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ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY At the beginning of the 90s, Peru adopted a new economic model that removed protec- tionism and State meddling in favor of market liberalization and private economic initiative. The successive governments have kept the model and the resulting stability of the econo- mic policies has allowed a sustained GDP growth. It has been two and a half decades during which production has diversified and investment multiplied. PRODUCTION STRUCTURE Peru is the seventh largest economy in Latin America and the Caribbean, and the second with the fastest growth in the region between 1990 and 2015. Its GDP, adjusted by purchasing power parity (PPP), rose 6.9% annually during that period. In 16 years (2000 to 2015), Peru’s GDP has grown 5.2% annually, reaching peaks of 9.1% in 2008, and 8.5% both in 2007 and 2010. This means that the Peruvian economy has tripled in size, which has made an impact on the reduction of poverty – from 58.7% (2004) to 22.7% (2014) – and extreme poverty – from 16.4% (2004) to 4.3% (2014). The Central Reserve Bank of Peru estimates a GDP growth of 4% for 2016 and forecasts 4.5% and 4.2% for 2017 and 2018, respectively.

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ING_002.cdrECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
At the beginning of the 90s, Peru adopted a new economic model that removed protec- tionism and State meddling in favor of market liberalization and private economic initiative. The successive governments have kept the model and the resulting stability of the econo- mic policies has allowed a sustained GDP growth. It has been two and a half decades during which production has diversified and investment multiplied.
PRODUCTION STRUCTURE
Peru is the seventh largest economy in Latin America and the Caribbean, and the second with the fastest growth in the region between 1990 and 2015. Its GDP, adjusted by purchasing power parity (PPP), rose 6.9% annually during that period.
• In 16 years (2000 to 2015), Peru’s GDP has grown 5.2% annually, reaching peaks of 9.1% in 2008, and 8.5% both in 2007 and 2010.
• This means that the Peruvian economy has tripled in size, which has made an impact on the reduction of poverty – from 58.7% (2004) to 22.7% (2014) – and extreme poverty – from 16.4% (2004) to 4.3% (2014).
• The Central Reserve Bank of Peru estimates a GDP growth of 4% for 2016 and forecasts 4.5% and 4.2% for 2017 and 2018, respectively.
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
INVESTMENTS TRENDS
The engine of the Peruvian economy is private investment, which is four times larger than public investment. It has shown increasing figures between 2004 and 2013, and the Government has set the goal of reinforcing the promotion strategy to reach and surpass the levels recorded three years ago.
• The real fixed gross investment had an annual average growth of 7.3% between 2000 and 2015. It is projected that for 2017 and 2018, it will register expansions of 4.0% and of 4.4%, respectively, thus recapturing its positive path.
• Private investment is concentrated in activities where Peru stands out at the global level such as mining, telecommunications and finance.
• Investment in infrastructure through the promotion of public-private partnerships for the development of important projects in transportation, energy, and water and sanitation, will impel the recovery of investments in the years to come.
• Investments in aquaculture, forestry, hydrocarbons and food processing are also expected to be attracted.
• Likewise, the increasing household income is boosting a rapid urban development and expansion of the cities thus creating investment opportunities, mainly in the real estate and retail sectors.
DIVERSITY
With an area of 1'285,215.6 Km2, Peru is the fourth largest country in Latin America. The territory is diverse: it has 84 of 104 existing life zones on the planet, in addition to wide-ranging mineral, energetic, hydric, agricultural, forestry and fishing wealth.
• In GDP terms, the manufacturing sector is the most important with 16.5% of participation, followed by other services (14.9%), mining and hydrocarbons (14.4%) and commerce (10.2%).
• Due to their multiplier effect and their contribution to labor generation, the increasing development of agriculture and tourism has played a significant role in the diversification of production.
• The economically active population amounts to 15.1 million (50% of the popula- tion).
Gross domestic product: 2000-2018 (Real % change)
Source: IMF
Per capita GDP, average growth in US$ (PPP) (1990 - 2015)
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
It is projected that by 2020, the per capita GDP in terms of purchasing power parity (PPP) will reach US$ 14,749, meaning that it will have increased by 20.9% in 5 years.
Source: INEI
EXPORTS EVOLUTION
After growing over 37% per year in 2005-2006, Peruvian exports reached a record level of US$ 47,400 million in 2011, registering a 32% growth from the previous year. The increase of exports during the last two decades was possible thanks to factors such as:
• High level of commodity prices.
• Sustained demand for Peruvian products, mainly from countries with which Peru maintains trade agreements.
• Expansion of the exportable supply.
• Strengthening competitiveness of exporting companies.
EXPORTS DIVERSIFICATION
The shipping of Peruvian goods to the international market has been extended, in volume, value and number of destination countries, as well as in the variety of pro- ducts. This increasing diversification attenuates the risks of possible demand contrac- tion of some specific market.
• Metals make up 80% of Peruvian traditional exports (copper, gold, silver, molybde- num, zinc, lead, iron ore and tin).
• Crude oil and byproducts, gas, and fish meal and fish oil are also important traditio- nal exports.
• Amongst the non-traditional exports (manufactured and processed goods), the standouts are agricultural, textiles and apparel, chemical, steel and metal, and jewelry.
Traditional exports (US$ millions FOB)
Source: Central Bank y SUNAT
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
Fuente: BCRP y SUNAT Elaboración: ProInversión
Non-traditional exports (US$ millions FOB)
1/ Includes fur, leather and art crafts, mainly. Source: Central Bank y SUNAT
Since the 90s, Peru has kept an open trade policy that is reflected in the unilateral reduction of tariffs: the average effective tariff rate has decreased from 12.3% in 1993 to 1.2% in 2015.
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
FOREIGN TRADE
Peruvian exports multiplied by 5 between 2000 and 2015. This result is mainly explained by the opening of trade and the economic liberalization, which have allowed the participation of the private sector in almost all productive sectors. One of the main mechanisms that the country has used to increase and diversify its exports is the trade treaties, in particular free trade agreements (FTA).
• Peru’s foreign trade (exports plus imports) rose from US$ 14,312 million in 2000 to US$ 71,621 million in 2015.
• Following the commodities boom and a brief period in which the trade balance was negative (US$ 3,150 million in 2015), it is estimated that in the next years the trend will reverse and trade surpluses of US$ 368 million and US$ 650 million will be reached in 2017 and 2018, respectively.
• Peru has 18 trade agreements currently in force, among them, those subscribed with the United States, China, the European Union, Japan, Canada, and the Pacific Alliance (Chile, Colombia, Mexico and Peru).
• Also, Peru is member of APEC and the World Trade Organization (WTO).
• About 95% of Peruvian exports enjoy the benefits of an FTA.
• China is the main destination of Peruvian exports (22%), followed by the United States (15%), Switzerland (8%) and Canada (7%).
• Peru is on the way to become an exports hub. To achieve said position, it is working in improving connectivity and logistics services.
Trade balance (US$ millions)
MONETARY POLICY
Price stability in Peru is the result of a monetary policy with an inflation goal of between 1% and 3%. Because price control does not exist, the Central Bank uses tools as the reference interest rate and open market operations to manage the inflation target, putting special attention to variations of the exchange rate.
• The Central Bank is, by Constitutional mandate, an autonomous entity. Therefore, its decisions are made under strictly technical criteria.
• During the last 10 years, inflation has not surpassed the 4% annual rate, thus being the lowest in Latin America and the Caribbean.
• Regarding the exchange rate stability, the Central Bank´s role is to attenuate short term fluctuations, but not to modify the medium- and long-term trends.
• This orderly and disciplined approach has transformed Peru into the country with the lowest exchange rate volatility in Latin America.
Inflation (%)
(*) As of September. Source: Central Bank
Evolution of the nominal exchange rate: Soles per US$ 1.00 (end of period)
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
FISCAL POLICY
The Peruvian economic model is based on the private initiative as the engine of growth and grants the State a regulatory and subsidiary role. This way, its main function is to provide the population with basic services and infrastructure and to allocate resources in social programs whose target is to insert the beneficiaries into the economy. In this sense, the orderly management of the budget is crucial, for it assures fiscal stability, which is one of the pillars of the economic program.
• The Government implements a disciplined and countercyclical fiscal policy, which assures the funding of the social programs with the collection of taxes.
• The fiscal policy is aimed to foster the short- and medium-term growth through public investment and to preserve a responsible fiscal handling that allows redu- cing vulnerabilities in an international context with multiple risks, assure the sustainability of public finances, and preserve the good credit qualification the country has received.
THE BUDGET
In the last 10 years, the evolution of the economic balance has been dependent on the needs for public funds provoked by international events such as the financial crisis and the global recession – it recorded deficits in 2009 and 2010 – and the fall of commodity prices since 2014.
• Starting in 2017, the Government will conduct a process of public expenses modu- lation aimed at reducing the fiscal deficit as compared to the levels recorded in the last two years. The target is to gradually return to a structural fiscal deficit of 1% of the GDP.
• The fiscal space that the Peruvian economy has built in previous years allows the implementation of a gradual fiscal consolidation.
• The public Budget, besides being consistent with the fiscal sustainability guide- lines, includes criteria assuring the quality of expenditure: 71% of the 2017 budget will be measured by results (up from 62% in 2016).
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY
PUBLIC DEBT
The financial requirement, an indicator that measures the funds that the public sector needs to offset the economic balance and to amortize the internal and external debt, is offset by disbursements of previously contracted external debt and the issuance of sovereign bonds.
• In 2015, the public debt as percentage of GDP was 23.3%, the second lowest in South America.
• The issuance of Peruvian global bonds and debt management operations (exchan- ge and repurchase), increased the external debt balance from 8.7% of GDP to 11.1% of GDP between 2014 and 2015.
• In 2015, the Government continued issuing sovereign bonds and Treasury notes to cover scheduled needs and to pre-finance budget requirements for 2016, thus increasing the internal debt balance by 0.3% of the GDP.
• 53% of the total public debt is denominated in national currency. The participation of the debt contracted in soles has been increasing in the last 10 years, in order to reduce its exchange rate risk exposure.
• The debt at fixed interest rates has increased from 63% of the total in 2006 to 82% in 2015.
• Between 2006 and 2015, the average maturity of the total public debt increased from 8.4 to 12.1 years.
Source: Central Bank and IMF
Gross public debt (% of GDP)
ECONOMIC SOUNDNESS 25 YEARS OF GROWTH AND STABILITY