Copyright © 2003. The Institute of International Finance, Inc. All rights reserved. The contents of this report may be neither reproduced nor distributed outside the membership in whole or in part without the prior written approval of The Institute of International Finance, Inc.

The economy recovered at a rapid 4.9 percent in 2002 following four years of stagnation. Export-led recovery in the first semester was complemented by expansionary fiscal and monetary policies resulting in more broad-based economic growth in the second half of the year. Growth this year is expected to slow, reflecting growing populist pressure in congress and its adverse impact on the investment climate, as well as the need for fiscal adjustment. The authorities have broadly complied with its economic program supported by the IMF, and economic performance has been encouraging. Inflation is negligible and the fiscal deficit, at 2.3 percent of GDP, has been declining steadily. The exchange rate has been stable and even less volatile than that of investment-grade countries such as Mexico and Chile. We expect Peru’s currency to remain roughly constant in nominal terms to the end of the year. While the government has maintained pro-market economic policies, it faces increasing pressure from Alan García’s APRA party that is pushing for more interventionist policies, including elimination of the severely weakened privatization program. If implemented, these policies will negatively impact the investment climate and jeopardize the recovery that is taking place. The impact of the recently created regional governments is not likely to translate into fiscal weakening in the short run, but it has added to political noise and contributed to negative business expectations. In light of the recent economic performance, we believe GDP growth of 4 to 5 percent can be sustained over the medium term if the government is able to resist pressure on public finances from the new regional governments and those in congress in favor of new legislation of a populist nature. If President Toledo is not successful in this endeavor, the country’s creditworthiness, as reflected in the EMBI+ subindex for Peru, is likely to widen. Given the strength of these concerns at present, we project private investment to recover only moderately this year and GDP growth to slow to 3.8 percent before rising to 4 percent in 2004.

Recent Political and Economic Developments Paralleling the economic recovery, President Toledo’s popularity has increased. His approval rating has risen from 15 percent in early October to 30 percent at present. The president’s rising popularity has dispelled immediate concern that a political crisis would paralyze government and disrupt the recovery, although the cloud hanging over the political horizon is a reminder that undue optimism is not at all warranted.

• Domestic demand rose by an estimated 4.3 percent in 2002, as a result of recovery of both consumption and investment.

• Inflation remained low in 2002, only 1.5 percent for

the full year. This was at the lower range of the 1.5 to 3.5 percent inflation target set by the central bank.

• The trade and current account balances improved in

2002. The current account deficit fell to an estimated $1.07 billion (1.9 percent of GDP) as exports rose faster than imports, and the trade balance shifted from deficit to surplus.

IIF CONFIDENTIAL February 11, 2003

SUMMARY APPRAISAL PERU

Real GDP

(percentage change previous year) Domestic Economy and External Trade 2001 2002e 2003f 2004f (percent change) Real GDP 0.2 4.9 3.8 4.0 Real domestic demand -0.7 4.3 4.1 3.8 Change in net foreign balance1 0.9 0.6 -0.2 0.3 Consumer prices, end -period -0.1 1.5 2.3 2.9 Public sector balance1 2.6 2.3 1.9 1.5 (millions of dollars) Trade balance -90 348 337 302 Merchandise exports 7108 7576 8386 9029 Merchandise imports -7198 -7228 -8049 -8727 Current account balance -1169 -1071 -1302 -1441 (% GDP) (-2.2) (-1.9) (-2.2) (-2.3) (percent change) Export volume 6.3 2.0 5.6 4.9 Import volume 1.0 -0.7 9.1 6.3 Terms of trade -2.0 2.7 3.3 0.7 Real effective exchange rate2 3.8 0.3 1.7 -1.5 Exchange rate, average (New Soles/$)3 3.507 3.516 3.525 3.603

e = estimate, f = IIF forecast 1 Percent of GDP. 2 Relative consumer prices, - = depreciation.

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2

3

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1999 2000 2001 2002e 2003f 2004f

Summary Appraisal: Peru/Page 2 The Institute of International Finance, Inc

Economic Policies In a difficult political environment characterized by growing populist opposition in congress, the government has remained pro-market, continuing to pursue a macropolicy consistent with economic stability. Peru is beginning the second year of a stand-by arrangement with the IMF, and, with the exception of the privatization program, has largely complied with the agreed-upon targets. • Fiscal policy, which was expansionary in the run-up

to the regional elections in November, was tightened sharply at the end of the year in order to comply with the IMF fiscal deficit target of 2.3 percent of GDP.

• Successful tax collection reforms helped the

government achieve its fiscal target. • The central bank adopted an expansionary monetary

policy throughout most of 2002 supportive of the economic recovery. The expansionary monetary stance was only briefly interrupted in September and October, as the central bank tightened in response to the adverse market reaction to increased political uncertainty in Brazil (the “Lula effect”).

• Peru has a flexible foreign exchange regime. With

only minimal intervention, the country’s currency has been among the most stable in Latin America in recent years. The real effective exchange rate appreciated by 0.3 percent in 2002.

Outlook and Key Issues

We expect the economy to grow 3.8 percent in 2003, down somewhat from last year. Our projection of somewhat lower growth this year compared to 2002 is based on investor concerns regarding fiscal balance associated with possible increased spending pressure from regional governments and the negative effects of populist pressure on privatization and investment. We believe that the government will undertake the needed fiscal adjustment this year despite a difficult political environment, and this will constrain growth mildly in the near term. We expect the deficit of the nonfinancial public sector to come down to 1.9 percent of GDP this year, in line with the agreed-upon IMF target. Growth in 2003 features continuing recovery of exports and private investment, but at a more moderate pace. Development of the massive Camisea gas project will continue to contribute to economic activity. We expect the construction sector to continue to expand, bolstered by the government’s support of low-cost housing and lower interest rates. Agricultural and textile

production will benefit from the U.S. Andean Trade Promotion and Drug Eradication Act (ATPDEA) that came into effect last October. The act grants Peru preferential access to U.S. markets. • We project exports to grow by over 10 percent as a

result of accelerated increases in mineral exports and expansion of nontraditional exports to the U.S. We expect the current account deficit to increase slightly to $1.3 billion (2.2 percent of GDP) this year.

Questions and comments may be directed to Mr. Julio E. Revilla (tel: 1+202-857-3655, e-mail: jrevilla@iif.com) or Mr. Frederick Z. Jaspersen (tel: 1+202-857-3608, e-mail: fjaspersen@iif.com). Both may be reached via fax (1+202-775-1430).

Trade and Current Account Balances

(millions of dollars) External Debt and Debt Service 2001 2002e 2003f 2004f (millions of dollars) External debt 28633 30249 30437 31328 % GDP 53.0 53.4 50.8 50.1 % exports2 310.2 311.6 288.9 278.0 Medium-/long-term debt 25588 27352 27743 28539 Short-term debt 3046 2897 2694 2789 International financial institutions

6527 7281 7886 8342

Official bilateral creditors 9311 9443 8924 8796 Commercial banks 3875 3738 3429 3409 Other private creditors 8921 9787 10199 10782 Reserves excluding gold 8672 9548 10048 10648 Months of imports 2 9.1 9.8 9.4 9.4 (percent exports) Debt service 40.6 40.3 36.2 32.3 Interest payments due 17.2 17.1 15.9 15.3 Amortization due 23.4 23.1 20.3 17.0 e = estimate, f = IIF forecast 1 Goods, services, and income.

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1999 2000 2001 2002e 2003f 2004f

Trade Balance Current Account Balance

Copyright © 2003. The Institute of International Finance, Inc. All rights reserved. The contents of this report may be neither reproduced nor distributed in whole or in part outside the membership without the prior written approval of The Institute of International Finance, Inc.

This report is based on a mid-January visit to Lima by Julio E. Revilla of the Institute staff. Mr. Revilla met with senior officials of the Ministry of Finance, the Central Bank of Peru, and the Superintendency of Banks and Insurance. He also met with representatives of the private banking and nonbanking sectors, and with economic and political analysts.

Recent Political and Economic Developments 1. President Toledo’s popularity increases, but a populist congress threatens to erode investment and economic recovery. President Toledo’s improved ratings have paralleled the country’s economic recovery. These were given an additional boost in late October, when opinion polls registered a 6 percent increase in his approval rating following his public recognition of an illegitimate daughter. In the beginning of 2003, an increased number of well-staged political appearances increased Toledo’s approval rating even further, bringing it close to 30 percent. The president’s moderate but increasing popularity, a change from his exceedingly low approval levels during most of 2002, has dispelled concerns of a political crisis that could paralyze the government. While these have eased, others have surfaced that are leaving an adverse impact on the investment climate. The congress, in which APRA (Alan García’s party) is strongly represented, has become increasingly populist in its opposition to private investment. Fiscal uncertainty has also increased following the creation last year of new regional governments. Other concerns have focused on President Toledo’s small power base and his ability to unify a politically fragmented country. The results of the November 17 regional elections and the victory of the center-left and numerous independent regional political parties heightened economic concerns. Former President García’s APRA party won 12 of the 25 regional presidencies. Independent regional parties won seven regions, while President Toledo’s Party, Perú Posible, won only one regional presidency. The remaining five regions were split among the Unión por el Perú, Nueva Izquierda, Somos Perú, and the Frente Independiente Moralizador. The elections confirmed that APRA is the strongest opposition party. Even though García pledged that the 12 regions his party won will be governed responsibly, concerns about APRA’s populism and the memory of hyperinflation and the economic meltdown that

characterized García’s presidency cast a shadow over the investment climate. As the populist congress has continued to voice its opposition to structural reforms and is working to undermine the stability of the regulatory regime, concerns about investment deepen. While President Toledo has vetoed a number of radical bills that would have made Peru’s regulatory environment less pro-business, congress and even members of Toledo’s own party are threatening to override a presidential veto. Some of the bills currently under discussion include measures aimed at 1) increasing the government’s role in the economy; 2) increasing workers’ benefits that could have the result of making the labor market more rigid; and 3) changing privatization procedures to give congress greater authority to determine the content of private contracts. Given this political climate, the private sector is alarmed by what it perceives to be a likely return to populist policies. 2. The economy recovered at a faster pace than expected as growth spread from agriculture and mining to the rest of the economy. Following four years of stagnation, Peru’s economy recovered at a rapid pace in 2002. The first half of the year was characterized by rapid growth of agriculture and exports, especially mining. In the second half, expansionary fiscal and monetary policies and the growth of private investment after four years of contraction resulted in more broad-based economic growth extending to sectors closely linked to domestic demand including construction, manufacturing and nonexport agriculture (Table 1). Table 1 Real GDP by Sector (percentage change from previous year) 2001 2002 Year Q1 Q2 Q3 Q4 Year Total GDP 0.2 2.8 6.1 5.2 5.4 4.9 Agriculture -0.7 7.5 6.4 1.6 4.7 5.5 Fishing -14.6 -20.8 8.5 7.4 8.0 0.4 Mining 11.2 25.6 18.6 3.6 6.5 12.6 Manufacturing -1.1 -0.8 4.3 5.6 5.2 3.6 Construction -6.0 10.3 7.9 11.4 4.5 8.4 Commerce 0.0 0.1 5.1 3.1 4.5 3.3 Others 0.4 0.7 5.3 5.4 6.5 4.5 Source: Central bank, National Statistics Institute and IIF estimates.

IIF CONFIDENTIAL February 11, 2003

COUNTRY REPORT PERU

Country Report: Peru/Page 2 The Institute of International Finance, Inc.

Despite its mild slowdown in the second half of the year, mining (6 percent of GDP) remained the fastest growing sector with an estimated 12.6 percent growth for the full year. The estimated 8.4 percent growth of the construction sector (5 percent of GDP), fueled by the massive Camisea natural gas project, was also propelled by the low-cost government-sponsored MIVIVIENDA and MITECHO housing programs. As private consumption recovered, the manufacturing sector (15 percent of GDP) rose by an estimated 3.6 percent. The agricultural sector (9 percent of GDP) rose by about 5.2 percent, driven by both a recovery of domestic consumption and higher export demand. Domestic demand rose steadily during the year, reaching an estimated 6 percent year-on-year growth in the last quarter. Growth for the full year is estimated at 4.3 percent. This strengthening of domestic demand was supported by an increase in consumption and investment growth, especially in the second half of the year. Private and public consumption rose by an estimated 4.2 and 3.3 percent, respectively, in 2002. Private investment, which had contracted during the first half of the year, accelerated in the second half, growing an estimated 0.7 percent for the year as a whole. To comply with the fiscal deficit target, public investment (about 20 percent of the size of private investment) contracted, falling by approximately 5 percent (Table 2). Table 2 Real GDP by Expenditure (percent change from previous year) 2001 2002e 2003f 2004f GDP 0.2 4.9 3.8 4.0 Domestic demand -0.7 4.3 4.1 3.8 Private consumption 1.3 4.2 3.5 3.0 Public consumption -0.5 3.3 1.8 2.5 Fixed investment -8.3 -0.4 5.5 4.6 Private -5.6 0.7 6.0 5.0 Public -19.0 -5.3 3.0 2.5 Change in stockbuilding1 0.1 1.0 0.4 0.6 Change in net foreign balance1 0.9 0.6 -0.2 0.3 Exports of goods and services 6.9 5.8 4.2 6.9 Import of goods and services 1.6 2.2 5.8 5.7 e = estimate, f = IIF forecast 1 As a percentage of GDP. Source: Central bank and IIF estimates. 3. Inflation remains low and unemployment declines. During the first half of the year, inflation fell in response to weak domestic demand and appreciation of Peru’s currency the “New Sol.” In the second half, more rapid economic growth and an expansionary monetary

policy contributed to a slight increase in the rate of consumer price inflation. For the full year, consumer price inflation was 1.5 percent. During the same period, wholesale prices rose by 1.7 percent following a 2.3 percent contraction in the twelve months ending in June of 2002 (Figure 1). Figure 1 Consumer Price Index and Wholesale Price Index (percent change from previous year)

-4

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Jan-00 Jan-01 Jan-02 Jan-03

CPI Wholesale

Fueled by the increased level of economic activity, total employment rose by 4.4 percent. The unemployment rate fell to 8.7 percent by the end of 2002 from 8.9 percent a year earlier. The rate of underemployment (the percentage of people working less than 35 hours per week) remained at about 20 percent. All of these figures are for the city of Lima (about 35 percent of the population), as national data is unreliable (Figure 2). Figure 2 Unemployment and Underemployment City of Lima (3-month moving average)

8

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17

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23

Nov-01 Feb-02 May-02 Aug-02 Nov-02

Unemployment Underemployment

4. The external trade and current accounts improved as exports rose at a rapid pace. The trade and current account balances improved in 2002. The current account deficit fell to an estimated

The Institute of International Finance, Inc. Country Report: Peru/Page 3

1.9 percent of GDP in 2002 from 2.2 percent of GDP in 2001. The trade balance shifted to a small surplus ($0.35 billion) from a slight deficit in 2001, the first surplus since 1990. The seeming paradox of a shrinking current account, despite more rapid growth of the economy, is attributable primarily, to the rapid expansion of merchandise exports (Table 3 and Figure 3). Table 3 External Trade and Current Account (billions of dollars)

2001 2002e 2003f 2004f Trade balance -0.1 0.3 0.3 0.3 Exports 7.1 7.6 8.4 9.0 Imports -7.2 -7.2 -8.0 -8.7 Balance on services and income -1.1 -1.4 -1.6 -1.7 Receipts 2.1 2.1 2.2 2.2 Payments -4.2 -4.5 -4.7 -4.9 (Interest payments) (-1.6) (-1.7) (-1.7) (-1.7) Transfers net 1.0 0.9 0.9 1.0 Current account balance -1.2 -1.1 -1.3 -1.4 (% of GDP) (-2.2) (-1.9) (-2.2) (-2.3) Memoranda: (percent change) Export volume 6.3 2.0 5.6 1.4 Import volume 1.0 -0.7 9.1 6.3 Terms of trade -2.0 2.7 3.3 0.7

e = estimate, f = IIF forecast Source: Central bank and IIF. Figure 3 Trade and Current Account Balances (millions of dollars)

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1999 2000 2001 2002e 2003f 2004f

Trade Balance Current Account Balance

e = estimate, f = IIF forecast Exports rose an estimated 6.6 percent in 2002 as a result of a significant increase in gold and copper exports. Exports of gold, Peru’s largest single export in the last several years (20 percent of total merchandise exports),

rose to an estimated $1.4 billion dollars in 2002 – an increase of 22 percent as average prices rose by about 14 percent and volume rose by 8 percent. Despite a decline of copper prices, copper exports rose by about 19 percent as export volume increased more than 20 percent with the added production at the large Antamina mining complex. Despite the rise of real GDP in 2002, imports were reined in by the decline of investment. For the full year, they remained relatively flat with an estimated growth of 0.4 percent from a year earlier. Imports of consumer goods rose an estimated 10.4 percent in 2002. Imports of intermediate goods rose by a more moderate 4.1 percent. Imports of capital goods contracted by 5.4 percent. The existence of a moderate current account deficit, despite a trade surplus, is the result of a deficit in the invisibles balance. An increase in import of services and moderately larger interest payments on external debt have more than offset the moderate increase in the export of services (including tourism) and the fall in interest receipts. 5. Foreign direct investment rises and the government once again turns to bonds. In 2002, foreign direct investment (FDI) rose to an estimated $2 billion (190 percent of the current account deficit), largely concentrated in the massive Camisea natural gas project and several mining operations (Figure 4). This higher-than-expected figure is also directly related to the investment of a Colombian conglomerate in Backus – the Peruvian beer monopoly. Privatization revenues fell to below $200 million. Despite domestic stock market increases, portfolio investment fell by an estimated $80 million (Table 4). Figure 4 Foreign Direct Investment (millions of dollars)

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e = estimate, f = IIF forecast

Country Report: Peru/Page 4 The Institute of International Finance, Inc.

Table 4 External Financing (millions of dollars) 2001 2002e 2003f 2004f Current account balance -1169 -1071 -1302 -1441 Equity investment, net 841 1950 1300 1400 Direct 1063 2030 1400 1500 Portfolio -222 -80 -100 -100 External borrowing, net 246 942 735 914 IMF -153 -173 -106 -35 Disbursements 0 0 0 0 Repayments -153 -173 -106 -35 IBRD 35 -22 249 209 Disbursements 149 146 350 310 Repayments -114 -168 -101 -101 Other multilateral creditors 756 727 558 285 Disbursements 955 979 760 452 Repayments -199 -252 -202 -167 Official bilateral creditors -195 -291 -236 -114 Disbursements 239 225 241 237 Repayments -456 -496 -482 -361 Short-term credits, net 22 -20 5 10 Arrears 0 0 0 0 Discounted debt transactions 0 0 0 0 Commercial banks -157 -148 -303 -20 Disbursements 1245 1012 970 980 Repayments -1052 -980 -1073 -1100 Short-term credits, net -350 -180 -200 100 Arrears 0 0 0 0 Discounted debt transactions 0 0 0 0 Other private creditors -40 849 573 589 Disbursements 104 1943 760 660 (Bonds and notes) (0) (1000) (0) (0) Repayments -184 -176 -172 -151 Short-term credits, net 40 -5 -15 80 Arrears 0 0 0 0 Discounted debt transactions 0 -913 0 0 Resident lending abroad, net -199 -653 -232 -273 Errors and omissions 579 -296 0 0 Reserves excluding gold (- = increase) -298 -876 -500 -600 Monetary gold (- = increase) 0 5 0 0 e = estimate, f = IIF forecast Source: Central bank and IIF. Peru’s trade surplus, the strength of its financial system, and the government’s return to the international capital markets bolstered the country’s international

reserves, which rose by an estimated $0.9 billion in 2002. The relative strength and stability of Peru’s currency eliminated the need for the central bank to sell foreign exchange to reduce excessive volatility of the exchange rate. Net lending by multilateral creditors continued to be strong in 2002 despite net outflows to the IMF and IBRD, as the government obtained financing from the IADB and the Corporación Andina de Fomento (CAF) – the multilateral financing agency of the Andean group. Net multilateral lending in 2002 reached an estimated $532 million, compared to $638 million in 2001. Net lending by bilateral creditors, including officially guaranteed private debt and short-term credit, contracted by an estimated $291 million as payments to the Paris Club remained large. Net disbursements from other private creditors rose substantially in 2002 as a direct result of the government’s decision to issue two new bonds. In February, the government issued a 10-year, $500 million global bond. Following issuance, a swap component was added whereby $930 million in new global bonds were issued in exchange for $1,210 million in Brady bonds. This was the first Peruvian sovereign bond since 1928 (see the July 31, 2002 Economic Report on Peru for more details). Eight months later, in November 2002, the government reentered the market with a 5-year, $500 million global bond. The bond was issued at a 612 basis -point-spread above U.S. Treasuries. The government had initially indicated that it would use an already approved partial credit guarantee (PCG) from the CAF to lower the spread; with its improved economic performance and declining country risk, however, Peru was able to secure a competitive interest rate on its own, without using the PCG. At the end of January 2003, the government issued a new 12-year, $500 million global bond at 610 basis points above U.S. Treasuries. Table 5 External Debt (millions of dollars, end-period)

1999 2000 2001 2002e Total external debt 29605 29204 28633 30249 By creditor Multilaterals 5922 5952 6527 7281 Official bilateral creditors 10319 10037 9311 9443 Commercial banks 3984 4040 3875 3738 Other private creditors 9380 9175 8921 9787 e = estimate Source: Central bank, Ministry of Economy and Finance, and IIF estimates.

The Institute of International Finance, Inc. Country Report: Peru/Page 5

In 2001, total ext ernal debt fell slightly to $28.6 billion due in part to the exchange rate valuation adjustment as the dollar appreciated against the yen and European currencies. In 2002, external debt increased to an estimated $30.2 billion. This was, in part, the consequence of a weakening dollar, but was also due to the government’s heavier reliance on external borrowing to cover its financial needs (Table 5). The external debt service ratio fell from 44 percent in 2000 to 40.3 percent at the end of 2002. Despite the almost 4 percent drop, external debt service remained relatively high (compared to 2002 estimates of 26 percent in Chile, 14 percent in Mexico and Venezuela, and 27 percent in Ecuador). 6. The stock market rallies following a disappointing first three quarters. Table 6 Financial Sector Indicators (millions of new soles and percentages of GDP)1 2000 2001 2002e Banking credit to the private sector 47361 45158 45866 (% GDP) (25.4) (23.8) (23.0) In New Soles 8777 8841 9286 (% GDP) (4.7) (4.7) (4.7) In dollars 38584 36318 36580 (% GDP) (20.7) (19.2) (18.4) Banking sector deposits 40647 41367 43321 (% GDP) (21.8) (21.8) (21.7) In New Soles 7958 9303 10168 (% GDP) (4.3) (4.9) (5.1) In dollars 32689 32064 33154 (% GDP) (17.5) (16.9) (16.6) Bad loans/ bank credit (% )2 10.2 9.0 7.6 Provisions/ bank credit (%)3 9.0 10.5 9.1 (Bad loans-provisions)/bank credit (%) 1.2 -1.4 -1.5 Lima Stock Exchange General Index 1208 1176 1392 New Sol (% change from previous period) -34.2 -2.6 18.3 Dollar (% change from previous period) -34.5 -0.3 16.0 Private pension funds (AFPs): Stock value 9599 12350 15906 (% GDP) (5.1) (6.5) (8.0) 1 Dollar deposits valued at the end-period exchange rate. Excludes central bank and Banco de la Nación. 2 Past-due loans plus refinanced loans. 3 Provisions for bad-performing loans. Source: Central bank and Superintendency of Banks and Insurance.

Domestic stock market prices rose strongly in the fourth quarter following a disappointing first three quarters. The recovery in the last quarter followed the trends in world stock markets, but outpaced them by a wide margin. By the end of the year, the General Lima Index had risen 18.3 percent in local currency terms and 16 percent in dollar terms from a year earlier (Table 6). The rally in the fourth quarter was the result of better-than expected commodity prices and the rapid growth of the mining sector. The stock market also benefited from the bidding war over Peru’s beer monopoly and its final buyout by a Colombian conglomerate. Nevertheless, market capitalization remains a modest $12.6 billion (22 percent of GDP). 7. The banking sector remains strong and highly liquid. The banking sector’s performance has improved steadily following the asset deterioration that peaked in 2000. The financial sector as a whole has strengthened and it continues to consolidate. There are now 14 banks compared to 26 three years ago. Nonperforming loans fell to 7.8 percent of total assets by the end of 2002, compared to 9.7 percent a year earlier. As banks finished complying with banking regulations governing prudential supervision, the ratio of provisions against nonperforming loans climbed to more than 120 percent. Despite the increased strength of the Peruvian banking sector, concern remains that the uncertainty plaguing banks operating elsewhere in Latin America will spill over into Peru. The Argentine crisis prompted the Spanish Banco Santander Central Hispano (BSCH) to sell its Peruvian operations to Banco de Crédito (Peru’s largest bank), increasing the latter’s share to 37 percent of total deposits and 34 percent of total loans. In a subsequent move, the Italian owners of Banco Wiese Sudameris announced their plans to retire from Latin America, including Peru. The announcement produced a minor run on the bank which was successfully contained.

Economic Policies In a difficult political environment characterized by growing opposition in congress, the government has remained pro-market and has continued to manage fiscal policy in a prudent fashion except during the run-up to the elections in November. Peru is beginning the second year of a stand-by arrangement with the IMF and, with the exception of the privatization program, has largely complied with the agreed-upon targets.

Country Report: Peru/Page 6 The Institute of International Finance, Inc.

1. The fiscal deficit narrows, but further fiscal adjustment is needed. In the run-up to the November regional elections, there were fiscal slippages, and midyear estimates placed the nonfinancial public sector (NFPS) deficit at 2.8 percent of GDP, against the target of 1.9 percent under the IMF program (the NFPS deficit is the equivalent of the public sector borrowing requirement, or PSBR, presented in the database tables attached to this report). With a view to bring fiscal policy back on track, the government and the IMF began to negotiate a possible revision to the fiscal deficit target, and the government started to take measures to reverse the weakening fiscal performance. In early December an agreement was reached to revise the target to 2.3 percent of GDP (postponing the target of 1.9 percent until 2003). Measures taken to cut spending took many forms, including the shutdown of most government offices for a good part of December. There were also major efforts to strengthen tax collection in the second half of the year. Accordingly, total taxes in the second half of the year rose by 6.6 percent from the same period a year earlier (5.7 percent in real terms), while for the year as a whole they rose 1.7 percent. Revenues from the value-added tax rose by 18 percent in the second half of 2002 compared to a year earlier, while for the year as a whole revenues for the value-added tax rose 9.3 percent (Table 7). The government was finally able to achieve a more moderate fiscal deficit, thanks largely to the recovery of domestic demand, successful tax collection reforms and the resulting increase in revenues. As a consequence, the NFPS deficit for 2002 fell to 2.3 percent of GDP. This compares to 2.6 percent of GDP in 2001 and 3.2 percent in 2000. Given the 2003 fiscal deficit target of 1.9 percent of GDP ($1.1 billion) and public sector debt amortization of $1.6 billion, the government’s gross financing requirements for 2003 are estimated at $2.7 billion. The government estimates that $1.1 billion of this will come from multilateral sources, $0.7 billion from international bond issues, $0.5 billion from domestic bonds and $0.4 billion from privatizations and concessions. Multilateral financing through the IADB and the CAF is virtually assured, but not likely to rise further. The government is also not likely to easily increase its domestic bond issuance since the market for New Sol-denominated government bonds is very thin. Importantly, while the government is still hoping to cover a good part of its financing needs from privatization receipts, we estimate that it will only be able to raise about $0.2 billion from this source. This will force it to increase its reliance on the international capital markets,

likely issuing an additional $500 million bond during the year. In anticipation, the government has included in this year’s budget an authorization to issue global bonds up to $1 billion. We believe the government will have no difficulty accessing international capital markets for this amount. Table 7 Public Sector Finances (percent of GDP) 1999 2000 2001 2002e Central government balance -3.1 -2.7 -2.8 -2.5 Primary balance -1.0 -0.6 -0.6 -0.4 Total revenue 14.8 15.0 14.3 14.3 (Taxes) (12.5) (12.1) (12.3) (11.9) Total expenditure 18.0 17.7 17.0 16.7 Current expenditure 14.6 14.9 14.7 14.9 (Interest payments due) (2.1) (2.2) (2.1) (2.1) (Other current expenditure) (12.5) (12.7) (12.6) (12.8) Capital expenditure 3.4 2.8 2.3 1.8 Other nonfinancial public sector balance 0.0 -0.5 0.2 0.2 Primary balance 0.1 -0.4 0.3 0.2 Nonfinancial public sector balance -3.1 -3.2 -2.6 -2.3 Primary balance -1.0 -1.0 -0.3 -0.2 (Interest payments) (2.2) (2.3) (2.2) (2.1) Financing of public sector balance

3.1 3.2 2.6 2.3

External financing -0.1 1.2 0.9 1.2 Domestic financing 2.4 1.2 1.0 0.8 Privatization receipts 0.8 0.8 0.6 0.3 e = estimate Source: IIF based on data from the Ministry of Economy and Finance.

2. Expansionary monetary policy fuels the recovery while inflation ends the year in the lower range of the inflation target. In January 2002, the central bank formally introduced an inflation-targeting framework. The inflation target for 2003 was set similar to that of 2002, at 2.5 percent with an accepted deviation of 1 percent above and below the target. At 1.5 percent, the 2002 inflation rate was at the lower limit of the target. The monetary policy of the central bank is now based on announcements of future interest rates. The central bank sets a range for interbank interest rate fluctuations using the monetary regulation interest rate as an upper limit and the overnight interest rate as a lower limit. The authorities now announce their monetary policy on a

The Institute of International Finance, Inc. Country Report: Peru/Page 7

monthly basis in accordance with a fixed and pre-established schedule. In addition, the central bank publishes a detailed inflation report three times a year. Throughout most of 2002, the central bank adopted an expansionary monetary policy. The policy set progressively higher limits on bank rediscount facilities and supported the steady fall of interbank interest rates. The expansionary monetary policy was reversed only briefly in September-October, when the “Lula effect” increased Peruvian country risk and that of most countries in Latin America. Liquidity increased in 2002. Broad money (M2) rose by an estimated 8 percent from a year earlier. Net domestic credit as a percentage of broad money also recovered to grow at 3.1 percent in 2002, compared to a rise of 0.9 percent a year earlier (Table 8). By early January, the central bank had once again eased monetary policy by reducing monetary regulation interest rates from 4.5 to 4.25 percent. Table 8 Factors Affecting Liquidity (change as a percent of broad money, end of previous period) 1999 2000 2001 2002e Net foreign assets 10.2 1.9 3.4 7.7 Net domestic assets 4.2 -2.3 -1.3 0.3 Domestic credit 14.9 -0.2 0.9 3.1 Claims on public sector, net 8.5 2.5 4.3 -1.3 Claims on private sector 6.4 -2.7 -3.4 4.4 Other assets. net -10.7 -2.1 -2.2 -2.8 Broad money (M2)1 14.5 -0.4 2.1 8.0 Money (M1)1 5.9 -2.0 0.3 3.5 Quasi-money 8.6 1.6 1.7 4.6 Memoranda: M2 (% of GDP) 34.4 32.1 32.3 33.2 M2 (% in dollars) 53.7 55.1 53.2 51.2 M1 (% of GDP) 12.7 11.3 11.2 11.8 e = estimate 1 Includes domestic and foreign currency holdings. Source: IIF based on data from the IMF and the central bank. Market interest rates both in nominal and real terms declined steadily during 2002, following the same pattern of a year earlier. Although the average lending interest rate in domestic currency (TAMN) remained relatively high at about 20 percent, the prime rate for corporations fell to approximately 2 percent. The large variance in interest rates is explained by considerable dispersion of risk in the credit market and the lack of a well-established institutional framework for property rights, which contributes to large risk premiums. As a result, smaller

firms and consumers pay interest rates above 50 percent (Table 9). Table 9 Interest Rates (annual rates)1 90 day Lending Inter- Lending Deposit2 Lending2 Lending Dollar bank Prime (Tipmn) (TAMN) Real 3 (Tamex)

1999 14.9 n.a. 11.8 35.0 30.5 16.5 2000 12.7 n.a. 9.8 30.0 25.3 13.7 2001 8.6 5.2 7.5 25.0 22.5 12.1 2002 3.2 2.7 3.5 20.8 20.6 10.0 2002 Q1 2.6 2.9 4.1 22.1 23.4 10.0 Q2 2.5 2.8 3.2 19.9 19.8 10.0 Q3 3.7 2.7 3.2 19.9 19.6 10.1 Q4 4.1 2.5 3.7 21.1 19.4 10.1

Oct 4.6 2.7 3.7 20.7 19.1 10.0 Nov 3.9 2.4 3.7 21.8 20.1 10.1 Dec 3.8 2.4 3.6 20.7 18.9 10.2

2003

Jan 3.7 2.3 3.5 20.3 17.6 10.1 1 Average monthly rates. 2 Average rates for deposits and lending in local currency. 3 Average rates for lending in local currency deflated by the CPI inflation. Source: IIF based on data from the central bank.

Table 10 Exchange Rate Developments (period averages) New Real Exchange Rate1 Soles/$ Index 1995=100 % Change2

1999 3.38 90.7 -8.9 2000 3.49 90.3 -0.5 2001 3.51 93.7 3.8 2002 3.52 94.0 0.3 2002 Q1 3.46 94.4 -1.7 Q2 3.46 94.2 -0.2 Q3 3.57 92.6 -1.8 Q4 3.57 94.8 2.5 2003 Jan 3.49 96.14 1.4 1 Based on trade with six main trading partners and consumer prices (- = depreciation). 2 Changes with respect to previous period. Source: Central bank and IIF.

Country Report: Peru/Page 8 The Institute of International Finance, Inc.

3. The exchange rate appreciates slightly. The central bank adopted a flexible exchange rate regime in the early 1990s. In the context of an inflation target, it does intervene, however, to moderate exchange rate volatility. In 2002, thanks to the relative strength of the New Sol, the bank’s exchange rate interventions were limited. Despite pressures of contagion from Brazil in the third quarter of the year, the real effective exchange rate appreciated by 0.3 percent during 2002 compared to a year earlier. In nominal terms, the New Sol depreciated against the dollar by 0.3 percent during 2002 as an average and by 2.2 percent from December 2001 to December 2002 (Table 10 and Figure 5). Figure 5 Real Effective Exchange Rate (1995 = 100)

85

90

95

100

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

From 2001 to 2002, the New Sol was one of the most stable currencies in Latin America. This is not necessarily a reflection of changes in Peru’s country risk, which has been closely correlated with that of other Latin American countries. The relative stability of the domestic currency seems to be explained more by the central bank’s commitment to low inflation and the growth of Peru’s international reserves. The latter has been driven by a strong trade balance and large capital inflows (Figure 6). Figure 6 Average Exchange Rate (July 2001 = 100)

95

100

105

110

115

120

Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02

Peru Chile Mexico

Outlook We project the economy to grow by 3.8 percent in 2003, down from an estimated 4.9 percent last year. Our estimate of somewhat lower growth this year compared to 2002 is based on uncertainties associated with the impact on public finances of the newly created regional governments and the negative effects of rising populism in congress. We expect growth to be negatively affected by El Niño as a consequence of a change in the pattern of rainfall. While it will not be affected as strongly as it was in 1998, when fishing contracted by 13 percent, heavy rainfall has already had an adverse impact on agricultural production. Finally, we believe that the government will have to address its need for additional fiscal adjustment and expect this to mildly constrain higher growth in the near term. In our projections, economic growth in 2003 will be led by a modest recovery of investment and continued strength of exports. The continuing development of the massive Camisea gas project also supports growth. The construction sector is expected to grow rapidly, boosted by government support of low-cost housing programs and low interest rates. Agricultural and textile exports and production will benefit from the U.S. Andean Trade Promotion and Drug Eradication Act (ATPDEA) that came into effect last October. The accord grants Peru preferential access to the U.S. market for agricultural, textile and some manufactured exports (Table 11). We expect inflation to reach 2.3 percent for 2003, in the lower range of the inflation target, based on continued strength of the domestic currency and moderate pressures from domestic demand. We project the current account deficit to increase slightly to $1.3 billion (2.2 percent of GDP) this year, reflecting a weakening of the invisibles balance. The trade balance is projected to remain at about the same level as last year. We estimate exports to grow by nearly 11 percent in response to the continued increase in mineral exports and the expansion of nontraditional exports to the U.S. market, thanks to the ATPDEA. Imports of capital goods are expected to increase also by about 11 percent in response to investment recovery and the construction of the Camisea gas project. In 2004, we project a trade surplus of about $300 million and a current account deficit of $1.4 billion (2.3 percent of GDP). We expect the deficit of the nonfinancial public sector to be brought down to 1.9 percent of GDP this year, in line with the target agreed with the IMF. The authorities’ expressions of their commitment have been encouraging in this context. The recent administrative reforms of the tax agency (SUNAT) have proven to be effective in increasing fiscal revenue and we expect this

The Institute of International Finance, Inc. Country Report: Peru/Page 9

to continue and contribute to fiscal adjustment. We believe the government will be successful in containing political pressure for increased expenditures from the newly elected regional governments and will meet its fiscal and other targets agreed with the IMF. In these circumstances we expect the government to continue to access international capital markets to meet its external needs. Table 11 Forecast Summary 2001 2002e 2003f 2004f Real GDP (% change) 0.2 4.9 3.8 4.0 Consumer prices (% change, end -period) -0.1 1.5 2.3 2.9 Nonfinancial public sector balance -2.6 -2.3 -1.9 -1.5 NFPS primary balance -0.3 -0.6 -0.1 0.0 Central government balance -2.8 -2.5 -2.0 -1.7 Trade balance ($ billion) -0.1 0.3 0.3 0.3 Merchandise exports 7.1 7.6 8.4 9.0 Merchandise imports -7.2 -7.2 -8.0 -8.7 Current account (% of GDP) -2.2 -1.9 -2.2 -2.3 Reserves excluding gold ($ billion) 8.7 9.5 10.0 10.6 Total external debt ($ billion) 28.6 30.2 30.4 31.3 Amortization due ($ billion) 2.2 2.2 2.1 1.9 e = estimate, f = IIF forecast Source: Central bank and IIF.

As indicated above, a serious risk we see in an otherwise rather favorable economic situation and outlook is the political climate. Although President Toledo has remained pro-market, the populist congress is increasing its opposition to structural reforms. This could adversely affect the country’s investment climate and weaken the current recovery. Congress, including Toledo’s party, is likely to adopt a more populist position closer to that of Alan García’s APRA party. The same is true with the regional governments. Hopefully, these initial positions will become more moderate as APRA attempts to demonstrate that it can govern effectively at the regional level before the campaign for the 2006 presidential elections begins in earnest. We believe that the economy should be able to grow at a 4 to 5 percent annual rate over the medium term if the government is able to successfully control fiscal pressures coming from the new regional governments, prevent congress’s populist tendencies from being reflected in new anti-business legislation, and reestablish a strong program to attract private sector investment. The unfolding political trend in the next 9 to 12 months needs to be closely watched before coming to a judgment on whether indeed the Peruvian economy will be in a position to exploit its potential through good policies.

IIF DATABASE: PERU 11-Feb-03Page 1

Code DOMESTIC ECONOMY & EXTERNAL TRADE 1997 1998 1999 2000 2001 2002e 2003f 2004f

DOMESTIC ECONOMY (1994 prices)

E100 Real GDP (new soles million) 117110 116485 117590 121267 121513 127468 132311 137604E101 Real GDP % change 6.7 -0.5 0.9 3.1 0.2 4.9 3.8 4.0

E201 Domestic demand % change 6.9 -0.8 -3.1 2.4 -0.7 4.3 4.1 3.8E211 Private consumption % change 4.3 -0.8 -0.4 3.9 1.3 4.2 3.5 3.0E221 Public consumption % change 7.6 2.5 3.5 5.1 -0.5 3.3 1.8 2.5E231 Gross fixed capital % change 15.3 -1.4 -11.1 -5.0 -8.3 -0.4 5.5 4.6E241 Private fixed capital % change 16.3 -2.4 -15.3 -2.0 -5.6 0.7 6.0 5.0E251 Public fixed capital % change 10.9 3.0 7.2 -15.4 -19.0 -5.3 3.0 2.5E262 Change in stockbuilding % GDP 0.0 -0.1 -0.6 0.3 0.1 1.0 0.4 0.6

E301 Exports of goods and services % change 13.1 5.6 7.6 7.9 6.9 5.8 4.2 6.9E311 Imports of goods and services % change 12.2 2.3 -15.2 3.6 1.6 2.2 5.8 5.7E322 Change in net foreign balance % GDP -0.5 0.3 4.2 0.7 0.9 0.6 -0.2 0.3

E400 Real GNP (new soles million) 114170 113337 114011 117817 118681 123924 129012 134267E401 Real GNP % change 7.2 -0.7 0.6 3.3 0.7 4.4 4.1 4.1

E500 Nominal GDP (new soles million) 157274 166514 174719 186756 189533 199202 211181 225344E501 Nominal GDP % change 14.9 5.9 4.9 6.9 1.5 5.1 6.0 6.7E505 GDP deflator % change 7.6 6.4 3.9 3.6 1.3 0.2 2.1 2.6E510 Nominal GDP ($ billion) 59.03 56.83 51.64 53.54 54.05 56.65 59.92 62.55

E600 Nominal GNP (new soles million) 153313 161964 169368 181404 185051 193585 205839 219801E601 Nominal GNP % change 15.4 5.6 4.6 7.1 2.0 4.6 6.3 6.8E605 GNP deflator % change 7.6 6.4 4.0 3.6 1.3 0.2 2.1 2.6E610 Nominal GNP ($ billion) 57.5 55.3 50.1 52.0 52.8 55.1 58.4 61.0

E701 Average nominal earnings % change 7.5 5.0 1.4 4.3 0.8 1.6E801 Industrial production % change 5.9 -3.5 -0.3 7.3 -1.7 3.8

EXTERNAL TRADE

T103 Goods exports: volume % change 16.5 -5.3 15.2 11.4 6.3 2.0 5.6 4.9T105 Goods exports: unit value % change -0.6 -11.0 -7.8 3.2 -4.9 3.8 5.5 2.7

T203 Goods imports: volume % change 11.9 0.9 -18.4 3.4 1.0 -0.7 9.1 6.3T205 Goods imports: unit value % change -3.1 -4.7 0.6 5.4 -3.0 1.1 2.1 2.0

T305 Terms of trade % change 2.5 -6.6 -8.3 -2.1 -2.0 2.7 3.3 0.7

T400 Exchange rate, end-period (S/$) 2.730 3.160 3.510 3.527 3.444 3.514 3.556 3.642T410 Exchange rate, average (S/$) 2.664 2.930 3.383 3.488 3.507 3.516 3.525 3.603T420 Parallel rate, end-period (S/$)

T430 Nominal effective rate (1995 = 100) 92.2 86.4 77.6 76.9 87.2 82.8 84.6 83.2T440 Real effective rate (1995 = 100) 101.6 99.6 90.7 90.3 93.7 94.0 95.6 94.2T441 Real effective rate % change -0.3 -1.9 -8.9 -0.5 3.8 0.3 1.7 -1.5

e = estimate, f = IIF forecast

IIF DATABASE: PERU 11-Feb-03Page 2

Code EXTERNAL BALANCE ($ million) 1997 1998 1999 2000 2001 2002e 2003f 2004f

B100 Trade Balance -1721 -2466 -631 -317 -90 348 337 302

B110 Merchandise exports 6832 5757 6119 7034 7108 7576 8386 9029B120 Merchandise imports -8553 -8222 -6749 -7351 -7198 -7228 -8049 -8727

B200 Balance on Services, Income & Transfers -1353 -1174 -1288 -1335 -1079 -1419 -1640 -1743

B210 Services & income receipts 2279 2562 2229 2318 2122 2133 2151 2239B212 Exports of services 1538 1748 1578 1580 1489 1686 1587 1638B214 Interest receipts 585 632 522 592 519 337 451 489B216 Other services & income receipts 156 182 128 147 114 110 113 112

B220 Services & income payments -4533 -4648 -4510 -4646 -4200 -4472 -4721 -4932B222 Imports of services -2305 -2281 -2278 -2373 -2289 -2428 -2641 -2792B224 Interest payments -1621 -1784 -1744 -1809 -1586 -1664 -1680 -1720B226 Other services & income payments -607 -582 -488 -464 -325 -380 -400 -420

B230 Transfers, net 901 912 994 993 999 920 930 950B232 Private transfers, net 770 780 867 863 869 791 800 821B234 Official transfers, net 131 132 127 130 130 129 130 129

B250 Current Account Balance -3074 -3640 -1919 -1651 -1169 -1071 -1302 -1441

B252 % GDP -5.2 -6.4 -3.7 -3.1 -2.2 -1.9 -2.2 -2.3

F280 Equity investment, net 1764 1365 1533 410 841 1950 1300 1400

F300 International financial institutions 1009 206 540 123 638 532 701 459F310 IMF 147 -145 -146 -141 -153 -173 -106 -35F320 IBRD 425 207 291 174 35 -22 249 209F330 Other multilateral creditors 437 144 395 90 756 727 558 285

F340 Official bilateral creditors -1029 -117 -60 306 -195 -291 -236 -114

F350 Commercial banks -4357 277 -1042 63 -157 -148 -303 -20F351 Credit flows 6434 286 -1042 63 -157 -148 -303 -20F354 Interest arrears -6139 -9 0 0 0 0 0 0F358 Discounted debt transactions -4652 0 0 0 0 0 0 0

F360 Other private creditors 5348 357 -11 6 -40 849 573 589F361 Credit flows/interest arrears 5930 357 -11 6 -40 1762 573 589

F400 Resident lending abroad, net 698 350 -273 -336 -199 -653 -232 -273

F450 Errors and omissions, net 44 -210 397 723 579 -296 0 0

F480 Monetary gold (- = increase) 0 -4 0 0 0 5 0 0F500 Reserves excluding gold (- = increase) -404 1417 835 356 -298 -876 -500 -600

e = estimate, f = IIF forecast

IIF DATABASE: PERU 11-Feb-03Page 3

Code EXTERNAL DEBT AND ASSETS ($ million) 1997 1998 1999 2000 2001 2002e 2003f 2004f

D100 Total External Debt 29103 30330 29605 29204 28633 30249 30437 31328

D102 % GDP 49.3 53.4 57.3 54.5 53.0 53.4 50.8 50.1D105 % Exports goods, services & income 319.4 364.6 354.7 312.3 310.2 311.6 288.9 278.0

D202 Medium/Long term debt 24492 25928 26216 25911 25588 27352 27743 28539D203 Short term debt 4518 4361 3348 3293 3046 2897 2694 2789D204 Interest arrears 93 40 40 0 0 0 0 0

By creditor:D300 International financial institutions 5177 5497 5922 5952 6527 7281 7886 8342D304 (Interest arrears) 0 0 0 0 0 0 0 0D310 IMF 1011 905 735 558 387 236 124 88D320 IBRD 1920 2128 2417 2590 2625 2609 2824 3033D330 Other multilateral creditors 2246 2464 2770 2804 3515 4436 4938 5222

D340 Official bilateral creditors 10344 10497 10319 10037 9311 9443 8924 8796D344 (Interest arrears) 53 0 0 0 0 0 0 0

D350 Commercial banks 4722 5023 3984 4040 3875 3738 3429 3409D352 Medium/long term 1561 2110 2223 2479 2664 2707 2599 2478D353 Short term 3121 2873 1720 1560 1210 1030 830 930D354 Interest arrears 40 40 40 0 0 0 0 0

D360 Other private creditors 8861 9313 9380 9175 8921 9787 10199 10782D364 (Interest arrears) 0 0 0 0 0 0 0 0

By borrower: 29103 30330 29605 29204 28633 30249

D400 Public sector 19305 19900 19851 19624 19523 21037D410 Private sector 6337 7149 7467 7549 7544 7722D420 Deposit money banks 3461 3281 2286 2032 1566 1490

D508 Face amount discounted debt reduction -4760 0 0 0 0 -280 0 0D558 Commercial banks -3878 0 0 0 0 0 0 0D578 Other creditors -881 0 0 0 0 -280 0 0

D600 $ Exchange rate valuation effect -1360 504 -152 -898 -817 954 -547 -22D610 % Total external debt in $ 63.1 61.4 60.9 61.6 62.7 70.2 70.7 71.0

EXTERNAL ASSETS ($ million)

A500 Reserves excluding gold 10982 9565 8730 8374 8672 9548 10048 10648A505 % Imports goods, services, & income 83.9 74.3 77.5 69.8 76.1 81.6 78.7 78.0A506 Months imports goods, services & income 10.1 8.9 9.3 8.4 9.1 9.8 9.4 9.4

A510 Gold value 322 336 320 300 306 383A512 Gold (million ounces) 1.115 1.100 1.100 1.100 1.100 1.115

A600 Deposit money banks' foreign assets 1216 1246 1389 1299 1366A700 Deposits in BIS banks 7200 6652 7197 6975 7600

e = estimate, f = IIF forecast

IIF DATABASE: PERU 11-Feb-03Page 4

Code DEBT SERVICE PAYMENTS ($ million) 1997 1998 1999 2000 2001 2002e 2003f 2004f

P100 Total debt service 3634 3722 3760 4117 3744 3909 3816 3635P105 % Exports goods, services & income 39.9 44.7 45.0 44.0 40.6 40.3 36.2 32.3

P110 Interest payments due 1621 1784 1744 1809 1586 1664 1680 1720P115 % Exports goods, services & income 17.8 21.4 20.9 19.3 17.2 17.1 15.9 15.3

P120 Amortization paid 2013 1938 2016 2308 2158 2245 2136 1915P125 % Exports goods, services & income 22.1 23.3 24.2 24.7 23.4 23.1 20.3 17.0

P204 Average interest rate on external debt 5.1 6.0 5.8 6.2 5.5 5.7 5.5 5.6P214 Average real rate on external debt 5.8 19.1 14.7 2.9 10.9 1.8 0.0 2.8

AMORTIZATION 2003 2004 2005 2006 2007

R100 Total principal repayments due 2136 1915 1458 1384 1911

R110 IMF 106 35 36 37 18R120 IBRD 101 101 83 85 92R130 Other multilateral creditors 202 167 161 159 161R140 Official bilateral creditors 482 361 353 349 357R150 Commercial banks 1073 1100 674 600 625R160 Other private creditors 172 151 151 154 658

WORLD ECONOMIC FRAMEWORK 1997 1998 1999 2000 2001 2002e 2003f 2004f

W101 Industrial country real GDP % change 3.19 2.31 2.85 3.53 0.72 1.47 2.14 2.87W204 $ LIBOR (six-month, average) 5.85 5.54 5.54 6.65 3.73 1.91 2.81 3.72W304 Brent spot oil price ($/bbl, average) 19.12 12.72 17.70 28.31 24.41 24.79 24.50 18.00

W410 SDR/$, end-period 0.74 0.71 0.73 0.77 0.80 0.74 0.76 0.76W420 Euro(Ecu)/$, end-period 0.91 0.86 1.00 1.07 1.13 0.95 1.00 1.00W430 Yen/$, end-period 129.95 115.60 102.20 114.90 131.80 118.70 129.50 130.00

W505 World price commodities % change -3.31 -14.75 -6.90 1.71 -5.25 2.84 7.68 2.55W515 World price manufactured goods % change -4.68 -3.70 -2.47 -3.52 -2.09 1.80 2.02 -0.06

W603 Export market volume % change 11.5 5.7 5.6 11.2 -1.2 2.0 6.7 7.2W615 Trading partners' $ prices % change 0.3 -0.4 -1.8 1.1 -2.2 -0.4 0.2 1.9

COUNTRY TRADE BY COMMODITY

Exports:C100 Copper ($ million) 1096 779 776 933 987 1178C102 Volume (thousand tons) 501 486 521 529 686 850C103 Volume % change 5.4 -3.0 7.1 1.5 29.6 23.9

C104 Unit price ($/lb) 1.03 0.75 0.71 0.82 0.72 0.71C105 Unit price % change -0.8 -27.3 -4.9 15.3 -12.9 -1.2

C200 Fishmeal 1031 392 533 874 835 772C202 Volume (thousand metric tonnes) 1926.3 666.2 1482.0 2352.3 1942.0 1420.0C203 Volume % change 19.7 -65.4 122.5 58.7 -17.4 -26.9

C204 Unit price ($/tm) 535.16 588.38 359.53 371.55 430.01 546.01C205 Unit price % change 3.2 9.9 -38.9 3.3 15.7 27.0

e = estimate, f = IIF forecast

IIF DATABASE: PERU 11-Feb-03Page 5

Code GOVERNMENT & MONETARY SECTORS 1997 1998 1999 2000 2001 2002e 2003f 2004f

GOVERNMENT SECTOR (new soles million)

G100 Public sector borrowing requirement -253 1329 5482 6044 4833 4550 4030 3400G102 Public sector borrowing % GDP -0.2 0.8 3.1 3.2 2.6 2.3 1.9 1.5

G106 Financed by domestic credits 337 687 5593 3758 3078 1514G107 Financed by external credits -591 642 -111 2286 1755 3036

G300 Central government borrowing 1325 1791 5499 5119 5264 4946G302 Central government borrowing % GDP 0.8 1.1 3.1 2.7 2.8 2.5

G306 Financed by domestic credits 1313 1230 5812 3022 3282 1818G307 Financed by external credits 12 561 -313 2097 1982 3128

G310 Central government revenue 25193 26707 25872 27944 27039 28408G311 Central government revenue % change 14.0 6.0 -3.1 8.0 -3.2 5.1G312 Central government revenue % GDP 16.0 16.0 14.8 15.0 14.3 14.3

G320 Central government expenditure 26518 28498 31371 33063 32303 33354G321 Central government expenditure % change 10.4 7.5 10.1 5.4 -2.3 3.3G322 Central government expenditure % GDP 16.9 17.1 18.0 17.7 17.0 16.7

G500 General government debt 22666 23569 23505 24249 24687 26327G502 General government debt % GDP 38.4 41.5 45.5 45.3 45.7 46.5

G510 General government domestically issued debt 4350 4550 4815 5044 5720 5840G520 General government foreign issued debt 18316 19019 18690 19205 18967 20487

MONETARY SECTOR (new soles million)

M100 Net foreign assets 24119 25111 30490 31652 33681

M200 Domestic credit 29784 39869 47717 47579 48109M201 Domestic credit % change 73.4 33.9 19.7 -0.3 1.1

M210 Claims on the public sector -8028 -5966 -1504 10 2579M250 Claims on the private sector 37812 45835 49221 47569 45530

M300 Other liabilities 9142 12462 18079 19344 20660

M400 Money + quasi-money (M2) 44762 52518 60127 59887 61131M401 M2 % change 30.8 17.3 14.5 -0.4 2.1M411 M2 velocity % change -12.2 -9.8 -8.4 7.3 -0.6

M500 Money (M1) 15175 19165 22273 21072 21278M501 M1 % change 69.1 26.3 16.2 -5.4 1.0

M600 Reserve money 4761 5023 5876 5642 5883M601 Reserve money % change 19.1 5.5 17.0 -4.0 4.3

M805 Consumer prices % change average 8.5 7.2 3.5 3.8 2.0 0.2 2.1 2.6M815 Consumer prices % change end-period 6.5 6.0 3.7 3.7 -0.1 1.5 2.3 2.9

FINANCIAL MARKETS

K101 General Lima Index, new sol terms % change 25.5 -25.5 37.4 -34.2 -2.6 18.3

K111 General Lima Index, $ terms % change 19.5 -35.6 23.7 -34.5 -0.3 16.0

K120 Equity market capitalization ($ billion) 17.4 11.0 13.4 10.5 10.9 12.6K130 Equity market turnover ($ billion) 12.1 7.7 4.7 3.6 3.4 2.9

K200 Interbank rate 12.8 18.7 14.9 12.7 8.6 3.2K210 Lending rate 30.9 32.6 35.0 30.0 25.0 20.8K220 Deposit rate 10.3 10.9 11.8 9.8 7.5 3.5K230 Real deposit rate 1.6 3.4 8.0 5.8 5.4 3.3

e = estimate, f = IIF forecast

IIF DATABASE: PERU 11-Feb-03Page 6

Code STRUCTURAL FACTORS 1997 1998 1999 2000 2001 2002e

MERCHANDISE TRADE

S100 Merchandise exports ($ million) 6832 5757 6119 7034 7108 7576 Export composition % total:

S102 Petroleum 5.5 4.0 4.1 5.7 5.9 6.2S103 Copper 16.0 13.5 12.7 13.3 13.9 15.5

Export destination % total:S112 U.S. 23.4 32.9 29.6 27.7 25.1 25.8S113 Japan 7.1 3.8 4.3 5.5 6.5 6.6

S115 Exports % GDP 11.6 10.1 11.8 13.1 13.2 13.4

S120 Merchandise imports ($ million) 8553 8222 6749 7351 7198 7228 Import composition % total:

S122 Intermediate goods 42.1 43.0 45.7 50.7 50.9 51.8S123 Capital goods 34.5 33.1 32.5 29.3 27.0 24.5

Import origin % total:S132 U.S. 31.8 32.5 31.7 29.7 30.1 31.5S133 Spain 8.6 7.4 7.5 9.2 8.8 8.6

S135 Imports % GDP 14.5 14.5 13.1 13.7 13.3 12.8

REAL GDP BY ORIGIN: 1990 = 100

S210 Agriculture (8.5% GDP in 1990) 138.3 139.2 156.8 166.8 164.3S220 Mining (4.4% GDP in 1990) 154.0 159.8 180.5 184.8 205.4S230 Manufacturing (15.6% GDP in 1990) 138.5 134.1 133.4 142.3 140.8S240 Construction ( 4.1% GDP in 1990) 216.2 217.5 194.6 186.3 175.0S250 Services (67.4% GDP in 1990) 139.3 138.6 138.6 142.1 142.6

INVESTMENT AND SAVING (% GNP)

S305 Gross domestic investment 24.7 24.2 22.2 20.7 18.8 18.6S315 Gross national saving 17.5 15.9 16.6 15.8 14.9 15.2S325 Net foreign balance -7.1 -8.3 -5.6 -4.9 -3.9 -3.4

POPULATION AND EMPLOYMENT

S400 Population (million) 24.68 25.10 25.52 25.94 26.35 26.75S401 Population % change 1.7 1.7 1.7 1.6 1.6 1.5S411 Per capita real GDP % change 4.9 -2.2 -0.7 1.5 -1.3 3.3S420 Per capita $ GDP 2392 2264 2023 2064 2051 2118

S430 Employment (million) 7.74 7.88 7.58 7.54 7.62S431 Employment % change 3.5 1.7 -3.7 -0.6 1.1S440 Recorded unemployment rate (%) 8.3 7.9 8.0 7.8 7.9

e = estimate, f = IIF forecast