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Cablegate: Peru's Economic Boom Continues in 2007

VZCZCXRO6006
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHPE #0103/01 0181204
ZNR UUUUU ZZH
R 181204Z JAN 08
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 7683
INFO RUEHWH/WHA DIPLOMATIC POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 LIMA 000103

SIPDIS

SIPDIS

COMMERCE FOR 4331/MAC/WH/MCAMERON
TREASURY FOR MMALLOY
USTR FOR BHARMAN AND MCARRILLO

E.O. 12958: N/A
TAGS: ECON EFIN USTR PE

SUBJECT: PERU'S ECONOMIC BOOM CONTINUES IN 2007

SUMMARY
-------
1. 2007 was a banner economic year for Peru, despite a devastating
8.0 earthquake in August just south of Lima. The stellar numbers
for 2007 continue an upward trend, as Peru reaps the fruits of
earlier economic reforms and liberalization, as well as the current
Garcia Administration's prudent economic policies. Peru's economy
has grown every month for the past 78 months, including an
impressive 8.3% in 2007, the biggest GDP increase in a dozen years.
Peru is the only county in the hemisphere to have posted at least
4% GDP growth for each of the past 6 years while keeping average
inflation under 2%.

2. Soaring private investment and domestic demand fueled the 2007
growth, with export growth playing less of a role than in previous
years. 2007 also brought Peru low inflation, a budget surplus,
decreasing debt, and declining poverty rates. Topping the cake, the
U.S. Congress ratified and President Bush signed the U.S.-Peru Trade
Promotion Act in December, and the free trade agreement should enter
into force later this year. Most Peruvians consider the FTA crucial
for continuing growth through trade and investment, helping to
reduce poverty, and locking in the hard-won economic and social
reforms of the past decade. End Summary.

VIBRANT GROWTH SINCE MID-2001
-----------------------------
3. Following a 7.6% expansion in 2006, Peru racked up another great
economic year in 2007. Minister of Economy and Finance Luis
Carranza announced January 8 that Peru's economy grew by an
estimated 8.3% in 2007, its biggest GDP increase in 12 years. GDP
per capita rose to an estimated $3,931 (over 50% higher than in
2004). The official figures for 2007 will be released on February
15.

4. Carranza highlighted that the Peruvian economy has been growing
steadily since mid-2001, making the current expansion Peru's
longest. Canada's Scotiabank said in a recent report that Peru is
living its Golden Age. GDP in 2007 was fueled by vigorous domestic
demand, with private investment increasing 25.5% and private
consumption 7.4%.

5. For the January-November period, construction surged 15.8% from
2006 to 2007, manufacturing increased 10.7%, retail and wholesale
trade 9.9%, and other services 9.0%. Agriculture and livestock grew
a meager 1.9% and mining and hydrocarbons 1.1%. Although exports
were the main driver of growth in previous years, they grew only
4.7% over the first three quarters of 2007.

FDI SURGING
-----------
6. The importance of Foreign Direct Investment (FDI) in Peru is
increasing, and accounted for almost a third (31.1%) of total Gross
Fixed Private Investment during the first three quarters of 2007.
Based on Central Bank (BCR) data, Post estimates FDI totaled close
to $6 billion in 2007. The Hunt Oil-led Peru LNG gas export project
alone spent about $750 million in Peru in 2007 (and the total
investment will be $3.6 billion). FDI has been well diversified
over the past few years, including sectors like power generation,
oil and gas, mining, banking, and retail trade.

RESISTING INFLATIONARY PRESSURE
-------------------------------
7. Inflation (based on the average Lima Consumer Price Index, CPI)
edged down to 1.8% in 2007 from 2.0% in 2006. However, measured at
year-end, inflation edged up to 3.9% from 1.1% a year earlier. This
late-year surge is projected to continue into 2008, with average
inflation expected to reach 2.4-3.0% in 2008. Price increases in
food and clothing were the main causes of inflation.

8. The GOP's "Petroleum Products Stabilization Fund," created as a
temporary fuels prices containment mechanism in 2004, continued to
help keep inflation low. Under this mechanism, oil refineries draw
from the fund when world oil prices exceed a certain price range,
and replenish the fund when world oil prices fall below that price
range, thereby avoiding passing oil price increases to the consumer.
Analysts at the private Banco de Credito (BCP) told us they
estimate that the direct effect of the mechanism was a 0.9%
reduction in the Lima CPI in 2007.

FULL PUBLIC COFFERS & APPRECIATING CURRENCY

LIMA 00000103 002 OF 002


-------------------------------------------
9. A pleased Carranza noted that Peru had a fiscal surplus of about
2.9% of GDP in 2007 and of 2% in 2006, after running deficits for
every year since at least 1970. Public debt dropped to 28.9% of
GDP. Tax revenues soared 13.3% in real terms in 2007. Foreign
reserves surged to a whopping $27.7 billion from $17.3 billion in
2006. The currency (new sol) averaged 3.13 per USD, a 4.4%
appreciation in the year, partly the result of massive support
operations by the Central Bank.

BETTER THAN DOW & EASIER CREDIT
-------------------------------
10. The Lima Stock Exchange (BVL) was the second most profitable in
the region, after Brazil, with the general index rising over 36% in
2007. The BVL grew by a world-best 168.3% in 2006. Credit (bank
loans) soared to $22.3 billion, a 41.2% increase over 2006 and the
highest percentage increase in a dozen years. Consumer loans
increased 58.8% and loans to small enterprises rose 49.1%. The
delinquency rate on loans continued its downtrend, reaching an
all-time low of 0.93% for commercial loans and 2.69% for consumer
loans.

MORE JOBS & LESS POVERTY
------------------------
11. Employment increased by 5% nation-wide and 10% in Lima,
bringing Lima unemployment down to 7.9%. Peru's poverty rate has
long hovered around 50%, with extreme poverty at 24%. These numbers
are finally beginning to come down, and the Garcia Administration's
ambitious aim to reduce poverty to 30% by 2011 now seems possible.
Poverty was 48.7% (17.4% extreme) in 2005 and 44.5% (16.1% extreme)
in 2006. Most of this progress has been in Lima (24.2% poverty and
0.9% extreme poverty in 2007), along the coast, and in urban areas.
Poverty remains extremely high elsewhere, particularly in the rural
highlands (76.5% poverty and 46.5% extreme poverty in 2007).

ROSY OUTLOOK
------------
12. Business executives and analysts are bullish on Peru's near
future in spite of potential risks on the international front.
There are high expectations that, once implemented, the trade
agreement with the U.S. will provide a boost, and there are trade
negotiations underway with numerous countries. Peru is hosting the
Asia Pacific Economic Cooperation (APEC) forum as well as the
European Union - Latin America Summit in 2008, which should bring
additional foreign interest. The BCR's December survey on
macroeconomic expectations showed executives and analysts
forecasting GDP growth near 7% in 2008, and between 6-7% for 2009.
Minister Carranza projected that per capita GDP would reach $5,279
in 2011.

COMMENT: PERU ON THE RIGHT TRACK
--------------------------------
13. Peruvians see the U.S.-Peru Trade Promotion Agreement (PTPA) as
a sign of positive things to come. Many see the PTPA as not only
fostering growth through trade and investment, but also as a crucial
mechanism to lock in the economic and social reforms of the last
decade. Observers agree that Peru has been on the right track, and
is likely to continue in this direction. 2008 is a showcase year
for Peru, which has become a model for economic success through open
markets and fiscal discipline. The GOP's most pressing challenge is
to convert this positive macroeconomic situation into effective
social and economic policies that reach marginalized Peruvians in
the poor highlands and hard-to-reach jungle areas.
NEALON

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