Peru: Country Economic Forecast: 25 Nov 2011

After four months in office, President Ollanta Humala has made a positive start to his five-year term with the broad commitment to ensuring economic stability and aiding social inclusion. Even so, he is not immune to the trials posed by domestic politics as recent developments show. Barring surprises, these should not threaten fundamental confidence in the administration. Humala has had the advantage of a growing economy set in train by his predecessor. GDP grew by 7.7% in H1 2011 (after 8.8% in 2010), but the pace slowed to 6.6% in Q3. In September, the central bank cut its 2011 GDP growth forecast to 6.3% from 6.5%. We have retained our 2011 GDP forecast of 6.3%, with a slowdown to 5.0% seen in 2012. Against a more difficult global backdrop, the outlook is buoyed by US$470m of stimulus measures announced September, rising tax income and a 5% real increase in the 2012 budget to US$35bn. These factors, plus a potential revenue boost from the revised mining law, should help sustain growth without overstretching the fiscal accounts. Interest rates have been held at 4.25% since May despite inflation rising 4.2% in October, well above the 1-3% target. The nine-month trade surplus rose to US$7bn from US$4.6bn a year earlier, which should help curb the current account deficit, which reached US$2bn in H1. We expect a 2011 current account deficit of US$3.9bn (2.2% of GDP), rising to US$4.3bn in 2012.