The strong fundamentals of the Peruvian Economy

Julio Velarde

Governor

Central Bank of Peru

April 2012

1. Long-run trends

2. Recent economic developments and prospects

3. Monetary Policy Framework

4. Closing remarks

Agenda

2

Peru was the sixth-fastest growing economy in the past 11 years

3

4.2

4.2

4.3

4.3

4.6

4.6

4.7

4.7

4.7

4.8

4.9

5.3

5.4

5.4

5.6

5.8

7.5

8.1

8.8

10.4

13.5

Colombia

Hong Kong SAR

Thailand

Ukraine

Pakistan

Egypt

Argentina

Malaysia

Russia

Philippines

Islamic Republic of Iran

Indonesia

United Arab Emirates

Kuwait

Singapore

Peru

India

Kazakhstan

Nigeria

China

Qatar

Real GDP Growth (Average % change 2001-2011)

5.2 5.9

3.6

-1.0

4.0

5.7

50' 60' 70' 80' 90' 00'

GDP growth: 1951-2010 (Average percent change)

GDP grew 5,7% in the last decade, the fastest rate since the 70’s

4

Average inflation rate in the last decade was 2,3%, the lowest rate since the 40’s

5

1.0 15.1 7.4 9.5

32.6

369.5

24.6 2.3

30' 40' 50' 60' 70' 80' 90' 00'

Inflation: 1930-2010 (Average percent change)

68

136

100

0

20

40

60

80

100

120

140

160

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

(1975 = 100)

Per capita GDP did

not recover its 1975

level until 2006

Avg.Growth 1950 – 1975:

2,7%

Avg. Growth 1976 – 1992:

-2,4%

Avg. Growth 1993 – 2011:

3,8%

Per Capita GDP

6

15.5 14.8 15.0 15.1 15.5 16.4 18.2

21.5

17.7 19.2 19.6 19.8

3.1 2.8 2.8 2.8 2.9

3.1 3.4

4.3

5.2 5.9 4.6

5.8

18.6 17.6 17.8 17.9 18.4

19.5

21.5

25.9

22.9

25.1 24.1

25.6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Gross Fixed Investment 2001-2012 (% GDP)

Private Investment Public Investment

Average investment 2010-2012 is 25% of GDP

7

*Forecast

8.2

4.4 3.9 3.9

3.3 3.1 3.1 2.8 2.8 2.7 2.6 2.2

1.6 1.6 1.3 1.2 0.9 0.8 0.7 0.7 0.4 0.3

Ch

ina

(1)

Ind

ia (

4)

Sou

th K

ore

a (7

)

Taiw

an p

rov.

of

Ch

ina

(8)

Mal

aysi

a (1

8)

Thai

lan

d (

20

)

Ind

on

esia

(2

2)

Ho

ng

Ko

ng

SAR

(23

)

Per

u (

24

)

Ch

ile (

25)

Sin

gap

ur

(29)

Arg

enti

na

(36)

Un

ited

Sta

tes

(53

)

Uru

guay

(5

4)

Bo

livia

(6

6)

Ger

man

y (7

3)

Bra

zil (

80)

Co

lom

bia

(8

5)

Jap

an (

88)

Mex

ico

(8

9)

Ecu

ado

r (9

8)

Ven

ezu

ela

(10

2)

Labor Productivity Growth * (Average 1990-2011)

Source: The Conference Board, Jan. 2012. * Number in parentheses indicates worldwide position

Peru among countries with the highest labor productivity in Latin America

8

Employment has been growing strongly

-1.9

0.0

1.7

2.7

4.5

7.2

8.3 8.3

1.3

4.2

5.4

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Urban Employment 1/

(% Change)

1/ Enterprises with more than 10 employees

Source: Ministerio de Trabajo y Promoción del Empleo.

During 2003-2011 average GDP growth was 6,5% while average urban

employment was 4,8%

9

58.5 55.6

49.1

42.4

37.3

33.5 30.8

25

30

35

40

45

50

55

60

65

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

2004 2005 2006 2007 2008 2009 2010

Per capita GDP and poverty

Per capita GDP (left axis) Poverty (right axis)

Percent Nuevos Soles 1994

Poverty decreased as a consequence of GDP growth

10

-5.6 -5.9 -6.3

-4.7

-0.9 -0.4

1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2011

Current Account of the Balance of Payments: 1981-2011 (% of GDP)

Strong external position reflects substantial long-term private capital inflows

1.5 0.6 0.4

6.0 5.1

4.1

6.4

1981 1986 1991 1996 2001 2006 2011

Private Sector Financing: 1980-2011 (% of GDP)

Private Sector Financing: 1980-2010 (Billions of US$)

1980 1985 1990 1995 2000 2005 2011 268 90 109 3 251 2 709 3 225 11 300

11

Sound fiscal policies have improved public finances in Peru

-7.8

-9.8

-3.2

-1.7 -1.6

1.2

1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2011

Overall balance of the public sector: 1981-2011 (% of GDP)

12

Debt burden is sustainable: public net debt expected to be 6,1% of GDP in 2012

Public Debt Average Maturity

(years)

Year 2011

Domestic debt 14,6

Foreign debt 11,6

Total 12,7

Public Debt 2011* (%GDP)

54.5

41.7

27.8

21.7

9.5

Brazil Colombia Mexico Peru Chile

* Source: Moody's Statistical Handbook, November 2011

45.9

37.7

21.7 19.9

37.5

30.1

8.2 6.1

2001 2005 2011 2012*

Gross Debt Net Debt

Public Debt (% GDP)

13

•Forecast

The Central Bank of Peru has accumulated international reserves as a precautionary measure

6.6 8.5

10.2 9.2 8.4 8.2 8.6 9.6 10.2 12.6

14.1 17.3

27.7 31.2

33.1

44.1

48.8

56.4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Net International Reserves (Billions of US$)

•As of April 4, 2012

2006 2010 2012 *

NIR (Millions of US$) 17 275 44 105 56 369

NIR / GDP (%) 18,7 28,7 30,9

NIR / Short-run debt (times) 2,9 5,2 6,6

NIR / Liquidity (%) 81,9 91,0 93,8

14

Financial dollarization has been decreasing and nearly halved since the beginning of the decade

73 74 77 79

82 80 79 77 74

71 67

60 57

52 46 44 44

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Dollarization of credit to the private sector (%) The declining credit dollarization

ratio has limited the effect of

exchange rate depreciations on

dollar debtors solvency.

15

1. Long-run trends

2. Recent economic developments and prospects

3. Monetary Policy Framework

4. Closing remarks

Agenda

16

Consumer expectations continued in the optimistic field

61

58 56

65

59

54 53

59 59

64

58 59 59 59

56

68

59 61

56

30

35

40

45

50

55

60

65

70

Sep-1

0

Oct

-10

Nov-1

0

Dec-

10

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct

-11

Nov-1

1

Dec-

11

Jan-1

2

Feb-1

2

Mar-

12

Consumer Confidence Index (Economic Household Situation)

Optimistic

Pessimistic

Source: Apoyo Consultoría

17

Investor expectations are in the optimistic field

70 71 70 68

66 65 65

46 49

47

51 51

58 58 58 56 57

60

64

20

30

40

50

60

70

80

Sep-1

0

Oct

-10

Nov-1

0

Dec-

10

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct

-11

Nov-1

1

Dec-

11

Jan-1

2

Feb-1

2

Mar-

12

Investor Confidence Index (3-month expectations on economic situation)

Optimistic

Pessimistic

Source: BCRP

18

Surveys: Growth would be around 5,5% 2012-2013

5.5 5.5 5.8

Financial Entities Economic Analysts Non-Financial Firms

Expectations of GDP growth: 2012 (%)

5.7 6.0 6.0

Financial Entities Economic Analysts Non-Financial Firms

Expectations of GDP growth: 2013 (%)

Source: Survey on Macroeconomic expectations, BCRP.

19

5.7

4.9 4.5

4.3 4.2 4.2 4.1 3.7 3.6

3.3

Per

u

Co

lom

bia

Ecu

ado

r

Ch

ile

Uru

gu

ay

Ven

ezu

ela

Bo

livia

Par

agu

ay

Arg

enti

na

Bra

sil

GDP Growth: 2012

Source: Consensus Forecast (March 2012) and BCRP.

20

According to Consensus Forecast, during 2012 Peru would be the fastest growing economy in the region

Source: Consensus Forecast (March 2012) and BCRP.

28.5

9.8

6.7 5.4 5.3 5.1 5.0

3.4 3.3 2.3

Ven

ezu

ela

Arg

enti

na

Uru

gu

ay

Bra

sil

Par

agu

ay

Bo

livia

Ecu

ado

r

Co

lom

bia

Ch

ile

Per

u

Inflation rate: 2012

21

With the lowest inflation rate

0.2

5.0

4.0

5.0

6.8

7.7

8.9

9.8

0.9

8.8

6.9

5.7 6.3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

Gross Domestic Product (Annual percent change)

GDP growth in 2011 reached 6,9%

22

*Forecast

2008 2009 2010 2011 2012 * 2013*

GDP 9,8 0,9 8,8 6,9 5,7 6,3

Domestic demand 12,3 -2,8 13,1 7,2 5,9 6,5

Private consumption 8,7 2,4 6,0 6,4 5,8 5,8

Public consumption 2,1 16,5 10,0 4,8 5,3 5,1

Private investment 25,9 -15,1 22,1 11,7 8,2 8,7

Public investment 33,6 21,2 27,3 -17,8 34,3 7,3

Exports 8,2 -3,2 1,3 8,8 7,5 7,7

Imports 20,1 -18,6 24,0 9,8 8,3 8,3

* Forecast

Our baseline projection estimates a GDP growth of 5,7% for 2012 driven by domestic demand

23

2008 2009 2010 2011 2012 * 2013*

GDP 9,8 0,9 8,8 6,9 5,7 6,3

Agriculture and livestock 7,2 2,3 4,3 3,8 4,0 4,3

Fishing 6,3 -7,9 -16,4 29,7 -4,7 2,8

Mining 7,6 0,6 -0,1 -0,2 2,8 10,7

Raw materials 7,6 0,0 -2,3 12,3 3,4 6,3

Non-Primary manufacturing

8,9 -8,5 16,9 4,4 5,1 6,2

Electricity and water 7,8 1,2 7,7 7,4 5,5 5,9

Construction 16,5 6,1 17,4 3,4 11,3 7,6

Commerce 13,0 -0,4 9,7 8,8 5,9 5,4

Other services 9,1 3,1 8,0 8,3 5,8 6,3

Non-primary sectors would continue leading the dynamism

* Forecast

24

Source: COES

Electricity production continues to show solid growth…

10.9 10.1

9.0 9.5 9.4

8.5 8.3

9.6 8.8

8.3 7.7

8.1

5.6

7.9

6.7

Jan.2011

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan.2012

Feb Mar

Electricity Production (YoY growth rate)

25

1/ Seasonally adjusted

*Preliminary

…similarly in cement consumption

13.4

-3.3 -4.8

-12.3

-2.9 -2.5 -1.3 -2.3

8.1

19.5

24.4

18.0

12.0 12.9

23.0

Jan.2011

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan.2012

Feb Mar*

Domestic consumption of cement 1/

(annualized QoQ growth rate)

26

25.3

40.2

9.3

35.7

39.6

34.3

21.5 19.5

6.1

25.3

9.8

6.1

15.9

2.2

36.1

Jan.2011

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dic Jan.2012

Feb Mar*

Volume of Capital Good Imports (YoY growth rate)

Capital good imports grew at double digits in the first quarter

*Preliminary

27

17 17 19

21

17 18

21 22

26

21

16 16 15 13

Jan.2011

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dic Jan.2012

Feb

Sales of supermarkets (YoY growth rate)

Sales of supermarkets and department stores have been growing at double digits

23 19 20

24

17 17

26

22

17 18

20 17

10

16

Jan.2011

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dic Jan.2012

Feb

Sales of department stores (YoY growth rate)

28

* Forecast

3,1

1,4

-4,2

0,2

-1.7 -1.3 -1.5 -1.8

4.5

9.1

7.6

5.7

7.9

6.4

4.9 5.1

2006 2007 2008 2009 2010 2011 2012* 2013*

Current Account Balance and Long-term financing: 2006 - 2013 (% of GDP)

Current account balance Long-term gross financing (disbursements + foreign direct investment)

US$ Millions 2010 2011 2012* 2013*

Current account balance -2 625 -2 267 -2 955 -3 935

Private long term gross

financing 12 090 11 309 9 837 11 050

The current account deficit would remain in sustainable levels…

29

30

…supported by trade surplus

US$ Billions 2006 2007 2008 2009 2010 2011 2012* 2013*

Exports 23,8 28,1 31,0 27,0 35,6 46,3 48,7 53,4

Imports 14,8 19,6 28,5 21,0 28,8 37,0 39,6 43,5

*Forecast

9,0 8,5

2,6

6,0 6,8

9,3 7,9

10.0

0

20

40

60

80

100

120

140

160

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012* 2013*

1994

=10

0

US

$ b

illio

ns

Trade Balance and Terms of Trade (US$ billions and index 1994=100)

Trade Balance Terms of Trade

31

Fiscal surplus of 1,1% of GDP is expected in 2012

3,1

1,4

-4,2

0,2

2.4

-1.3

-0.3

1.9

1.1 1.4

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

Overall balance of the public sector: 2004-2013 (% of GDP)

* Forecast

1. Long run trends

2. Recent economic developments and prospects

3. Monetary Policy Framework

4. Closing remarks

Agenda

32

33

The Peruvian monetary policy framework includes besides the usual features of an inflation targeting scheme a set of tools to deal with the risks of financial dollarization.

Hybrid Inflation Targeting Scheme

Inflation Targeting

Control of Dollarization Risks

Normal Credit/GDP evolution Liquidity Risk • Reserve requirement on foreign

currency liabilities • Preventive NIR accumulation

Exchange Risk (Balance Sheet Effect) • Sterilized FOREX Intervention to

reduce exchange rate volatility

Inflation target : 2% +/- 1% • Operational Target: Overnight

interest rate

+

33

Source: BCRP.

1.25

4.25

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Mar

-06

May

-06

Jul-

06

Sep

-06

No

v-0

6

Jan

-07

Mar

-07

May

-07

Jul-

07

Sep

-07

No

v-0

7

Jan

-08

Mar

-08

May

-08

Jul-

08

Sep

-08

No

v-0

8

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

Central Bank Policy Rate (In percentage)

The Central Bank has kept its monetary policy rate since May 2011

34

25%

00

10

20

30

40

50

60

70

80

Jan

-07

Jun

-07

No

v-0

7

Ap

r-0

8

Se

p-0

8

Fe

b-0

9

Jul-

09

De

c-0

9

Ma

y-1

0

Oct

-10

Ma

r-1

1

Au

g-1

1

Jan

-12

Reserve requirement in domestic currency(In percentages) %

Pre-Lehman

Post-Lehman

Recovery

55%

60%

00

10

20

30

40

50

60

70

80

Jan

-07

Jun

-07

No

v-0

7

Ap

r-0

8

Se

p-0

8

Fe

b-0

9

Jul-

09

De

c-0

9

Ma

y-1

0

Oct

-10

Ma

r-1

1

Au

g-1

1

Jan

-12

Reserve requirement in foreign currency(In percentages) %

Pre-LehmanPost-Lehman Recovery

Short term credit lines

Deposits

The Central Bank has been using reserve requirements to FOREX banks’ liabilities (FX deposits and foreign short-term credit lines))

35

19.0

16.7

18.0

-5

5

15

25

35

45

55

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Feb.12

Credit to the Private Sector (12 month growth rate)

Soles US$ Total

Credit continues showing higher rates of growth

36

CREDIT TO THE PRIVATE SECTOR Annual % change

Dec-10 Dec-11 Jan-12 Feb-12

Soles 21,2 20,4 19,6 19,0

US $ 20,8 17,3 18,4 16,7

Total 21,0 19,0 19,1 18,0

There is still room for capital market development

67.9

51.4

32.2 30.9

17.8

Chile Brazil Colombia Peru Mexico

Bank credit to the private sector: Latin America 2011 (% of GDP)

Source: IMF

37

Mortgage credit is low compared to other countries in Latin America

18.0

11.0

5.0 4.0

3.0

Chile Mexico Colombia Brazil Peru

Mortgage credit: Latin America (% of GDP)

38

Source: Morris (2009), with the exception of Chile and Peru (national sources, 2010)

Non-performing loans rate has been less than 2% in the past five years

39

1.54

1.0

3.0

5.0

7.0

9.0

11.0

13.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Non-performing loans rate of the commercial banks (percentage)

FOREX operations aim to moderate exchange rate volatility rather than simply intervine to fix any specific trend.

40

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

2.50

2.70

2.90

3.10

3.30

3.50

3.70

FO

RE

X in

terv

en

tio

n (

Mil

lon

s o

f U

SD

)

Ex

ch

an

ge R

ate

(P

EN

/US

D)

FOREX intervention and exchange rate

FOREX Intervention Exchange Rate

Lehman crisis

Source: BCRP

65

70

75

80

85

90

95

100

105

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-11

Ap

r-11

Ma

y-1

1

Ju

n-1

1

Ju

l-11

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

EXCHANGE RATE INDEX(December 2008=100)

Colombian Peso

Chilean Peso

Brazilian Real

Mexican Peso

Nuevo sol

PEN has been very stable

41

As of March, inflation is transitorily above the target range

-1

1

3

5

7

mar/05 mar/06 mar/07 mar/08 mar/09 mar/10 mar/11 mar/12

INFLATION AND INFLATION TARGET (12 MONTH % CHANGE)

Maximum

Minimum

Inflation

target

range

Inflation 12 month %, March Inflation: 4,23% CPI ex food and energy: 2,47%

CPI ex food and

energy

42

1. Long run trends

2. Recent economic developments and prospects

3. Monetary Policy Framework

4. Closing remarks

Agenda

43

Closing remarks

44

The strong fundamentals of the Peruvian Economy

Julio Velarde

Governor

Central Bank of Peru

April 2012