Embassy of PeruBritish-Peruvian Trade and Investment

Group Meeting

15 April 2004

2

Agenda

Executive Summary

Economic Update

Financial Developments

Fiscal Policy

Government Debt

Trade & Investment

3

Executive Summary

Peru’s 2003 growth of 4% was among the highest in the region. For 2004 we project again GDP growth of 4%

Strong economic fundamentals have allowed Peru to weather the regional and international turmoil

Peru is undertaking measures to ensure sustainable economic growth by promoting private investment and fostering regional and output diversification

The strengthening of the tax collection system has accounted for additional revenues of 1% of GDP in 2003. Recent tax measures should further increase tax collection by 0.8% of GDP

2004 growth will be driven by: Camisea Gas Project, growth of textile industry fostered by ATPDEA and recovery of the international economy

4

Agenda

Executive Summary

Economic Update

Financial Developments

Fiscal Policy

Government Debt

Trade & Investment

5

4.05.0

3.5 3.74.5

7.5

4.0 4.44.5 4.53.5

2.9

4.53.4 3.5 3.2

0

2

4

6

8

Peru Chile Colombia Mexico Ecuador Argentina Brazil Latin America

2004E 2005F

-1,1-1,6

-4,9

1,7

-1,0

-3,5

1,32,6

3,6 3,55,2 4,8

2,31,1

9,0

5,6 5,2 4,84,0

8,4

4,4

6,6 6,45,2

6,0 6,1

3,11,5

5,7

3,4 3,1 3,6 4,1

0,9

3,1 3,01,3

-7

-4

-1

2

5

8

11

Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04

Peru’s economy has grown consistently over the past two years

Monthly GDP Growth(% yoy)

GDP Growth - Comparative Analysis(% yoy)

Toledo AdministrationTransition Gov

Source: INEI (above) and JPMorgan (below)

6

Q3_03 Q4_03 2003 2004(F)

Agriculture 2.5 -0.3 2.3 2.1

Fishing -9.2 -11.5 -13.4 10.7

Mining and fuel 7.5 4.2 6.7 7.1

Manufactring 1.8 -0.2 2.1 4.7

Based on raw materials -0.9 -5.2 -2.8 6.3

Non primary 2.5 1.2 3.4 4.3

Construction 2.6 3.2 4.0 5.2

Commerce 3.2 0.7 3.6 3.1

Other services 3.2 4.7 4.4 3.6

GROSS AGGREGATED VALUE 3.1 2.7 3.7 3.9

Taxes on products and import duties 5.8 4.2 6.3 4.6

GDP 3.4 2.8 4.0 4.0

Primary sectors gross aggregated value 3.5 0.2 2.5 4.7

Non-Primary sectors gross aggregated value 3.0 3.3 4.0 3.7

The recovery has been broad-based across different sectors

Source: INEI, MEF

7

…while expanded ATPDEA benefits are expected to boost non-traditional exports even further

ATPDEA benefits granted by the US to Andean countries are expected to increase Peru’s exports to the US by an average of 13% per year between 2004 and 2006

Recent participation in Mercosur provides easier access to exports to the Brazilian market

Camisea´s cheaper energy will increase competitiveness and turn oil-related trade accounts into surplus

Peru is expected to start FTA negotiations with the US in 2Q_04

USA27%

Europe33%

Asia18%

Other7%

Latin America

15%

Destination of Peru’s Exports (% of total exports)

Source: MEF

8

Q3_03 Q4_03 2003 2004 (F)

Global demand 3.4 2.7 3.9 4.3

Internal demand 3.7 2.5 3.7 3.1Private consumption 2.9 2.6 3.2 3.2Public consumption 2.7 7.3 4.5 3.1Gross domestic investment 8.0 -0.6 5.2 2.5Gross fixed investment 4.7 4.5 4.9 5.6

Private 6.5 2.8 5.2 5.7Public -4.5 11.8 3.4 5.1

Exports 1.8 3.9 5.0 10.8

Global supply 3.4 2.7 3.9 4.3

GDP 3.4 2.8 4.0 4.0Imports 3.5 2.0 3.5 6.2

…and private investment has started to recover

-19,7

-0,6

-4,5

0,25,75,2

-30

-20

-10

0

10

1999 2000 2001 2002 2003 2004(F)

Source: Central Bank, MEF

Global Supply and Demand(% change yoy)

Private Investment (% yoy)

9

Higher non-traditional and mining exports are pushing the trade balance into surplus

Source: Central Bank, MEF

6,8

5,8

6,1

7,0 7,0

7,6

8,9

10,9

8,6

8,3

6,8

7,47,3

7,4

8,2

8,9

5,0

6,0

7,0

8,0

9,0

10,0

11,0

12,0

1997 1998 1999 2000 2001 2002 2003 2004(F)

Exports Imports

Evolution of Imports and Exports (US$ BN)

10

The current account deficit is mostly financed by long-term capital inflows

2427

2785

4640

36483428 3390

1519 1557

1184 1206 1116

525

904

1231

23432457 2394

2154

17381543

1000

2032

1309 1300

250

750

1250

1750

2250

2750

3250

3750

4250

4750

5250

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004(F)

CA Deficit FDI* + Long-Term Loans

Current Account Deficit and Long-Term Flows(US$ MM)

Source: Central Bank* FDI figures exclude privatization proceeds

11

Inflation remains within the 1.5% to 3.5% target range

Source: Central Bank (above) and Moody’s and S&P (below)

1,3 2,31,0

4,06,1

12,014,1

40.0

0

5

10

15

20

Panama(Ba1/BB)

Peru (Ba3/BB-) Chile (Baa1/A-) Mexico(Baa2/BBB-)

Colombia(Ba2/BB)

Russia(Baa3/BB+)

Jamaica (B1/B) Dom Rep(B3/CC)

Inflation - Comparative Analysis (% Dec/Dec, 2003E)

Inflation Evolution(% LTM)

-2

-1

0

1

2

3

4

J-01 A-01 J-01 O-01 J-02 A-02 J-02 O-02 J-03 A-03 J-03 O-03 J-04

3,4

12

Agenda

Executive Summary

Economic Update

Financial Developments

Fiscal Policy

Government Debt

Trade & Investment

13

Prudent monetary policy has reduced interest rates while maintaining price & FX stability

Nuevos Soles Interbank Lending Rate(%)

Source: Central Bank

0

4

8

12

16

Jan-01 Jun-01 Nov-01 Apr-02 Sep-02 Feb-03 Jul-03 Dec-03

2,5

14

80

100

120

140

160

180

200

220

Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04

Brazil Chile Colombia Mexico Peru

The Nuevo Sol has been resilient to the pressures experienced by other Latin American currencies

Latin American Currencies(Jan 1 2002 =100)

Source: JPMorgan

(%)

15

Peru’s external liquidity position continues to strengthen, while FX reserves are growing

Net International Reserves(US$ BN)

14,8

11,310,0

8,7

3,5

0

4

8

12

16

Peru (Ba3/BB-) Chile (Baa1/A) Colombia (Ba2/BB) Russia (Baa3/BB+) Mexico (Baa2/BBB-)

Months of Import Coverage - Comparative Analysis (In months, 2003E)

Source: Central Bank (above) and S&P & Moody’s (below)

8

8,8

9,6

10,4

Ene-01 J un-01 Nov-01 Abr-02 Sep-02 Feb-03 J ul-03 Dic-03

10,5

16

5

6

7

8

9

10

11

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

53.4

46.942.8 44.3

51.9

66.171.2

73.9

1.21.1

0.8

0.4

0.30.3

0.8

1.3

0.00

0.35

0.70

1.05

1.40

1997 1998 1999 2000 2001 2002 2003 Feb 200430

40

50

60

70

80

Financial sector indicators continue to strengthen...

Source: Superintendencia de Banca y Seguros

Non-performing Loans(% of total loans)

Banking Sector Profitability

(%) Net Interest Income / Interest Income

Return on Assets

(%)

5,8

17

9,000

9,500

10,000

10,500

11,000

11,500

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

8,000

8,500

9,000

9,500

10,000

…as bank lending in soles increases...

(PEN MM)(US$ MM)

Source: Central Bank

Bank Lending

US Dollars

Soles

18

100 10050

100 10050

10050

100 10050

10050 50 30 50 70 80 100

50100

50

357

277

185

256316

192247

123

252 268

125164

124 10158

146 160 168198

96151

92

0

100

200

300

400 Amt Auctioned Amt Demanded

…and domestic issues become largely oversubscribed

Domestic Issues(PEN MM)

5.9 5.7 5.94.7 5.0 4.7 4.9 5.0

5.9 6.2

9.5

6.9 6.6 6.57.3 7.5

456789

10

Apr May Jun Jul Aug Oct Nov Feb Oct Nov Jul Sept Dec Jan Feb Mar

Interest Rates (multiple maturities)(%)

2004

May(10/04)

May(1/05)

Jun(6/05)

Jun(6/10)

Jul(6/05)

Jul(6/08)

Aug(8/06)

Sept(6/08)

2005 2008

Source: MEF

Oct(10/07)

Oct(8/06)

20072006

Issue Date:

Maturity:

Issue Date

Maturity

Nov(08/06)

Nov(10/07)

Dic(7/08)

Dic(12/13)

Mar(6/04)

Abr(10/04)

Ene(1/14)

Ene(708)

Feb(8/06)

Feb(2/09)

Mar(3/10)

Mar(2/09)

2009

19

Agenda

Executive Summary

Economic Update

Financial Developments

Fiscal Policy

Government Debt

Trade & Investment

20

On the fiscal front, the ongoing efforts to boost tax collection are yielding impressive results

Tax measures implemented in 2002-2003 were aimed at widening the tax base, and curb evasion by strengthening the tax collection agency

As a result of past tax measures, revenues are expected to increase by 1% of GDP on an annual basis

Recent tax measures are expected to increase revenues an additional 0.6% of GDP for 2004

Internal Tax Collection (% change yoy)

Source: SUNAT

-30.0

-15.0

0.0

15.0

30.0

45.0

11,1

21

Agenda

Executive Summary

Economic Update

Financial Developments

Fiscal Policy

Government Debt

Trade & Investment

22

The macroeconomic framework 2002-2006 points to a consolidation of the economic recovery

Source: MEF & Central Bank

Macroeconomic Framework 2002 2003 2004F 2005F 2006F

GDP growth rate (%, yoy) 4.9 4.0 4.0 4.5 5.0

Current account (% of GDP) -2.1 -1.8 -0.8 -0.8 -0.8

Inflation (% change, Dec-Dec) 1.5 2.5 2.5 2.5 2.5

Exports of Goods and Services (%-change, yoy) 8.6 17.1 22.5 5.6 7.3

Non-Financial Public Deficit (% of GDP) -2.3 -1.9 -1.5 -1.0 -0.5

Primary Balance (% of GDP) -0.3 0.1 0.6 1.2 1.8

Total Public Sector Debt (% of GDP) 47 47.5 45.0 43.1 40.7

23

Peru has a flexible and manageable financing plan for 2004

Source: MEF

Millions of US Dollars 2004F

Uses 2574

Amortizations 1628

Fiscal Deficit 946

Sources 2574

External 2075

Multilateral 600

Bonds 1000

Project Related 450

Other 25

Internal 499

Local Market Bonds 550

Other -51

24

Agenda

Executive Summary

Economic Update

Financial Developments

Fiscal Policy

Government Debt

Trade & Investment

25

TRADE PERU-UK

The UK is Peru's first trading partner in the EU and second market for Peruvian exports after the US, with 12.32% in 2003. Exported value is US$ FOB 1 092.48 m in 2003.

Main Peruvian exports during 2003 have been gold (89.52%), refined copper (2.16%), fishmeal (1.99%), tin (0.84%), grapes (0.71%), asparagus (0.65%), coffee (0.56%), mandarines (0.27%), avocado (0.21%) and zinc oxid (0.21%).

BILATERAL TRADE PERU-UK 2003 (in m US$)

1998 1999 2000 2001 2002 2003

EXPORTS (FOB) 267 562 581 935 873 1 092

IMPORTS (CIF) 93 82 93 90 74 80

BALANCE 175 480 488 844 799 1013

TOTAL TRADE 360 644 675 1,025 947 1172

26

BRITISH INVESTMENT IN PERU

The UK is the second source of long term investment for Peru, after Spain. The framework for British investment is the Bilateral Investment Treaty of 1993.

In2003, British investment was US$ 2,734 m, 22% of the accumulated stock.

In 1990, UK investment was the third and rose from 7.54% of total stock beginning the 90s, to 22%.

UK investment is mainly in mining, communications, finance, trade, industry, service, energy, tourism, transport, agriculture, construction, housing and oil.

The UK supported recently the IADB financing for the Camisea natural gas project.

27

BRITISH INVESTMENT IN PERU Total UK %Gth %FDI Rank

1990 1,304 98 - 7.53 3º

1991 1,337 107 9 8.01 3º

1992 1,504 127 18 8.45 3º

1993 1,642 142 11 8.64 3º

1994 4,451 380 168 8.53 3º

1995 5,060 520 37 10.27 3º

1996 6,237 774 49 12.41 3º

1997 7,280 1,000 29 13.74 3º

1998 8,076 1,274 27 15.78 3º

1999 9,475 2,021 59 21.34 2º

2000 10,907 2,184 8 20.02 2º

2001 11,604 2,362 8 20.36 2º

2002 12,273 2,696 14 21.96 2º

2003 12,396 2,735 1.5 22.06 2º

 

28

YUNCAN HYDROELECTRIC CENTRAL

Enersur was awarded, by offering US$ 205 m, the contract of use for Yuncan, signed on Feb 16 2004. The payments are US$ 57.6 m as contract right, US$ 124.5 m in 17 years as use right to pay the Japanese Bank for International Cooperation and US$ 23 m in 17 years as a social contribution for the development of the Pasco Department. The use contract was signed on February 16, 2004.

 Located 340 Km north-east Lima, consists of the construction of a Hydroelectric Center with 130 Mw installed power, including 3 generators of 44,5 Mw each, to produce 901 Gwh per year, as well as building 50 Km of 220 Kw Transmission Lines for interconnection with the National Electric System.

During the final stage of construction the awarded bidder will make a number of advance payments to finance the contribution of the Peruvian State. Such payments shall be made monthly, from February 16, 2004 up to July 30, 2005 (date of deliver).

The State guarantees the user a refund of the advanced payments if the contract is rescinded for failure to deliver the central within the maximum term established, that is, within twelve months after the planned delivery date.

 

29

BAYOVAR PHOSPHATES

Phosphate concessions located on the Northern Coast, 1,000 Km from Lima. Reserves estimated at 816 million tons, equivalent to 262 million tons of phosphoric rock concentrates with 30% content of P2O5. Potential reserves are estimated at 10 billion tons.

Mining concessions cover 74,059 hectares in the phosphate zone, which include 6,300 Ha in the underground water extraction area.

There is access to the mine through a road from Piura and Lima, direct access to the National Power Grid, water available in the zone, facilities for the construction of new port, labor force available in the area. A pilot treatment plant is available, with an annual production capacity of 80,000 metric tons of phosphoric rock (30.5 % P2O5), which includes a 72-hectare treatment area.

Information Memorandum is available to the interested parties.

The invitation for bids is expected for the second quarter of 2004.

30

LAS BAMBAS COPPER PROJECT

Located in Apurímac, 260 Km from Cuzco by road, altitude between 4,400 and 4,650 m above sea level.

Comprises the Chalcobamba, Ferrobamba, Sulfobamba and Charcas deposits, with an area of 31,798 Has. Copper deposits are skarn type, with sulfides, oxides and iron. Gold mineralisation exploring potential.

Proven reserves of 40.5 million tons, grades over 2% copper and 500 million tons exploration potential.

Las Bambas is connected by road with Cuzco, has access to ports San Nicolás in Marcona and Matarani in Arequipa, is powered by National Interconnected Grid. The Camisea project is in the area of influence and skilled labour is available in the area.

14 bidders have already qualified and the awarding criterion will be the offered royalty.

A diamond drilling program (2,500 m) is under execution to provide better geological knowledge to the bidders.

Social agreements with local and regional authorities have been already signed in order to support the private investment promotion process of this project.

The public bidding is due on 2 July 2004.

 

31

ROAD SECTIONS OF MULTIMODAL AMAZON AXIS OF IIRSA

Peru takes part in the twelve-country “Initiative for Integration of South America Regional Infrastructure” (IIRSA for its Spanish acronym) agreed upon at the 2000 South American Chiefs of State Summit.

Three axis of four in this plan connect our country with Brazil, the largest internal market of South America, providing increasing opportunities for investment, trade, tourism and strategic alliances. On the other hand Brazil would be able to trade with Asia via the Pacific Ocean.

The southern axis will allow integration between Bolivia, the Brazilian states of Acre, Rondonia, Matto Grosso, Matto Grosso do Sul and the Peruvian Southern Macroregion. The northern axis would allow integration of our North Amazon and Central regions with Brazil’s Amazon State and the industrial city of Manaos.

32

NORTH: PAITA- PIURA- CORRAL QUEMADO- RIOJA- TARAPOTO- YURIMAGUAS

The North Amazon Multimodal Axis includes the road sections between Paita in the coast and Yurimaguas in the Northern Amazon –960 Km–, as well as investment on the river ports of Yurimaguas and Iquitos. This will allow navigability in the Huallaga and Marañón rivers connecting Yurimaguas and Iquitos with Brazil.

The private investment promotion process for this project started on March 8, 2003 and the call for bids in the International Public Tender to give the project in concession was published on August 25, 2003.

The concession will be awarded to the bidder submitting the lowest economic proposal. The payment schedule includes an annual payment to the State –minimum 10 years– and payment for operation and maintenance during a 20-year period.

The estimated investment amount is US$ 134 million, maintenance and operation expenses are close to US$8 million a year.

The call for bids was issued on August 25, 2003, the project may be awarded in the third quarter of 2004.

33

CENTER: LIMA- RICARDO PALMA- LA OROYA- CERRO DE PASCO- HUANUCO- TINGO MARIA-

PUCALLPA

The Central Amazon Multimodal Axis includes the road sections between Lima and Pucallpa (867.2 Km), as well as investment for the Pucallpa River port providing navigability in the Ucayali River between Pucallpa and Iquitos.

The project includes rehabilitation of the San Alejandro–Neshuya road section, care of critical points in the section Pumahuasi Bridge – Chino Bridge and maintenance for all road sections. In addition, the concessionaire may be given the option to develop a second stage of connection between the Ricardo Palma Bridge to the Ramiro Prialé Road, if approved by the Ministry of Transport. There is also an option to develop infrastructure for the Pucallpa River port.

The concession will be awarded to the bidder submitting an economic proposal considering the lowest present net value of revenues from toll collection. The estimated amount of investment is approximately US$ 59 million, the maintenance and operation expense will average approximately US$ 8 million per year.

The call for bids was issued on October 16, 2003 so that the project may be awarded in the fourth quarter of 2004.

34

EL CHACO - LA PUNTILLA TOURISM PROJECT

Design, construction and operation of a Tourist Complex adjacent to the Paracas National Reserve, located on government land, approximately 27.8 Ha, facing Paracas Bay, approximately 250 Km from Lima, 10 minutes from Pisco International Airport and 15 minutes from San Martin port.

This scheme divides the land in five independent areas, each one having a front to the Pacific Ocean and the opposite side facing the Pisco-Paracas road.

Plot A, with an area of 11,592.86 m 2 for a lodge, Plot B, with an area of 17,517.52 m 2 for a hostel, Plot C, with an area of 62,188.15 m 2 for a resort, Plot D, with an area of 176,830.79 m 2 for a vacation housing development, Plot E, with an area of 6,540.21 m 2 to be transferred to the Paracas town for construction of a wharf.

 Economic proposals must consider a social contribution to be offered for Plot A, Plot B or Plot C.

 The estimated investment for Plots A, B, C and D is US$ 6 million approximately.

 The invitation to bid has been published during first quarter 2004.

 

35

REGIONAL AIRPORTS

Peru is a country with important tourism potential. One million tourists visited Peru in 2001 and our goal for 2006 is three million. The country’s geographical location is ideal for a Latin American trade hub link with Asia Pacific.

This project involves modernisation of a set of 19 airports and airfields throughout the country, managed by the Peruvian Corporation of Civil and Commercial Aviation (CORPAC). Likewise, Law Nº 27528 issued in October 2001 assigned to Proinversion the task of updating Final Feasibility Studies for a new airport for the town of Chinchero - Cuzco, which was carried out by the British Consortium Currie & Brown/ Masons, selected by international tender, during the first half of 2002.

The government will set service, quality and safety standards to be met by each airport and will transfer them under the DBFOT (design, build, fund, operate and transfer) system.

For contract awarding, the main factor will be the lowest contribution by the State. The duration of concession contracts is 25 years.

Total investment required for the 19 airports that were suggested by Currie & Brown/ Masons was estimated at US$ 153 million.

Awarding of bids for the first airport package should take place during the second quarter of 2004.

36

LIMA ELECTRIC TRAIN

The municipality of Lima is promoting the building concession for the first phase of the Lima Urban Train, from Villa El Salvador to the 2 De Mayo Hospital Station (21.5 Km), including a 33 year concession contract, 3 years for project completion, commitment by the private operator, transfer to the private operator, for use and usufruct of existing operating assets, partially constructed civil works and detailed engineering for the stretch to be constructed. 

A significant part of the infrastructure has already been built and will be provided as part of the concession: 9.85 Km of double line, of which 1.96 K, is elevated, 7 stations, 120 m length platforms can accommodate 6-car trains. Also five 6-car trainsets plus 2 spare cars, supplied by Fiat-Ansaldo-Breda, 22 motor cars and ten trailers, all in new condition, maintenance yard with control center, car cleaning facilities, emergency power plant with 3 Mw capacity and a 60/20 Kv substation. 

The bidding process will be conducted by Cepri Lima, a special unit created by the Municipality to promote private investment in infrastructure projects. It will be a single round - sealed envelope process and will include technical and financial pre-qualification of operators, a draft of concession contract, and bid and performance bonds. 

The prequalification process will last until May 2004, the tender offer will take place during the second half May 2004 and the process will close on June 2004.