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Viewing cable 06LIMA474, PERUVIAN ECONOMY FIRING ON ALL CYLINDERS

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Reference ID Created Released Classification Origin
06LIMA474 2006-02-06 15:09 2011-08-25 00:00 UNCLASSIFIED Embassy Lima
VZCZCXYZ0000
RR RUEHWEB

DE RUEHPE #0474/01 0371509
ZNR UUUUU ZZH
R 061509Z FEB 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 8592
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA 2942
RUEHCV/AMEMBASSY CARACAS 9043
RUEHLP/AMEMBASSY LA PAZ FEB QUITO 9999
RUEHSG/AMEMBASSY SANTIAGO 0164
RUEHBU/AMEMBASSY BUENOS AIRES 2242
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC
RUMIAAA/USCINCSO MIAMI FL
UNCLAS LIMA 000474 
 
SIPDIS 
 
STATE FOR WHA/AND, WHA/EPSC AND EB/IFD/OMA 
STATE PASS USTR (BHARMAN) 
STATE PASS AID (LAC/SA) 
TREASURY FOR G. SIGNORELLI 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
DEPT OF ENERGY FOR D. PUMPHREY/ GARY WARD/SARAH 
LADISLAW/MANOLIS PRINIOTAKIS 
DEPT PASS TO INT/USGS/RESTON FOR DMENZIE/AGURMENDI 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD ENRG SOCI PGOV PE
SUBJECT: PERUVIAN ECONOMY FIRING ON ALL CYLINDERS 
 
1.(U) Summary:  the Peruvian GDP expanded by 6.3 percent -- 
the fastest rate since 1997 -- and topping economists' 
earlier estimates.  Investment and exports were the primary 
engines of growth, but the expansion was broad-based, with 
important sectors, including mining, agriculture and non- 
primary manufacturing, also expanding.  The inflation rate 
was a low 1.5 percent, at the Central Bank's targeted floor. 
Poverty is receding, particularly in areas with strong 
exporting industries.  Analysts predict that the economy 
will continue to expand in 2006 and beyond, even if there is 
a slow down in the global economy.  Much depends, however, 
on the upcoming presidential elections.  End Summary: 
 
Strong Growth -- Low Inflation 
------------------------------ 
 
2.(U)  Peru's economy grew significantly for the fourth 
consecutive year, expanding 6.3 percent in 2005, according 
to the Ministry of Economy and Finance.  The strong 
expansion was driven by surging exports, which grew 33 
percent year-on-year to $17 billion.  Despite the rapid 
economic acceleration, inflation was maintained at the 
Central Bank's targeted floor, 1.5 percent.  The rising 
economy lifted tax collections by 16 percent, contributing 
to a manageable budget deficit of 0.6 percent.  Strong 
export growth has created a record high trade surplus, $4.3 
billion, and high international reserves, $14.1 billion. 
Investment was up 11 percent. 
 
Exports Leaping and Bounding 
---------------------------- 
 
3.(U)  Propelled by a favorable global economy, Peruvian 
exports have more than doubled since 2002, according to the 
Ministry of Commerce and Tourism.  The United States 
continued to be the principal destination for Peruvian 
products, taking in $5 billion of Peruvian exports in 2005, 
a 37 percent jump over 2004.  China has emerged as the 
second biggest market, importing nearly 11 percent of 
Peruvian products ($1.8 billion), about 50 percent more than 
the previous year. 
 
4. (U) Mineral exports, driven by record prices and higher 
production, expanded by 33 percent to $9.4 billion in 2005. 
As a result, minerals' share of overall Peruvian exports 
rose slightly to 56 percent of the total.  Other sectors 
such as apparel and textiles saw substantial growth in 2005, 
even as international competition stiffened.  Apparel and 
textile exports surpassed $1.2 billion, a 16 percent 
increase over 2004, despite the turbulence created by the 
removal of U.S. and European quotas and the surge in Chinese 
exports to those markets.  The boom in apparel exports is a 
direct result of the Andean Trade Promotion and Drug 
Eradication Act (ATPDEA), which entered in to force in 2002. 
 
5. (U) Agricultural exports jumped an impressive 27 percent 
in 2005 to $1.4 billion, according to the Ministry of 
Agriculture.  Coffee was the leading agricultural export 
($306 million), but non-traditional products made up three- 
quarters of all agricultural shipments.  Asparagus exports 
increased 11 percent, paprika exports grew by nearly 90 
percent and artichoke exports doubled.  The diversification 
of agricultural exports is particularly good news for the 
Peruvian farm and livestock industries, as they prepare to 
compete in the post-free trade agreement economy. 
 
Another Good Year for Mining 
---------------------------- 
 
6. (U) The Peruvian mining industry benefited from record 
high prices and increased production in some sectors.  Gold 
production jumped 21 percent to 210 million metric tons in 
 
2005.  Gold exports were up 25 percent to $3 billion.  The 
price of molybdenum jumped a remarkable 1,300 percent 
between 2001 and 2005.  As a result, molybdenum concentrates 
exports soared from $32.9 million in 2003 to an estimated 
$1.2 billion in 2005.  Cooper production was down, but 
higher prices led to a 27 percent rise in the value of 
exports to an estimated $3.1 billion. 
 
7. (U) Natural gas production jumped 76 percent to 146.2 
million cubic feet per day in 2005, the first full year of 
production of the large Camisea facility.  Crude oil 
production continued its downward trend as reserves decline. 
 
Homegrown Growth 
---------------- 
 
8. (U)  Private consumption, which had been growing at about 
3.5 percent for the last four years, rose an estimated 4.5 
percent in 2005.  Construction rose an estimated 6.3 
percent, spurred by a GOP housing construction program, road 
construction and the proliferation of shopping malls. 
Manufacturing was up 6.3 percent.  Private investment, 
driven in part by investment in mining production, housing 
and highway construction, grew by an estimated 11 percent. 
Peru's tourism sector increased an estimated 20 percent in 
2005 to 1.4 million tourists, generating around $1.4 billion 
in revenue. 
 
Poverty Reduction Starts to Pick Up 
----------------------------------- 
 
9. (U) The four successive years of substantial economic 
growth appear to be making a dent in the high unemployment 
and poverty rates in Peru.  The unemployment rate in Lima 
declined to 7.6 percent in December 2005, the lowest level 
since 2001, while underemployment declined to 54.7 percent 
in the fourth quarter.  The Ministry of Economy and Finance 
estimates that the poverty level declined nearly 12 percent 
between 2001 and 2005, from 54.3 percent to 49.5 percent. 
The Ministry also estimates that extreme poverty -- those 
living on about a dollar a day -- declined 25 percent over 
the same period, from 24.1 percent to 18 percent. 
 
Don't Blow It -- 2006 
--------------------- 
 
10. (U)  Analysts both in and outside the government predict 
continued economic growth in 2006 of around 5 percent.  The 
Ministry of Commerce and Tourism believes that exports will 
top $20 billion in 2006.  Private investment is expected to 
grow 8 to 9 percent.  Local economists expect inflation to 
remain within the Central Banks range of 1.5 to 3 percent. 
 
11. (U) Economists and investors are taking a cautious 
approach to the Peruvian economy because 2006 is an election 
year.  The emergence of the ultra-nationalist, anti-system 
candidate Ollanta Humala as a front-runner caused a wave of 
anxiety among businesses and a brief drop in the stock 
market.  Humala's economic policies are not yet fully known, 
but he has made several anti-investment comments, such as 
limiting Chilean investments in Peru, and he has publicly 
aligned himself with Venezuelan President Chavez and the 
newly elected Bolivian President Morales.  Post will report 
shortly on the economic policies of Humala and the other 
front running candidates. 
 
STRUBLE