Peru sets an example to other emerging markets of how to reach a fast track of growth and poverty reduction by carrying out strong economic policies, International Monetary Fund Managing Director Dominique Strauss-Kahn said today in Lima.

 

“With a recovery underway that will see growth in Peru of between 6-7 % this year, the challenge now is to manage success by continuing the timely and gradual phasing out stimulus and avoid the build-up of inflationary pressures, which hit the poor hardest,” Mr. Strauss Kahn added after discussions with President Alan García, Minister of Economics and Finance Mercedes Aráoz and President of the Central Reserve Bank Julio Velarde.

 

Peru’s economic performance over the last decade has been impressive by domestic and international standards. Strong economic fundamentals, a sound institutional policy framework, and a solid track-record of prudent macroeconomic policies helped reduce vulnerabilities, achieve record-high economic growth, and advance significantly with poverty reduction. Reflecting on these achievements, Peru was granted investment grade by Fitch and Standard & Poor’s in 2008 and by Moody’s at end-2009, consolidating its standing among major emerging market economies. Peru’s medium-term prospects remain bright, linked to sustained efforts in the implementation of an ambitious structural reform agenda.

 

Peru’s economic resilience during the global financial crisis was the result of the proactive policy response and sound fundamentals. Growth in Peru decelerated sharply in 2009, due to the global financial crisis, but remained positive at about 1 % for the year, despite a few months in negative territory. Thanks to the strong buffers built in recent years, Peru was able to implement a significant monetary and fiscal policy response, which helped to avoid a credit crunch, support domestic demand and sustain employment.

 

The central bank injected substantial liquidity in the financial system and lowered the policy rate to an historic low of 1.25 %. A significant fiscal stimulus plan was introduced, which entailed a positive fiscal impulse of about 2.5 % of GDP in 2009. Peru’s financial sector proved resilient to the global financial crisis thanks to the sound prudential framework put in place in past years and its strong initial standing, and it has remained well-capitalized, liquid and profitable. Peru’s external financial account showed also resilience to the global financial crisis, with a resurgence of capital inflows and appreciation pressures in recent months. To moderate currency volatility, the central bank has intervened in the foreign exchange market, purchasing US$2.5 billion so far this year.

 

Economic activity is expected to grow strongly in 2010, with limited slack in resource utilization thanks to the successful policy response. With the economy already gaining momentum, a sustained improvement in global conditions and the remaining stimulus, staff projects growth at 6.25 % this year and 6 % in 2011. Peru’s recovery appears less dependent on policy support than in other advanced and emerging market economies, as it did not open a significant output gap and the balance sheets of the corporate, household, and financial sectors remain unimpaired.

 

Moreover, the balance of risks to growth in Peru appears tilted to the upside, linked to prospects of renewed capital inflows to strong emerging markets and domestic demand dynamics, including the cyclical rebuilding of inventories and acceleration of private investment projects put on hold last year. A relapse in global growth and a return of global risk aversion are the principal tail risk that could encumber the growth outlook for Peru.