Statement by the IMF Staff Representative

The 2006 Article IV Consultation with Peru and request for a Stand-By Arrangement highlights that the Peruvian economy has been reaping benefits of sound policies in a favorable external environment. The new government remains committed to sustaining fiscal consolidation to entrench macroeconomic stability while boosting infrastructure and social spending to decisively reduce poverty. Executive Directors commended the progress made in identifying foreign exchange-related credit risks in the banking system, and encouraged the authorities to implement their reform agenda aimed at reducing risks from dollarization.

Abstract

The 2006 Article IV Consultation with Peru and request for a Stand-By Arrangement highlights that the Peruvian economy has been reaping benefits of sound policies in a favorable external environment. The new government remains committed to sustaining fiscal consolidation to entrench macroeconomic stability while boosting infrastructure and social spending to decisively reduce poverty. Executive Directors commended the progress made in identifying foreign exchange-related credit risks in the banking system, and encouraged the authorities to implement their reform agenda aimed at reducing risks from dollarization.

1. This statement provides additional information that has become available since the circulation of the staff report. It does not alter the thrust of the staff appraisal.

Macroeconomic developments

2. Recent economic indicators suggest that economic performance remains strong.

  • Real GDP is estimated to have grown by about 7½ percent (year-on-year) during January–November 2006, underpinned by strong private consumption and investment. In December, 12-month inflation fell to 1.1 percent, below the 1.5–3.5 percent target range, largely reflecting lower gasoline prices and a one-off decline in telephone rates. Core inflation remained stable, at 1.4 percent.

  • The external current account surplus is estimated to reach close to 2 percent of GDP in 2006, about ¾ percentage point of GDP above staff projections. This development primarily reflects higher prices of metals and lower-than-projected imports during the fourth quarter.

  • Net international reserves stood at US$17.4 billion at end-2006. The exchange rate has continued to appreciate moderately against the U.S. dollar, by 1½ percent since November.

Policy developments

3. Preliminary data suggest that the consolidated public sector balance would record a surplus of 1½ percent of GDP in 2006. This outcome would exceed projections in the staff report by about ½ percentage points of GDP, largely as a result of lower expenditures, most notably related to investment, at all government levels.

4. The authorities have adopted several measures, in line with their Letter of intent and Memorandum of Economic and Financial Policies. Specifically:

  • The draft law amending the Fiscal Responsibility and Transparency Law was presented to congress and approved on first reading (MEFP, ¶5). The draft law will have to go through a second reading before final approval by congress.

  • Legislation to reinstate the tax on casinos and slot machines was passed on December 21, 2006 (MEFP, ¶7).

  • The regulations governing the agreement with mining sector companies for a voluntary contribution to support poverty alleviation and infrastructure needs were issued on December 21, 2006 and are broadly in line with what has been described in the staff report (¶ 24).

  • The regulatory framework designed to help establish a one-step window for exporters and importers was approved by Congress in early January (MEFP, ¶19).

  • Banks have completed the assessment of their portfolios to identify unhedged borrowers (MEFP, ¶22). Preliminary information confirms that about 18 percent of banks’ foreign currency denominated loans have been extended to unhedged borrowers. It is expected that banks will continue to reclassify these loans and build additional provisioning requirements.

  • The Superintendency of Banks has further liberalized the regulations affecting private pension funds’ investments abroad (MEFP, ¶27). In particular, private pension funds would now be allowed to invest in non-investment grade instruments, as well as in mutual funds that invest in private equity, venture capital, real estate, and hedge funds. The new regulations also ease the limit for investing in a single mutual fund (from 1 percent to 2 percent), and eliminate the maximum limit (3 percent) on investments in a mutual fund management company.