptions

The EIU lowers its 2015 oil price forecast to US$54/barrel

EventThe fall in the global price of oil has showed no sign of easing, and the EIU isreducing its forecast for the average price of dated Brent blend (the internationalbenchmark) in 2015 to US$54/barrel from US$80/b.

AnalysisMarket fundamentals are largely unchanged from six months ago when prices firstbegan to fall: rapid growth in shale oil production in the US, combined with OPEC'srefusal to cut output, is resulting in an oversupplied market which, given thegenerally subdued nature of demand in the global economy, has yet to findequilibrium. The weakness of the global economy is crucial. Although we expectlower prices to boost aggregate demand, the impact will be more subdued than inthe past, partly owing to continued deleveraging in the euro zone.

We now expect prices to average $42/b in the first quarter of 2015 (the cyclical low),before moving higher towards the end of the year, for an annual average of US$54/bin 2015. There are several factors that will support higher oil prices in the secondhalf of this year. First, the Saudi budget for 2015 is predicated on an average price ofUS$60/b, which means some cuts to production, either alongside its OPEC partnersor of a more incremental and unilateral nature, are likely around mid-year. Second,North American production growth will slow sharply as lower prices render someinvestments in new wells uneconomic. Third, the spread between spot prices andtwo-year futures has widened in recent weeks, which makes oil more attractive totraders, provided that they can access storage. Finally, OPEC meets in June and islikely to be less tolerant of prices of US$50/b or lower.

Prices are likely to be volatile in next few months, as movements have becomeincreasingly detached from supply-and-demand fundamentals. It will take some timebefore the overall trajectory in prices becomes clear. Although the current routreflects an imbalance between supply and demand, rising extraction costs supporthigher prices over the medium term.

Impact on the forecastThe oil price fall will hit the fiscal and external balances of oil exporters, which willpush down economic growth for these countries. For oil importers, the lower pricewill act as a de-facto tax cut for consumers, who are paying less at the pump for fuel.As a result, we are slightly raising our 2015 real GDP forecasts for several major oil-consuming economies, including the US and China.

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January 19, 2015: Monetary policy outlook

Surprise rate cut after growth disappoints

EventWeak economic growth contributed to an unexpected drop in Peru's referentialinterest rate.

AnalysisTheBancoCentraldeReservadelPer(BCRP,theCentralBank)lowereditsreferential interest rate by 25 basis points, to 3.25%, in an unexpected move onJanuary 15th. The BCRP had lowered the rate by 25 points in both July andSeptember 2014. The Central Bank listed four reasons for the downward move,including sluggish economic growth, decreasing inflation, volatility in internationalmarkets and the lower international prices for crude. The BCRP's board was clearthat the recent decision did not signal a trend.

The move came shortly after the Instituto Nacional de EstadsticaeInformtica(thenational statistics office) reported 0.31% growth in November, well belowestimates. The expectation for growth had been 1.5%. Although preliminarynumbers for December show some improvements, including increased cementshipments and electricity consumption, the underlying reasons for the decline inNovember remain. The principal cause for weak GDP growth was a decline of closeto 70% in the fisheries sector, which, in turn, dragged down manufacturing.

Inflation was 3.22% in 2014, slightly above the upper end of the target, but theBCRP anticipates it dropping rapidly to 2% because of international declines in oiland food prices. The government contributed to falling oil prices last November byreducing the tax on gasoline by 5%, contributing further to lower prices at the pump.The BCRP is also watching the exchange rate. The nuevo sol fell by 0.4% onJanuary 16th, following the interest rate reduction, and is now at its weakest levelsince July 2009 (just over Ns3:US$1). The Central Bank announced a series ofmeasures at the start of the year to deal with the depreciation, lowering reserverequirements in nuevo soles and increasing them for foreign currency. The BCRPalso said that it would gradually increase liquidity, injecting up to Ns9bn (US$3bn)into the market. The BCRP stated in its January report that the board would adopt"additional flexibility measures" if necessary.

Impact on the forecastAnother cut in the interest rate is possible if inflation drops too quickly andstronger GDP growth remains elusive. For the moment, however, our baselineforecast is that the 3.25% rate will be kept on hold.

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February 2, 2015: Inflation

Inflation eases slightly in January

EventAnnual inflation in the Lima metropolitan area (taken as the basis for monetarypolicy) in January reached 3.07%, the lowest level since September 2014, suggestingthat inflation will stay within the 1-3% target range this year.

AnalysisAccordingtotheInstitutoNacionaldeEstadsticaeInformtica(INEI,thenationalstatistics institute), inflation was 0.17% in January in month-on-month terms, whichwas considerably below the average monthly increase seen in 2014. The BancoCentraldeReservadelPer(BCRP,theCentralBank)hasforecastthataverageannual inflation will hover around 2% in 2015, down from last year's result of 3.2%.Although above the BCRP's target, inflation in Peru last year was the lowest level inSouth America.

The January number was influenced by a decline in the transport andcommunications sector, down by 1.36% year on year. This sector includes fuels,which have trended downwards as the international price of crude has fallen. Peru isa net fuel importer.

The price of petrol at the pump was down by 12.4%, while the price of diesel wasdown by 9.9% and liquid petroleum gas for vehicles by 8.7%. Increasing the most inJanuary were prices for food and beverages, which rose by 0.79%.

The forecast for lower inflation has provided room for the BCRP to continueadopting measures to increase liquidity in the local economy. The BCRP on January27th reduced the reserves requirements that banks that must keep in nuevo soles to8.5% from 9%. It was the second reduction in less than a month, with the Bankdropping reserves requirement by 0.5% on December 31st. The BCRP begangradually lowering reserve requirements in 2013, when they were at 20%. It alsodropped from 2% to 1.5% the share of current-account deposits that banks arerequired to keep on hand in the BCRP to cover obligations. The BCRP estimatedthat the move would make almost US$300m available to financial institutions.

The BCRP lowered its growth forecast for 2014 to 2.4%, and to 4.8% for 2015. TheMinistry of Finance followed on January 30th, with the finance minister, AlonsoSegura, saying that the international headwinds facing Peru and the rest of theregion were stronger than had originally been anticipated. He added, however, thathe believed that growth of 4.8% would make Peru the fastest-growing economy inthe region this year.

Impact on the forecastOur forecast of average annual inflation of 2.7% in 2015 remains unchanged.

AnalysisJanuary 12, 2015

Chinese and Latin American leaders tighten ties in BeijingLeaders from the 33 member states of the Comunidad de EstadosLatinoamericanosyCaribeos(CELAC,a33memberblockofallindependentnations of the Americas, excluding Canada and the US) met with Chinese leadersin Beijing on January 8th and 9th for the first CELAC-China Forum. The meetingconfirmed a growing interest in closer ties between China and Latin America, andpoints to a deepening of bilateral trade and investment flows going forwards.

Peru 31


The two-day meeting was co-chaired by China's foreign minister, Wang Yi, andCostaRica'sforeignminister,ManuelGonzlezSanz,asCostaRicaisprotemporepresident of CELAC. Together, the two sides agreed on three major documents:regulations on the forum, a five-year co-operation plan and the Beijing Declaration.These agreements include various measures to boost co-operation among thegroup's governments and private sectors.

Boosting trade and investmentOver the next five years (2015-19), China will invite 1,000 leaders from CELACmember states to visit China. Similarly, both sides will aim to achieve US$500bn inbilateral trade (in 2013 bilateral trade totalled around half of this figure), while alsoincreasing investment to around US$250bn. As part of this effort, China has vowedto invest in infrastructure projects in the region, and to provide 6,000 governmentscholarships for CELAC members, while also increasing Mandarin-languageprogrammes in primary and secondary schools in member countries. Members alsoagreed to boost co-operation between civil authorities and that the next forumwould be held in Chile in 2018.

Increased financing needsChinese influence in the region has grown tremendously in the past decade as theAsian giant has sought an ever greater share of the region's natural resources, withbilateral trade growing by a factor of 22 between 2000 and 2013. In many countries,China has eclipsed the US as the largest trading partner. Similarly, over the pastdecade Chinese state financial institutions have disbursed around US$100bn intrade credits and investment to Latin American countries. According to Inter-American Dialogue, a US-based think tank, 54.4% of this money was spent oninfrastructure, 26.3% on energy, 12.6% on other and 5.1% on mining. Around half ofthe money (US$50.6bn) went towards Venezuela, with repayment partially financedthrough oil exports. Similar agreements were made with Ecuador. Other largerecipients include Argentina (shut out of international capital markets since itsdefault in 2001) and Brazil.

The forum comes at a time of slower growth amid declining commodity prices inLatin America, owing in part to reduced Chinese demand. Particularly hard-hit areChina's largest clients, such as Ecuador and Venezuela, who have seen shortfalls asthe price of oil has fallen by more than half since the middle of 2014. This makes theannouncement of increased financing particularly welcome in these countries, whichalso announced that they had received billion-dollar investments from China duringthe forum.

Cementing tiesHowever, also important are the announced investments in infrastructuredevelopment and education, which could help to boost Latin America'scompetitiveness. The announced scholarships and increased meetings betweenChina and CELAC governments are also good news, as they will increaseconnectedness and intercultural understanding, which are currently lacking but arenecessary to build lasting ties. Although the announcement of improved diplomaticandtradetiesbetweentheCELACcountriesandChinaisnothingnewandinthepasthasfailedtomaterialisethededicationtothemeetingshowsacommitmentfrom both sides to nurturing an intra-regional relationship.

China's growing interest in Latin American markets, and its increased assertivenessin searching for market opportunities and natural resources in what has traditionallybeen seen as the US's backyard, coupled with Latin America's interest indiversifying its trade and investment ties to less traditional partners in a morecomplicated external environment, suggest that bilateral relations will continue todeepen moving forwards.

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January 28, 2015

Cheaper oil prompts monetary loosening around the world2015 has begun with a flurry of monetary policy loosening as central banks indeveloped and emerging markets attempt to adjust their economies to cope withshifts in the global economy. The Economist Intelligence Unit expects further cutsto interest rates around the world in the coming months, and we have pushed backour expectations of monetary tightening. The results will make the US even moreofanoutlierandevenmoreimportanttotheglobaleconomyaswecontinuetoexpect the Federal Reserve (Fed) to lift rates in July or September.

The backdrop to recent adjustments has been six months of declining commodityprices, led by oil, copper and iron ore. As prices fall, the economic fortunes ofimporters and exporters diverge, creating uncertainty in global markets andrevisions to monetary policy stances. There is also a widening gap between theencouraging economic performance of the US, which is now doing well on almostevery measure, and the perennial disappointment of Europe and Japan. The latestrounds of large-scale monetary easing by the European Central Bank (ECB) and theBank of Japan led to big declines in the value of the euro and the yen against theUS dollar, which are causing ripples in the world economy far beyond theirrespective shores.

Turning on the tapsThe transmission of cheaper energy prices into stronger economic growth is likelyto be weaker now than in previous times of weakening oil prices. There are multiplereasons for this: households in many countries are not confident enough to spendtheir additional income, reflecting a continuing trend of deficient global aggregatedemand; consumers outside the US have seen their local currencies depreciateagainst the US dollar, meaning that the price of oil has not fallen as much in localcurrency terms; and governments have taken the opportunity to remove subsidiesor raise taxes on fuel, which has reduced the level of savings passed on toconsumers.

Consequently, the global economy is continuing to grow at a disappointing rate.Lower energy prices are, however, having a more direct effect on inflation, which isfalling around the world. A slow-growing global economy and diminished pricepressures mean that many central banks are easing monetary policy, despitemanaging very different economies. The first wave broke in January, when centralbanks in Egypt, India, Romania, Switzerland and Peru all announced cuts to theirpolicy rates. These moves were followed by similar action in Canada, Denmark(twice), Pakistan, Singapore and Turkey. These institutions fall roughly into two

Peru 33


camps. There are those that are primarily cutting rates to battle disinflation, andthose that are exploiting a fall in inflationary pressures to support economic growth.Denmark, Romania and Switzerland fall into the former category, the rest into thelatter.

The Swiss and Danish central banks moved to lower rates in anticipation of theECB's quantitative easing (QE) programme, which is expected to intensify upwardpressure on their currencies against the euro. At the same time as it cut its policyrate deeper into negative territory (its target rate is now -1.25% to -0.25%), the SwissNational Bank removed the franc's three-year-old ceiling against the euro, triggeringa massive appreciation. Despite speculation to the contrary, the Danish economyminister has denied that the krone's peg to the euro is under threat. Instead, theDanish authorities will continue to operate negative interest rates and intervene inforeign-exchange markets in a bid to contain upward pressure on the krone and keepit close to its central rate against the weak euro.

The Bank of Canada reduced rates in a pre-emptive strike. As one of the world'slargest oil exporters, the fall in the global oil price is having a dampening effect ongrowth and inflation. Canada does not have the same concerns about its economyas those in, and heavily linked to, the euro zone, but is wary that large falls ininvestment by energy companies and oil export revenue could choke off the slowrecovery in the economy, which is already struggling to gather momentum.

Energy importers benefit from inflationslowdownIn the emerging world, Egypt, India and Turkey are all net oil importers with current-account deficits that will benefit from cheaper fuel. The authorities have beenfighting long battles with structurally high inflation, but the fall in the oil price hasgiven them some respite. In India, falling oil prices have outweighed the effects of amediocre monsoon. Inflation has fallen faster than the central bank was expecting,enabling it to cut interest rates as a means of boosting growth. In Egypt, cuts to fuelsubsidies in 2014 necessitated a sharp increase in interest rates to stave off risinginflation, but pressures have now eased sufficiently for rates to be lowered. InTurkey, oil has given the authorities the confidence to move early to reduce interestrates. The main worry in both economies is currency depreciation. The value of theEgyptian pound is managed by the central bank, whereas the Turkish lira is freelyfloating. It is possible that the disinflationary effects of lower oil prices could beoffset by a renewed depreciation in the currencies, which would require expensiveintervention at a time of uncertain liquidity.

These central banks are likely to be the first movers, with others to follow.Conditions suggest that there is a chance of cuts across the emerging world, from

Peru 34


Chile to China to Poland to South Korea, while in the developed world the dates forexpected monetary tightening are being pushed further into the future, notably inAustralia and the UK. All of this means that the Fed (and possibly the Bank ofEngland) is likely to be the only major central bank to increase interest rates thisyear. We remain of the view that the Fed will first lift rates in the third quarter of thisyearinJulyorSeptemberastheUSeconomywillcontinueitsrecentimpressivegrowth. Given that domestic consumption, rather than trade, is the main driver of theUS economy, we think that there is enough internal momentum for it to expandquickly, even allowing for a weaker external picture. But we also recognise that thedamage to exports by the rapid appreciation of the dollar, or a demand shock suchas a prolonged period of bad weather, could persuade the Fed to delay.

How have the markets responded to these changes? A clue lies in the gold price,which tends to rise at times of uncertainty in the global economy (and fall duringperiods of strength in the US dollar), as investors like to hold it as a hedge againstinflation and stress in the financial system. In the second half of 2014, when the USdollar took off against other major global currencies, gold prices in dollar terms fellbycloseto20%infourmonths.However,priceshaverisenby10%inUS dollarterms since the beginning of 2015, revealing fears that the oil price decline is aprecursor to a period of global distress. The direction of the gold price will be auseful leading indicator as to whether the current round of monetary easing has hadthedesiredeffectorwhetherfurthereasingisinprospect.

January 30, 2015

Unemployment and informality remain huge regional challengesTwo recent studies by the International Labour Organisation (ILO) highlight thatunemployment in Latin America is set to increase in the next few years. They alsopoint out that unemployment is overwhelmingly affecting women and young people.These trends threaten to increase poverty and inequality, two areas in which theregion has made considerable progress in the past decade. They also have thepotential to lead to a rise in social conflict, given that youth unemployment inparticular is a factor behind social unrest. This makes it imperative thatgovernments across the region adopt policies to create better-quality jobs, whichare essential for an effective fight against poverty and inequality, and to achieveinclusive growth.

The ILO's recently published WorldEmploymentandSocialOutlookTrends2015 report highlights that the number of people with no jobs globally is likely toreach over 212m by 2019, up from 201m currently. In 2015 alone, 3m people areexpected to join the unemployed, which overwhelmingly comprise women andyoung people between 15 and 24 years of age. Although the report points out thatthe gap in unemployment levels between men and women has declined since thebeginning of the decade, unemployment among men reached 5.3% in 2013,considerably lower than the rate for women (7.7%). Youth unemployment inparticular has increased in all regions, despite improving education levels.

Regional trendsThe report shows that, following an initial period of recovery after the financialdownturn of 2008, Latin America has seen economic growth weaken, leading to anincrease in unemployment, which has particularly affected countries that rely oncommodities exports.

The ILO's PanoramaLaboralLatinoamricayelCaribe2014study, published inDecember, similarly indicates that 2014 marked a turning point after a decade ofstrong growth across the region that saw an increase in the number and quality ofjobs. The report notes that there are 15m unemployed people in urban areas acrossthe region, which may increase by half a million in 2015 alone, from its current levelof 6.1%. However, the most worrying development highlighted by the report is that

Peru 35


unemployment during 2014 actually recorded a slight fall, which goes against thetypicaleffectsthatadeclineineconomicgrowthandjobcreationproduces.Ultimately, for every tenth of a percentage point that economic growth declines,about 100,000 jobs are prevented from being created. But unemployment fellbecause of a reduction in the labour-participation rate, which means that the size ofthe labour pool shrunk enough to offset the growth in unemployment (this resultwas largely influenced by Brazil's weight within in the region, where bothunemployment and participation rates fell significantly). The majority of those thatleft the workforce and remained unemployed were women and young people.

While this may be the result of people entering full-time education, it may also be aresult of frustration due to lack of opportunities. Moreover, this is likely to betemporary, and these women and young people are likely to seek to be reinsertedinto the labour force during 2015, thus pushing unemployment rates back up. Thusthe initial reduction in unemployment recorded during 2014 is not entirely positive.

Informality a big challengeThe PanoramaLaboralLatinoamricayelCaribe2014study also highlightsproblems with the quality of employment throughout Latin America, as there are130m people who belong to the informal economy, which typically implies poorworking conditions, labour instability, and lack of protection and rights, in additionto lower productivity rates and salaries.

The report also points out that there are huge differences between the quality ofjobsinurbanareasvisvisruralareas.Aparticularprobleminruralareasisthelack of social protection and defective application of minimum wages. The ILOfound that in 10 out of the 14 countries analysed, only half of the populationemployed in the rural sector earned a salary. This is not only because rural salarylevels tend to be lower than in urban areas, but also because enforcement ofminimum pay is uneven.

Productivity issuesBeyond the fall in commodity prices and weak global demand, the decline ineconomic growth in Latin America i

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