InflatIon RepoRt: Recent trends and macroeconomic forecasts … · 2020-01-26 · Recent trends and...

Recent trends and macroeconomic forecasts 2012-2013

InflatIon RepoRt:

Central Reserve Bank of Peru441-445 Antonio Miro Quesada. Lima 1Telephone: 613-2000 - Fax: 613-2525

Mail: [email protected]

Exchange rate

Interest rate

Credit and liquidity

International environment

Public finance

Economic activity

(Output gap)Inflation

Inflationexpectations

Supplyshocks

Demandshocks

Financialshocks

Monetarypolicy:

Reference interest rate and quantitativeeasing instruments

INFLATION REPORTRecent trends and macroeconomic forecasts

CENTRAL RESERVE BANK OF PERU

This Inflation Report was drawn up using data on gross domestic product, balance of payments, and operations of the non-financial public sector as of December 2011, and data on monetary accounts, inflation, financial markets, and foreign exchange rate as of February 2012.

Foreword ........................................................................................... 5

Summary ............................................................................................ 6

I. International environment ............................................................ 10

II. Economic activity .......................................................................... 39

III. Balance of payments ................................................................... 58

IV. Public Finances ............................................................................ 70

V. Monetary policy ............................................................................ 87

VI. Inflation ........................................................................................ 108

VII. Balance of risks ............................................................................. 116

Boxes1. Greece’s second bailout package and debt restructuring program ....................... 37

2. Electricity sector: Supply-demand balance at the national and regional

levels, 2012 - 2013 .................................................................................................. 54

3. Growthanddiversificationofnon-traditionalexports(1996–2011) ...................... 65

4. Method used to calculate the structural balance .................................................... 82

5. Recent amendments to the Fuel Price Stabilization Fund ..................................... 84

6. Debt and systemic risk: The role of macroprudential instruments ......................... 100

7. Financial dollarization: Difference between natural persons and legal entities ....... 102

8. Microprudential and macroprudential instruments ................................................ 103

9. Dedollarization of pensions included in the private pension system ........................ 105

Pág.

CONTENT

InflatIon RepoRt:

Recent trends and macroeconomic forecasts 2012-2013

March 2012

5

Inf la t ion Report . March 2012

Foreword

• AccordingtothePeruvianConstitution,theCentralReserveBankofPeru(BCRP)isapublicautonomousentitywhoseroleistopreservemonetarystability.

• In order to consolidate this goal, the Bank’s monetary policy is based on aninflationtargetingscheme,withaninflationtargetof2.0percent,plusorminusonepercentagepoint(between1.0percentand3.0percent).TheCentralBank’sinflation target is aimed at anchoring inflation expectations at a similar levelto the inflation rate in developed countries and reflects the BCRP’s permanentcommitmentwithmonetarystability.

• Thenatureofmonetarypolicyispreventiveandthereforeisaimedatanticipatinginflationary or deflationary pressures, taking into account that inflation may beinfluencedbyfactorsbeyondthecontroloftheCentralBank,suchassupplyshocksor thepricesof importedproducts,whichmay result in transitorydeviationsofinflation from the target. The Central Bank considers the annual increase in theconsumerpriceindexrecordedineachmonthandnotonlyatyear’send.

• Each month, and according to a previously announced schedule, the Board oftheBCRPapprovesareferenceratefortheinterbanklendingmarket.Thisinterestrate,whichisthemonetaryoperationaltarget,affectstherateofinflationthroughseveralchannelsindifferenttimeframesand,therefore,isdeterminedonthebasisofmacroeconomicforecastsandsimulations.

• Additionally,theCentralBankimplementspreventivemeasurestopreservefinancialstabilityandmonetarypolicytransmissionmechanisms.Throughinterventionsintheforeignexchangemarket,theCentralBankreducesexcessivevolatilityintheexchangerateandaccumulatesinternationalreserves,thusdevelopingstrengthstofacenegativeeventsinaneconomywithstillahighleveloffinancialdollarization.The Central Bank also uses other monetary policy tools that affect the volumeof liquidityandcredit inamoredirectmanner,suchasreserverequirements indomesticcurrencyandinforeigncurrency.

• The forecasts on which monetary policy decisions are based are disseminatedthroughtheInflationReporttoshowtheconsistencyofthedecisionsadoptedwiththeaimthateconomicagents’expectationstaketheseforecastsintoaccount.TheCentralBankalsodisseminatesthestudiesanalyzingtheriskfactorsthatmaycausedeviationsintheforecastsoftheeconomicvariablesconsidered.

• TheCentralBankwillpublishitsnextInflationReportinJune2012.

6


Summary

i. UncertaintyinfinancialmarketsassociatedwiththedebtcrisisintheEurozonehasdeclinedsinceDecemberduetotheagreementreachedregardingasecondbailoutprogramforGreeceandduetotheliquiditysupplypolicyadoptedbytheEuropeanCentralBank.Thisdeclineinuncertaintyhasalsobeenfavoredbythebetter-than-expecteddataofeconomicactivityindevelopedcountries(especiallyintheUnitedStates).

Although the probability of a new global recession has decreased significantly,therearestillrisksassociatedwiththeproblemsintheEurozoneandwiththeriseinthepriceofoilregisteredrecently.Inthisscenario,therateofglobalgrowthin2012isstillforecastat3.3percent.Eventhoughgrowthindevelopedcountrieshasbeenrevisedontheupside,thisincreaseisoffsetbytheslightlylowergrowthforecastintheemergingeconomies.

ii. During 2011, the Peruvian economy grew at a rate of 6.9 percent, showing agrowth rate similar to the average one observed in the last eight years. Afterregisteringarateof8.8percent in2010,thepaceofgrowthmoderatedduring2011 towards levels closer to the rate of the potential output, in line with thedeclineregisteredinthegrowthrateofdomesticdemand.

A growth rate of 5.7 percent is estimated in the central forecast scenario for2012(5.5percentinourpreviousReport)consideringthehighertermsoftradeanticipatedandtheimprovementforeseeninconsumerandbusinessexpectationsrelativetoourlastReport.In2013GDPisforecasttogrow6.3percent.

iii. In contrast with the deficit registered in 2010 (0.3 percent), in 2011 the nonfinancialpublicsector(NFPS)recordedaneconomicsurplusof1.9percentofGDP.This balancewas associated, on theonehand,with the increase in the currentrevenuesofthegeneralgovernmentand,ontheotherhand,withtheslowdownin thepaceofgrowthof expenditure.Afiscal surplusof1.1percentofGDP isforecastfor2012.Thisprojectedsurplus,whichissimilartotheoneconsideredinourDecemberReportandintheMultiannualMacroeconomicPlan(1.0percentofGDP),impliesapositivefiscalimpulseofabout0.7percentagepointsofGDP.

For2013,thisreport’sbaselinescenarioconsidersabalancesimilartothefiscalsurplus

of1.4percentofGDPestimatedintheRevisedMultiannualMacroeconomicPlan.Thisprojectionincludeschangesinrevenueandexpenditureconsistentwithalongtermtrend.

iv. The current account deficit in 2012 has been revised downwards and is nowprojectedat1.5percentofGDP(2.2percentinourDecemberReport).Thisrevision

7


ismainlyduetotheimprovementobservedintermsoftradeasaresultoftheriseincommodityprices,althoughthiswouldbeoffsetbyanincreasedfactorincomeassociatedwithhigher exportprices. In2013 thedeficit in the current accountwouldincreaseto1.8percentofGDP,alowerfigurethantheoneestimatedinourDecemberReport(2.1percentofGDP).

v. Showing transitorily levelsabove the inflation target, inflation in2011 recordedarateof4.74percent.Thisresultwasinfluencedbybothexternalanddomesticshocks that affected the prices of food products and fuels. Climate anomaliesaddedontotheriseintheinternationalpricesofcommoditiesobservedsincethelastmonthsof 2010, affecting the supply of someperishable farmingproductsespeciallyinthesecondsemesterof2011.The12-monthchangeintheconsumerprice index declined from 4.74 percent in December 2011 to 4.17 percent inFebruary2012, reflecting thebeginningof the reversal of the shocks thatwereobservedinthepreviousyear.

Inflation excluding food and fuels –an indicator used internationally to excludesupplyshocks–showedarateof2.4percentin2011anddeclinedto2.2percentatFebruaryofthisyear.

As stated in our lnflation Report of December, the rate of inflation is expectedto gradually converge to the target range since Q3-2012 if the cost pressuresgenerated by significant increases in commodity prices subside and if inflationexpectationsremainwithinthetargetrange.Moreover,theupwardrevisionintheprojectionoffuelpricesisconsideredintheinflationforecast.

vi. Between December and March the Board of the Central Bank maintained thereferenceinterestrateat4.25percent,thesameratelevelmaintainedsinceMay2011.Thislevelofthereferenceratereflectsamonetarypolicypositionconsistentwithpersistinguncertaintyininternationalfinancialmarketsandwiththereversalofthesupplyshocksthatincreasedtherateofinflationduring2011.

In contrastwithourpreviousReportwhich considered adownwardbias in thebalance of risks in terms of inflation, a neutral balance of risks is considered inthisreportforinflation.Thischangetakesintoaccounttherecentevolutionoftheworldeconomy,the increaseduncertaintyabouttheevolutionofoilprices,andthebetterprospectsofthePeruvianeconomy.

vii. Thedownwardrisksintheinflationforecastarebothexternalanddomestic.Theexternal risks are associated with the possibility that an international financialcrisismayunfold,whilethedomesticrisksareassociatedwithacontextofslowerdemandgrowthduetothepostponementofsomeinvestmentprojects.

8


a. Uncertainty about the evolution of the world economy

Thebaselinescenarioconsidersalowergrowthrateintheworldeconomythisyear(3.3percentvs.3.7percentin2011)andarateof3.8percentin2013afterarecoveryintheeconomy.Theriskofaglobalrecessionhasdecreasedinrecentmonthsduetothe lesspessimisticviewthat internationalmarketshaveadoptedingeneralvis-à-vistheEurozonefinancialandfiscalproblems.However, should such an adverse scenario develop, this situation wouldcontribute to weaken external demand and affect the domestic economythroughthefinancialandtradechannels.

Thisscenariodescribesadropinglobaleconomicactivitycoupledbyadeclinein the termsof trade.Additionally, a rise inglobal uncertainty could createpanicamonginvestorsinternationallyandunfoldasuddenreversalofexternalcapitalswitharealdepreciationandanincreaseinthecountryriskindicator.

Iftheserisksmaterialized,theCentralBankwoulduseitsavailableinternationalreservesandthevariousmechanismsithastoinjectliquidityinbothdomesticandforeigncurrencytooffsettheimpactofsuchshocksondomesticfinancialconditions. The monetary policy stance in the forecast horizon would beexpansionarytopreventdeflationaryrisks.

b. Evolution of domestic demand.

In a scenario of higher uncertainty, there is the risk that domestic agents’expectationsmaydeteriorate,especiallyinthecaseofinvestment,whichcouldgeneratea lowerdynamisminaggregatedemandandleadtheeconomytogrowbelowitspotentialgrowthrategeneratingdownwardpressuresoncoreinflation.Inthisscenario,theCentralBankwouldeaseitsmonetarypositioninorderthatinflationfallswithintheinflationtargetrange.

On the other hand, there are two risks on the upside for inflation associatedmainlywithhigherforeigncapitalinflowsandhighercommodityprices.

c. Increased capital inflows

Thehighavailabilityofliquidityininternationalmarketsduetotheaggressiveexpansionofcentralbanks’balancesindevelopedcountries,togetherwiththescarceattractiveinvestmentoptionsobservedintoday’scontextofhighglobaluncertainty,couldleadtoaflowofforeigncapitalstoemergingcountriessuchasPeru,generatingasimilarsituationtotheoneobservedpriortothecrisisthatstartedtowardstheendof2008.Ontheonehand,anincreasedcapitalinflowwouldacceleratetheexpansionofcredit,thusstimulatingaggregatedemand

9


andinflation.Ontheotherhand,thiswouldcauseappreciatorypressuresontheforeignexchangeratethatwouldtranslateintolowerdomesticinflation.Itisestimatedthattheneteffectofanincreasedcapitalinflowoninflationwouldbeslightlypositive.

In this scenario, the Central Bank would adjust its monetary policy includingmacroprudentialpolicy instruments,suchastheratesofreserverequirements, ifapaceofcreditexpansionthatcouldaffectmonetaryandfinancialstabilityisperceived.

d. Imported inflation or adverse climate conditions

Thereistheriskthatglobalinflationarypressureswillbemorepersistentthancurrently estimated in the baseline scenario. Uncertainty about how policymakerswillcopewithfinancialproblems,especiallyintheEurozone,ishavingastrongimpactonthelevelofglobaleconomicactivity.Amoredeterminedandcredibleeconomicpolicyinmostdevelopedcountriescouldgenerateaconfidenceshock,whichcouldleadtohigherglobaldemand.Iftheshocksarepersistent,theymayaffecttheevolutionofdomesticinflationthroughhigherimportedcosts,whichcouldgenerateinflationarypressures.

TheriskthatoilandoilderivativeswillshowhigherinternationalpriceshasalsoincreasedduetothepoliticaltensionsobservedintheMiddleEastrecently.Inthedomesticarea,thereisstilltheriskthatadverseclimateconditionsmayaffectthenormalsupplyofagriculturalproducts.

In this scenario, theCentralBankwouldadjust itsmonetarypositiononly ifimportedinflationaffectedeconomicagents’expectationsofinflation.

In summary, the balance of these risks shows a neutral balance in the inflation

forecastforend2012.

INFLATION FORECAST: 2012 - 2013(Last12month%change)

7

6

5

4

3

2

1

0

-1

7

6

5

4

3

2

1

0

-12010 2011 2012 20132006 2007 2008 2009

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I. International environment

1. GlobaleconomicactivityhashadapositiveevolutionsinceourlastInflationReportwas published. Aggregate indicators of activity, such as the global purchasingmanagers’index(PMI)recordeditshighestlevelinayear,whilethemanufacturingindexandtheservicesindexremainedentheexpansionarea(over50)forthreeandtwelveconsecutivemonths,respectively.

Graph 1JP MORGAN GLObAL PMI MANUFACTURING AND SERVICES

(February2007-February2012)

Source:Bloomberg.

Feb.0730

35

40

45

50

55

60

65

Feb.08 Feb.09 Feb.10

56.5

51.1

Feb.11 Aug.11 Feb.12Aug.07 Aug.08 Aug.09 Aug.10

Services Manufacturing

Graph 2

*PMIindex.Source:Bloomberg.

DEVELOPED COUNTRIES: February 2007 - February 2012Manufacturing index*

DEVELOPED COUNTRIES: February 2007 - February 2012Services index*

Feb.07 Feb.07Feb08 Feb.08Aug.09 Aug.09Aug.10 Aug.10Feb.12 Feb.12Aug.11 Aug.11Aug.07 Aug.07Feb.09 Feb.09Aug.08 Aug.08Feb.10 Feb.10

57.352.4

53.8 51.2

48.8 49.0

Feb.11 Feb.11

*PMIindex.Source:Bloomberg.

25 2530 30

40 40

50 50

60 60

35 35

45 45

55 55

65 65

USA USAUnitedKingdom UnitedKingdom JapanEurozone Eurozone

50.5

Otherindicatorsofactivityinthemajordevelopedcountries–UnitedStates(USA),Germany,andJapan–show,ingeneralterms,abetterevolutionthanpreviouslyanticipated. Consumer confidence has improved due to expectations that lowinterestrateswillbeobservedforquiteawhile,aswellasduetotheadditionalstimulusimplementedinsomeeconomies.Inlinewiththis,globalgrowthwouldhaveregisteredarecovery inQ1-2012afterhavingexperiencedaslowdowninQ4-2011.

Dec-2010 Dec-2011 Jan-2012 Feb-2012Services 56.9 53.0 55.3 56.5Manufacturing 55.5 50.5 51.3 51.1

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2. As inourprevious InflationReport, theworldeconomy is forecast togrow3.3percentin2012and3.8percentin2013.Theslightlyhighergrowthrateestimatedin developed countries –due to the evolution of activity in the United StatesandGermany,as reflected in recent indicatorsofactivity–wouldbeoffsetbyalowerdynamisminemergingcountrieswhich, inmanycases,continuetoshowinflationarypressures.Moreover,theestimatedaverageGDPofourmaintradingpartnershasbeenrevisedontheupsidefrom2.7to2.9percentfor2012andfrom3.1to3.2percentfor2013.

Graph 3QUARTERLY SEASONALLY ADJUSTED WORLD GDP GROWTH: 2008 -2011

(Annualizedrates)

Source:JPMorgan.1Q.08

3.6

2Q.08

2.1

3Q.08

0.0

4Q.08

-5.7

1Q.09

-5.2

2Q.09

3.5

3Q.09

4.6

4Q.09

5.6

1Q.10

5.4

2Q.10

4.6

3Q.10

3.9

4Q.10

4.3

1Q.11

3.8

2Q.11

2.5

3Q.11

3.7

4Q.11

2.5

TherisksofaglobalrecessionhavedecreasedcomparedtocontextdiscussedinourpreviousInflationReport,eventhoughuncertaintyaboutsomeEurozonecountriesremains,whichimpliesadownwardrisk.Anewriskfactoristheincreaseinthe

Table 1WORLD GDP GROWTH

(Annual%change)

2012 2013 2008 2009 2010 2011 IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12

Developed countries 0.1 -3.6 3.2 1.5 1.3 1.4 1.9 2.0Of which 1. United States -0.3 -3.5 3.0 1.7 1.8 2.3 2.1 2.42. Eurozone 0.4 -4.2 1.9 1.4 -0.6 -0.6 0.9 0.8 Germany 1.1 -5.1 3.7 3.0 0.1 0.2 1.2 1.2 France -0.1 -2.7 1.5 1.7 -0.3 -0.2 0.8 0.83. Japan -1.0 -5.5 4.4 -0.9 2.0 1.9 1.9 1.94. United Kingdom -1.1 -4.4 1.8 0.9 0.9 0.3 1.6 1.2Developing countries 6.0 2.8 7.4 6.0 5.5 5.4 5.8 5.7Of which 1. DevelopingAsia 7.8 7.2 9.5 7.7 7.4 7.2 7.6 7.5 China 9.6 9.2 10.4 9.2 8.2 8.2 8.4 8.2 India 6.2 6.8 10.1 7.1 7.5 7.1 7.7 7.72. Central and Eastern Europe 3.1 -3.6 4.5 4.9 2.8 2.2 3.5 3.33. LatinAmericaandtheCaribbean 4.3 -1.7 6.1 4.3 3.5 3.7 3.8 3.8 Brazil 5.2 -0.6 7.5 3.0 3.4 3.4 4.0 4.0World Economy 2.8 -0.6 5.2 3.7 3.3 3.3 3.8 3.8Memo: Trading partners 1/ 2.6 -1.3 4.5 3.5 2.7 2.9 3.1 3.2BRICs 2/ 7.7 5.4 9.2 7.4 6.9 6.9 7.2 7.1

Source: Bloomberg, IMF, Consensus Forecast. 1/ Basket of Peru’s 20 main trading partners. 2/ Brazil, Russia, India, and China.

12


Graph 5GDP GROWTH: 2001-2013

6.05.04.03.02.01.00.0

-1.0-2.0

4.03.02.01.00.0

-1.0-2.0-3.0-4.0

4.03.02.01.00.0

-1.0-2.0-3.0-4.0

16.014.012.010.0

8.06.04.02.00.0

7.06.05.04.03.02.01.00.0

-1.0-2.0-3.0

World Economy

USA

Developed countries

China

Developing countries

Latin America

2.8

-0.3

0.1

9.6

6.0

4.3

Average2001-2007:4.1

Average2001-2007:2.4

Average2001-2007:2.4

Average2001-2007:10.8

Average2001-2007:6.6

Average2001-2007:3.6

-0.6

-3.5

-3.6

9.2

2.8

-1.7

5.2

3.0

3.2

10.4

7.4

6.1

3.7 3.3 3.8

1.7

1.5

9.2

4.3

5.4 5.7

2.42.3

1.42.0

8.2 8.23.7 3.8

6.0

2003 200420022001 2005 2006 2007 2008 2009 2010 2011* 2012* 2013* 2003

2003

2003

2003

2004

2004

2004

2004

2002

2002

2002

2002

2001

2001

2001

2001

2005

2005

2005

2005

2006

2006

2006

2006

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011*

2011*

2011*

2011*

2012*

2012*

2012*

2012*

2013*

2013*

2003 200420022001 2005 2006 2007 2008 2009 2010 2011* 2012* 2013*

2003 200420022001 2005 2006 2007 2008 2009 2010 2011* 2012* 2013* 2003 200420022001 2005 2006 2007 2008 2009 2010 2011* 2012* 2013*

2013*

2013*

6.0

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

10.0

8.0

6.0

4.0

2.0

0.0

Japan

-1.0

Average2001-2007:1.6

-5.5

4.4

-0.9

1.91.9

5.04.03.02.01.00.0

-1.0-2.0-3.0-4.0-5.0-6.0

Germany

1.1Average

2001-2007:1.4

-5.1

3.7

0.2

3.01.2

*Forecast.

Graph 412 MONTH INFLATION: January 2007 - January 2012 (%)

Jan.07 Jul.07 Jan.08 Jul.08 Jan.09 Jul.09 Jan.10 Jan.11Jul.10 Jul.11 Jan.12

12

10

8

6

4

2

0

-2

GlobalDevelopedEmerging

Source:FMI.

priceofcrudewhichwouldimplyanegativesupplyshockandhigherinflationarypressures.

13


3. InUSA,severalindicatorsofactivity,employment,andconfidenceconfirmabetterevolutionthantheonepreviouslyforeseen.ConsumptioncontinuedrecoveringinQ4-2011(withanexpansionof2.1percent)andrecentindicatorsofconfidenceshowapositiveevolution.

Theseindicatorsareinlinewiththefavorableevolutionofemployment,giventhatover400thousandjobswerecreatedbetweenJanuaryandFebruary.Eventhoughnearly3.5millionjobshavebeencreatedsince2010,thisfigurerepresentsonly40percentofthejobslostduringthecrisis.

Investment grew 20.6 percent in Q4-2011, although a significant part of thisincrease is explainedby the accumulationof inventories. In contrastwithotherquarters,residentialinvestmentwasmoredynamiceventhoughitwascoupledbydropsinthepricesofhousesinthemonthofJanuary.Non-residentialinvestment,ontheotherhand,declinedinQ4.

Graph 6USA: REAL PERSONAL CONSUMPTION (12 month % change)

AND CONSUMER CONFIDENCE (Index of Univ. Michigan)

Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12

5.0

4.0

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

100

90

80

70

60

50

40

30

20

10

Confidence (right axis)

Consumption (left axis)

Table 2USA: SEASONALLY ADJUSTED GDP GROWTH (1Q.09-4Q.11)

(Quarterlyannualizedrates)

1Q.09 2Q.09 3Q.09 4Q.09 1Q.10 2Q.10 3Q.10 4Q.10 1Q.11 2Q.11 3Q.11 4Q.11

GDP -6.7 -0.7 1.7 3.8 3.9 3.8 2.5 2.3 0.4 1.3 1.8 3.0Personal consumption -1.5 -1.9 2.3 0.4 2.7 2.9 2.6 3.6 2.1 0.7 1.7 2.1 Durable 2.4 -4.0 20.3 -4.8 9.9 7.8 8.8 17.2 11.7 -5.3 5.7 15.3 Non Durable -1.0 -1.5 2.0 3.1 4.8 1.9 3.0 4.3 1.6 0.2 -0.5 0.4 Services -2.3 -1.7 -0.1 0.4 1.0 2.5 1.6 1.3 0.8 1.9 1.9 0.7Gross investment -46.7 -22.8 2.9 36.8 31.5 26.4 9.2 -7.1 3.8 6.4 1.3 20.6 Fixed investment -32.2 -17.0 0.7 -3.8 1.2 19.5 2.3 7.5 1.2 9.2 13.0 4.3 Non Residential -31.3 -15.8 -3.3 -3.7 6.0 18.6 11.3 8.7 2.1 10.3 15.7 2.8 Residential -35.4 -21.3 17.8 -3.8 -15.3 22.8 -27.7 2.5 -2.4 4.2 1.3 11.5Exports -29.0 -0.5 13.9 23.5 7.2 10.0 10.0 7.8 7.9 3.6 4.7 4.3Imports -34.0 -15.0 16.3 17.4 12.5 21.6 12.3 -2.3 8.3 1.4 1.2 3.8Government expenditure -1.7 5.9 1.3 -0.9 -1.2 3.7 1.0 -2.8 -5.9 -0.9 -0.1 -4.4

Source:U.S.BureauofEconomicAnalysis(BEA).

14


Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12

11

10

9

8

7

6

5

4

3

500

300

100

-100

-300

-500

-700

-900

Unemployment rate (left axis)

Employment change in thousands (right axis)

ThousandRate %

Graph 7USA: EMPLOYMENT AND UNEMPLOYMENT RATE

Source:Bloomberg.

Thesebetterindicatorsofactivity,employment,andconfidencewereobservedinacontextoflowerinflationarypressures.TotalCPIinflationclosed2011recordingarateofbelow3percentandcoreinflationshowedarateof2.3percent,whileinflationexpectations remainedstableat3percent. In its lastcommuniqué, theFederalReserve(FED)confirmedthatitwouldprobablymaintainlowinterestratesatleastuntilend2014.

Monetarystimuluswillcontinuetobemaintained inacontextofa reductionofthe fiscal deficit during the next years. It should be pointed out that the fiscalconsolidation measures for the next 10 years are still in the process of beingdiscussed.Lackofpoliticalagreementinthisarea,whichcouldleadtoadisorderlyadjustmentoffiscalaccounts,isariskfactorforgrowth.

Inthiscontext,theforecastongrowthinUSAin2012hasbeenrevisedupwards,from1.8percent(InflationReportofDecember2011)to2.3percent,inlinewiththe execution in Q4-2011, with the gradual improvement of the labor marketand of activity and confidence indicators, with the Federal Reserve’s continuedmonetarystimulus,andwithloweruncertaintyintheEurozonecountries.

4. GrowthprospectsintheEurozonehavebeenaffectedbythesovereigndebtcrisis.The worsening of financial conditions, the fiscal adjustments implemented, andthedeteriorationofconfidenceexplainthisunfavorableevolutionofactivityinthisregion.MostinvestorsestimatethatthecontractionregisteredinQ4-2011wouldextendatleastuntilthefirstsemesterofthisyear.

InQ4-2011,GDPintheEurozonerecordedacontractionof1.3percent(annual

quarterlyrate).Moreover,recentindicatorsofactivityintheareasofmanufacturingandservicesalsoshowthatrecessionhascontinuedaffectingthisregioninQ1-2012.

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1Q.07

3.4

1Q.08

2.1

1Q.09

-10.5

1Q.10

1.6

1Q.11

3.1

3Q.07

2.5

3Q.08

-2.0

3Q.09

1.8

3Q.10

1.7

3Q.11

0.6

2Q.07

1.9

2Q.08

-1.5

2Q.09

-0.8

2Q.10

3.6

2Q.11

0.5

4Q.07

1.5

4Q.08

-6.8

4Q.09

1.4

4Q.10

1.1

4Q.11

-1.3

Source:Bloomberg.

Graph 8EUROZONE: QUARTERLY GDP EVOLUTION

(Seasonallyadjustedannualizedrates)

However,significantdifferencesareobservedbycountries.Themostimportanteconomies, Germany and France, had a better-than-expected performance inQ4-2011: economic activity in France grew 0.9 percent, whereas Germanyshowedaslightcontractionthatwaslowerthananticipated(0.7percentversus1.2percent).

In Germany, the growth of investment –especially investment in construction–hasbeenadeterminingfactorintheGDPresultinQ4-2011,whiletherecoveryof investors’ confidence and the maintenance of conditions in the labor markethaveplayedaroleinrecentmonths.However,GermanexportsinQ4-2011andmanufacturingexportordersinthefirsttwomonthsofthisyearwouldbeindicatingthatrisksforgrowthremainintheregion’smajoreconomy.

Ontheotherhand,theeconomieswithdebtproblemshaverecordedsignificantcontractions thatarehigher thanexpected in themarket (Portugal’scontractionof5percentstandsoutinthissense).Recentindicatorsshowthatthesedifferenttrendshavecontinuedsofarthisyear.

Graph 9EUROZONE: QUARTERLY GROWTH

(Seasonallyadjustedannualizedquarterlyrates)

Source:Bloomberg.Eurozone Germany France Italy Spain

1Q.11 3Q.11

3.1

0.5 0.6

-1.3

5.5

1.1

2.3

-0.7

3.8

-0.3

1.30.9 0.6

1.2

-0.7

-2.9

1.50.7

0.2

-1.2

2Q.11 4Q.11

16


Inlinewiththesedevelopments,aslightcontraction(0.6percent)isstillforecastintheEurozonein2012,Germanybeingtheonlyexceptionasthiscountrywouldbetheonlyonetoshowsomeexpansion.Our forecastsongrowthinGermanyandFrance,thetwolargesteconomiesinthisregion,havebeencorrectedslightlyupwardsrelativetoourpreviousReport.Eventhoughtheriskislowerthaninourpreviousreport,themainriskforthisforecastisstillthesovereigndebtcrisissinceuncertaintyaboutthefiscalsustainabilityofsomeeconomiespersistsdespitetheimprovementsmaderecently.

5. ThegrowthofGDPinJapanwasnegativein2011(-0.9percent)duemainlytothenaturaldisastersthataffectedthecountry inMarch(earthquake)and inOctober(floods in Thailand interrupted the logistics supply chain, affecting exports intheentireAsianregion).OnlyinQ3wasapositivegrowthrateobservedintheeconomy (7 percent in annual terms) due to the fiscal and monetary stimulusimplemented.ActivitycontractedagaininQ4-2011(2.3percent)duetoEurope’sfinancialproblemsandtothenaturaldisastersthatThailandcontinuedtosuffer.

Japan is expected to resume its growth path in 2012 as soon as the problems inEurope start being resolved and the effects of natural disasters are overcome. Forthesereasons,thegrowthforecastforJapanin2012and2013remainsat1.9percent.

6. Emergingcountriesareexpectedtocontinuegrowingathighratesduring2012and2013duemainlytothegrowthof investment inemergingAsiancountries.Thisregionisestimatedtocontinuegrowingatratesofover7percent.

In2012Chinawouldcontinueshowinghighgrowth rates (8.2percent)due tothedynamismofpublicandprivateinvestment,butwouldslowdowncomparedto2011(9.2percent)duetothelowerdynamismoftheexternalsector–athirdofChina’stradeiscarriedoutwithEurope–andduetothemeasuresadoptedbythe authorities in order to prevent the formation of price bubbles in the assetsmarkets.China implementedaseriesofmeasures in2011duetothe likelihoodofanoverheatingintherealestatesector,thegrowthofbankcredit,andrisinginflation. Among others, these measures included restrictions on purchases ofa secondor thirdhouse,highermortgage installments, limitsonbank loansbybankingentity,andincreasinginterestratesandtheratesofreserverequirements.

Morerecently, theChineseauthoritieshaverevisedtheirestimatedgrowthratefor2012from8.0to7.5percentintheirXIIFive-YearPlan(2012-2017).Thisrateisnotanobjective,butthisisasignthatistellingthemarketthatthedynamismoftheChineseeconomymustgraduallydecline.Inthelastdecade,forexample,Chinagrewatanaveragerateof9.4percent(8.7percentin2000-2005and10.2percent in 2006-2010), while the rate announced by the government was 8.0percent.

17


Graph 10CHINA: QUARTERLY GDP GROWTH AND REFERENCE RATE

Sep.

00

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

14.0

13.0

12.0

11.0

10.0

9.0

8.0

7.0

6.0

5.0

QuarterlyGDP(Annualchange)-rightaxis Referencerate(%)-leftaxis

9.1 8.99.59.7

Dec.0

0M

ar.01

Jun.

01Se

p.01

Dec.0

1M

ar.02

Jun.

02Se

p.02

Dec.0

2M

ar.03

Jun.

03Se

p.03

Dec.0

3M

ar.04

Jun.

04Se

p.04

Dec.0

4M

ar.05

Jun.

05Se

p.05

Dec.0

5M

ar.06

Jun.

06Se

p.06

Dec.0

6M

ar.07

Jun.

07Se

p.07

Dec.0

7M

ar.08

Jun.

08Se

p.08

Dec.0

8M

ar.09

Jun.

09Se

p.09

Dec.0

9M

ar.10

Jun.

10Se

p.10

Dec.1

0M

ar.11

Jun.

11Se

p.11

Dec.1

1

Interest rate GDP

Source:Bloomberg.

7. InLatin America,monthly indicatorsof activity and industrialproduction showsome slowdownofgrowthduring the first twomonthsof the year. The regionis expected to grow 3.7 percent in 2012, showing a lower rate than the onerecordedlastyear(4.3percent).

Theseresultsreflectthecontinuationofthetrendthatstartedin2011whenthepace of economic growth slowed down over the year. Growth, which was ledbydomesticdemand,wasoffsetbytheincreasinglylowerexternalstimulusandgrowthoftheindustrialsector.Ofthecountrieswithinflationtargeting,ChileandColombia registered the highest growth rates in comparison with the previous

TABLE 3 CHINA’S ECONOMIC INDICATORS: 2010 - 2012

2010 2011 2012 December March June September December February

ManufacturingPMI(50neutrallevel) 53.9 53.4 50.9 51.2 50.3 51.0

IndustrialProduction(12month%change) 13.5% 14.8% 15.1% 13.8% 12.8% 11.5%

Inverstmentinfixedassets(12month%change) 24.5% 25.0% 25.6% 24.9% 23.8% 21.5%

Retailsales(12month%change) 19.1% 17.4% 17.7% 17.7% 18.1% 14.7%

Exports(12month%change) 17.9% 35.8% 17.9% 17.1% 13.4% 18.4%

Imports(12month%change) 25.6% 27.3% 19.3% 20.9% 11.8% 39.6%

Newloans(Billionsofyuan) 481 679 634 470 641 711

CPI(12month%change) 4.6% 5.4% 6.4% 6.1% 4.1% 3.2%

Foodprices(12month%change) 9.6% 11.7% 14.4% 13.4% 9.1% 6.5%

Source: Bloomberg.

18


year. InBrazil,growthsloweddowndueto theweakeningofconsumptionandprivateinvestment.

Inflationarypressures(duebothtosupplyandtodemandfactors)havealsobeenobserved in the region. Because of this, many Latin American countries havedecidedtoraiseinterestratesduringthefirstsemesterof2011andmakeapausein thewithdrawalofmonetarystimulusas fromthesecondsemester.However,thedifferentdegreesofslowdownoftheseeconomieshavedetermineddifferentpolicyreactions.Thus,whileBrazilhascutitspolicyrateby225bpssinceAugust,theCentralBankofColombiahasraiseditby50bpssofarthisyear.

Graph 11LATIN AMERICA: GDP GROWTH FORECAST*

*ConsensusEconomicsandBCRP(Peru).

2012

3.3

4.4

3.4 3.4 3.6 3.5 3.74.4 4.1 4.1 4.2 4.2 4.2

1.4

4.34.9

4.54.1

4.9 4.7

5.76.32013

Brazil Mexico Argentina Paraguay Bolivia Uruguay Venezuela Chile Ecuador Colombia Peru

EasternEuroperegisteredonaverageamoderategrowthin2011,withmarked

dif ferences as in the cases of Hungary and Turkey, which are estimated tohavegrown1.6and8.1percent,respectively.In2012and2013thisregionwouldgrowatlowerratesduemainlytotheevolutionoftheEurozone,thisef fectbeingpartiallyof fsetbythehighpricesofcommoditiessuchasoilandgas.

Financial markets

8. Financial markets were strongly influenced by uncertainty about Greece andother Eurozone countries with debt problems. At the time of writing thisreport,marketvolatilityhasdeclined.TheVIXindexhasdroppedfromlevelsof23atend2011to18inearlyMarch.Inadditiontolowerriskaversionafterthe arrangement reached with Greece, this result would be reflecting betterprospectsforglobalgrowth,andparticularlyforsomeofthemajordevelopedeconomies,suchasUSAandGermany.The indicatorsof thesovereigndebt,money, foreignexchange,andglobalstockexchangemarketshavereflectedthislowerriskaversion.

19


Graph 12RISk AVERSION COEFFICIENT: VIX (S&P’500)

(January2008-March2012)

Jan.080

102030405060708090

Nov.08 Sep.09 Jul.10 May.11Jun.08 Apr.09 Feb.10 Dec.10 Oct.11 Mar.12

Source:Bloomberg.1/ThecoefficientofimpliedvolatilityisderivedfromoptionsmarketintheS&P’500.Theratiomeasuresmeasurestheriskaversioninthestockmarkets.

9. Financialconditionsinsovereign debt marketshaveimprovedsignificantly,andespecially in the case of Italian markets which were being affected by fears ofcontagion. The fiscal adjustment measures and structural reforms announced,andthenewfiscalagreementandthemonetarypolicymeasuresadoptedbytheEuropean Central Bank (ECB) have positively influenced the evolution of thesemarkets,althoughwithoutreachingyettheconditionsobservedpriortothedebtcrisis.

Table 4SOvEREIGN SPREADS OF DEvELOPED COUNTRIES

End of period Change in bps Dec.08 Dec.09 Dec.10 Dec.11 Mar.12* Dec.11 Dec.10 Dec.09 Dec.08 (5) (4) (3) (2) (1) (1)/(2) (1)/(3) (1)/(4) (1)/(5)

CDS (pbs)

USA 67 38 42 49 32 -17 -10 -6 -35United Kingdom 107 83 74 98 61 -37 -13 -22 -46Germany 46 26 59 102 72 -31 12 45 26France 54 32 107 220 174 -46 67 142 120Spain 101 113 348 380 405 24 57 291 304Italy 157 109 238 484 366 -118 128 257 209Greece 232 283 1,026 8,786 25,423 16,636 24,396 25,139 25,191Portugal 96 92 497 1,082 1,323 242 826 1,232 1,227Ireland 181 158 619 724 632 -93 12 474 451

10 Year Treasury yields (%)

USA 2.21 3.84 3.29 1.88 2.28 40 -101 -156 7United Kingdom 3.02 4.02 3.40 1.98 2.37 39 -103 -165 -65Germany 2.95 3.39 2.96 1.83 1.97 14 -99 -142 -98

Source: Bloomberg. *Up to March 15.

20


Financialconditionsinthecountrieswithbailoutprograms(Greece,Portugal,andIreland)shownosignofrecoveryandcontinuereflectingaweakposition.Thereis stilluncertaintyabout long termfinancial soundness inGreece,Portugal, andIreland.

InGreece,thedebtrestructuringandotheradditionalfiscaladjustmentmeasureshavenotbeenabletoreversefearsofinsolvency.InPortugalandIreland,despitethepositiveresultsobtainedintheevaluationoftheprogramscarriedoutwiththeIMF/EU/ECB(thefiscalgoalsarebeingmet),therearestillfearsthatPortugalwillneedaPrivateSectorInvolvement(PSI)programsimilartotheoneimplementedwithGreeceandthattheresultinIreland’snextreferendumonanewfiscaltreatywillprevent, inthefuture, Ireland’saccesstotheEuropeanStabilityMechanism(ESM), the European bailout fund. The signature of a new fiscal treaty is arequirementtoreceiveresourcesfromtheEuropeanfund.Thefiscaltreatyimpliesastructuralfiscaldeficit limitof0.5percentofGDPforeachcountry,whichwillimplyapenaltyofupto0.1percentofGDPifthelimitisnotmet,andagradualreductionofthedebtratioto60percentofGDP.ThistreatywasapprovedbythemainEuropeanleadersinFebruaryandratifiedinthesummitinMarch.

FinancialconditionsinSpainimprovedsignificantlyuntil lateFebruary.However,sinceMarch,marketconditionsworsenedwhenthefiscaldeficitgoalforthisyearwasmodified from itsoriginal levelof4.4percent to5.3percentofGDP (afterhaving a level of 8.5 percent in 2011) following the negotiation between thegovernmentandtheEuropeanleaders.

Graph 13DEVELOPED COUNTRIES DEFICIT AND DEbT: 2011*

(%ofGDP)

Germany1.082

DeficitDebt

Italy3.9120

Portugal5.9107

France6.085

USA8.286

UK8.481

Spain8.569

Greece9.3165

Japan10.0233

Ireland10.3105

12

10

8

6

4

2

0

250

200

150

100

50

0

DebtDeficit

*Preliminarydata.Source:Moody s,IMFandInvestmentbanks.

21


10.Lower risk aversion has also favored the evolution of Latin Americancountries’debtmarkets. Reversing the trendobserved inQ4-2011, creditspreads in the regionshowadownward trendsince January. ThegreatestcorrectionsintheEMBIGandCDSspreadshavebeenobservedinBrazilandChile,respectively.

Table 5INDICATORS OF SOME EUROPEAN COUNTRIES

2008 2009 2010 2011

Countries under the EU/IMF program

Greece Growth(%) -0.2 -3.3 -3.5 -6.9 CDSSpreads(bps)1/ 232 286 1,010 8,786 Fiscalresult(%ofGDP) -10.0 -15.7 -10.6 -9.3 Debtratio(%ofGDP) 113 129 145 165 Annualaverageinflation(%) 4.1 1.2 4.7 3.3 Unemployment(%) 8.9 10.2 14.8 21.0 Ireland Growth(%) -3.0 -7.0 -0.4 0.9 CDSSpreads(bps)1/ 181 158 609 724 Fiscalresult(%ofGDP) -7.3 -14.2 -31.3 -10.3 Debtratio(%ofGDP) 44 65 93 105 Annualaverageinflation(%) 4.1 -4.5 -1.0 2.6 Unemployment(%) 8.6 13.1 14.6 14.3 Portugal Growth(%) 0.0 -2.9 1.4 -1.6 CDSSpreads(bps)1/ 96 92 501 1,082 Fiscalresult(%ofGDP) -3.7 -10.1 9.8 -5.9 Debtratio(%ofGDP) 72 83 93 107 Annualaverageinflation(%) 2.6 -0.8 1.3 3.7 Unemployment(%) 7.8 10.1 11.1 14.0 Countries without the EU/IMF program

Spain Growth(%) 0.9 -3.7 -0.1 0.7 CDSSpreads(bps)1/ 101 114 350 380 Fiscalresult(%ofGDP) -4.1 -11.1 -9.2 -8.5 Debtratio(%ofGDP) 40 53 61 69 Annualaverageinflation(%) 4.1 -0.2 2.0 3.2 Unemployment(%) 13.9 18.8 20.3 22.9 Italy Growth(%) -1.2 -5.5 1.8 0.4 CDSSpreads(bps)1/ 157 109 240 484 Fiscalresult(%ofGDP) -2.7 -5.3 -4.6 -3.9 Debtratio(%ofGDP) 106 116 119 120 Annualaverageinflation(%) 3.3 0.8 1.5 2.8 Unemployment(%) 6.9 8.3 8.3 8.1

1/ End of period data. Source: Eurostat, IMF, Moody’s and others.

22


11.Conditionsinmoney markets haveimprovedsubstantially,particularlyinEuropeanmarkets.AsreportedinourDecemberReport,conditionsintheU.S.moneymarketcontinued reflecting the low interest rates in USA and the limited exposure ofAmericanbankstotheEuropeandebtcrisis.

Graph 14SPREAD bETWEEN THE 3-MONTH US$-LIbOR RATE AND O/N OF SWAP MARkET (OIS) (%)


Jan.08 Jun.08 Nov.08 Apr.09 Sep.09 Feb.10 Jul.10 Dec.10 May.11 Oct.11 Mar.12

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Source:Bloomberg.1/Thesespreadsmeasuretheconditionsininterbankmarketsintherespectivecurrency.Ahigherspreadindicatesworseconditionsintheinterbankmarkets.

%

On the other hand, conditions in European markets have improved significantly.Europeaninterbankrateshavebeendecliningduetothetwo3-yearliquidityinjectionoperationsmadebytheECB(€489billioninDecember2011and€530billioninFebruary2012)andtheeasingofcreditrequirementsforthecollateralsusedbybanks.

ThisincreasedexpansionofliquiditybytheECBhasimpliedthatitsbalancehasreached record levels (€3 trillion) and that, in GDP terms (32 percent), it hasexceededthatofthemajorcentralbanks(FED:19percent,BankofEngland:21percent,BankofJapan:30percent).Withthis,thebalanceofECBloanstobanks

Table 6SOvEREIGN SPREADS OF EMERGING MARkETS

End of period data Difference of March against to: Dec.07 Dec.08 Dec.09 Dec.10 Dec.11 Mar.12 Dec.11 Dec.10 Dec.09 Dec.08

EMBIG (bps.)Peru 178 509 165 165 216 152 -64 -13 -13 -357Brazil 220 429 189 189 225 169 -56 -20 -20 -260Chile 151 343 95 115 172 146 -26 31 51 -197Colombia 195 498 203 172 191 142 -49 -30 -61 -356Emerging 255 724 294 289 426 323 -104 34 28 -402

CDS (bps.)Peru 116 303 124 113 172 121 -51 8 -3 -181Brazil 103 299 123 111 161 121 -39 10 -2 -177Chile 30 203 69 84 132 89 -43 5 20 -114Colombia 130 308 144 113 154 110 -44 -3 -34 -198Mexico 70 292 134 113 153 113 -40 0 -21 -179

Source: Bloomberg.*Up to March15.

23


(throughitsmainrefinancingoperations)hasreachedarecordlevelof€1.2trillionand registered an average maturity of 976 days. The banks that have favoredthemosthavebeen theSpanishand Italianbanks.Moreover, thisexpansionofliquidityhas, for the timebeing, returnedto theECBas remuneratedovernight(O/N)deposits.AfterthesecondinjectionofliquiditybytheECB,banks’overnightdepositsattheEuropeanCentralBankreachedarecordlevelof€ 821billion.

Banks in countries without bailout programs have started to get credit in themarket.Forexample,themarketofUSfundshasincreasedagainitsshareinFrenchbankssinceJanuaryofthisyear.

Inthiscontext,themainindicatorsofthemoneymarketreflectlowerbankcreditrisks.Thespreadbetweentheinterbankrates(Euribor)andtheovernightratesintheswapsmarket(OIS)havedecreased.Aspreviouslyobserved,thespreadsoftheforeignexchangeswaprateshavealsoimprovedforcreditindollars.

Graph 15SPREAD bETWEEN THE 3-MONTH EURO-LIbOR RATE AND O/N OF SWAP MARkET (OIS) (%)



2.5

2.0

1.5

1.0

0.5

0.0

Source:Bloomberg.1/Thesespreadsmeasuretheconditionsininterbankmarketsintherespectivecurrency.Ahigherspreadindicatesworseconditionsintheinterbankmarkets.

%

Graph 163 MONTH EURO/DOLAR bASIS SWAP 1/



0

-50

-100

-150

-200

-250

Source:Bloomberg.1/Itreflectstheexchangerateriskinthevariableratedebtineuroagainsthevariableratedebtindollars.

24


12. Year-to-date,themainstockmarketshaveregisteredgainsand,insomecases,havebeenabletoreversethelossesobservedin2011.Indevelopedcountries,thepositiveresultsof Japan’s StockExchange (inpartdue to thedepreciationof theyen) andGermany’sStockExchange(inpartduetothebetterfinancialconditionsassociatedwiththeevolutionofthedebtcrisis)standout,whileintheemergingcountriesthestockmarketswithbetterresultsintheLatinAmericanregionincludetheboursesofColombia,Brazil,andPeru,aswellastheboursesofRussiaandTurkeyinEurope.Theriseinthepricesofcommodities(metalsandcrude)andlowerriskaversionwouldaccountforthisbetterevolutioninthestockmarketsofemergingeconomies.

Graph 17STOCk MARkETS

(Endofperíod;%Chg.Mar.12respecttoDec.11)

-5% 0% 5% 10% 15% 20% 25% 30%

UNITEDSTATESCANADA

UNITEDKINGDOMNORWAY

AUSTRALIANEWZEALAND

JAPANHONGKONG

TAIWANKOREA

EUROZONEGERMANY

FRANCEIRELAND

PORTUGALSPAIN

GREECE

CZECHREP.HUNGARY

POLANDROMANIA

RUSSIATURKEY

UKRAINE

CHINAINDIA

INDONESIAPHILIPPINESSINGAPOREMALAYSIATHAILAND

ISRAEL

BRAZILCHILE

COLOMBIAMEXICO

ARGENTINAPERU

Source:Bloomberg.

13.The US dollar has started to reverse slightly the appreciation observed during2011duebasically to the reductionof riskaversionand to low interest rates inUSA. According to the currency basket elaborated by the FED (considering thecurrenciesofUSA’smain tradingpartners), thedollarhasdepreciatedaround2percentsofarthisyear.

25



120

115

110

105

100

95

90

Graph 18US DOLLAR INDEX*


*AriseintheindexrepresentsanappreciationoftheUSdollar.Source:FED.

Moreover, the dollar’s depreciatory trend against the currencies of the maindevelopedcountrieshasbeen limitedbasicallyby themonetaryeasingmeasuresadoptedbythemajorcentralbanks.Thus,forexample,thedepreciationofthedollaragainst the pound and the euro (about 1 percent) was limited by the measuresimplementedbytheECBandtheBoE.Tocounterbalancetheeffectsofthesovereigndebt crisis in the Eurozone, the former has been increasing liquidity significantly(since end 2011) and the latter has increased its asset purchase program by£50billion(from£275billionto£325billion).

Ontheotherhand,thedollarhasappreciated5percentagainsttheyen.ThereasonsaccountingforthisincludedthattheBoJincreaseditsassetpurchaseprogram(by10trillionyens,theJapanesegovernment’ssignalsofforeignexchangeinterventiontopreventtheappreciationoftheyen,andtheworseningofgrowthprospectsforJapan.

14.With the exception of the Argentine peso, year-to-date the currencies of LatinAmerican countries have appreciated against the dollar due to the higher netinflowofcapitals, lowerriskaversion,andtheriseinthepricesofcommodities.TheappreciationoftheColombianpeso(8.1percent)andtheMexicanpeso(6.8percent)areworthpointingout.TheevolutionoftheColombianpesoisexplainedbytheriseinthepriceofoil,bythedecisionoftheCentralBankofColombiatoraiseitspolicyrate(50bps.sofarthisyear),andbysignificantinvestmentflows.Ontheotherhand,theMexicancurrencyhasappreciatedmainlyduetothebetterprospectsoftheU.S.economy.

In this context, the central banks in the region have taken measures to offsetappreciatorypressures.Colombiahasactivatedagain theprogramofdailyspotpurchasesofUS$20million,extendingituntilAugustofthisyear.InBrazil,theCentral Bank has repeatedly intervened in the foreign exchange market and in

26


the spot andderivativesmarket to counterbalance theappreciationof the localcurrencyandthegovernmenthasadoptedothermeasurestooffsetcapitalinflowstothecountry,suchasincludingforeignloansandbondsaspartoftheoperationssubjecttoataxonfinancialoperations.

*Includesdedicatedandnot-dedicatedfunds.Source:Barclays.

Graph 19PORTFOLIO FLOWS TO EMERGING ECONOMIES*

(Weeklyflows.MillionsofUS$)

15,000

10,000

5,000

0

-5,000

-10,000

-15,000

EMEAAsiaLatAm

06-Ja

n-10

20-Ja

n-10

03-F

eb-1

017

-Feb

-10

03-M

ar-1

017

-Mar

-10

31-M

ar-1

014

-Apr

-10

12-M

ay-1

026

-May

-10

09-Ju

n-10

23-Ju

n-10

04-A

ug-1

021

-Jul-1

007

-Jul-1

0

18-A

ug-1

001

-Sep

-10

15-S

ep-1

029

-Sep

-10

13-O

ct-1

027

-Oct

-10

10-N

ov-1

024

-Nov

-10

08-D

ec-1

022

-Dec

-10

05-Ja

n-11

19-Ja

n-11

02-F

eb-1

1

16-M

ar-1

102

-Mar

-11

16-F

eb-1

1

30-M

ar-1

113

-Apr

-11

11-M

ay-1

125

-May

-11

08-Ju

n-11

22-Ju

n-11

06-Ju

l-11

20-Ju

l-11

03-A

ug-1

117

-Aug

-11

14-D

ec-1

1

31-A

ug-1

1

11-Ja

n-12

13-S

ep-1

1

25-Ja

n-12

27-S

ep-1

1

08-F

eb-1

2

09-N

ov-1

126

-Oct

-11

07-M

ar-1

2

12-O

ct-1

1

22-F

eb-1

2

23-N

ov-1

1

28-A

pr-1

0

Table 7EXCHANGE RATE (Endofperíodo)

c.u. per US$ % Chg. compared to: Dec.07 Dec.08 Dec.09 Dec.10 Dec.11 Mar.12 * Dec.11 Dec.10 Canada 0.996 1.217 1.052 0.997 1.019 0.992 -2.7 -0.5Japan 111.33 90.60 92.90 81.15 76.94 83.50 8.5 2.9UnitedKingdom(US$/c.u.) 1.985 1.463 1.616 1.560 1.554 1.571 1.1 0.7Eurozone(US$/c.u.) 1.459 1.398 1.432 1.338 1.295 1.308 1.0 -2.2Switzerland 1.1335 1.0669 1.0355 0.9335 0.938 0.923 -1.6 -1.2 Brazil 1.779 2.313 1.743 1.659 1.863 1.798 -3.5 8.4Chile 497.7 635.5 507.2 467.8 519.3 481.9 -7.2 3.0Colombia 2,017 2,246 2,040 1,915 1,936 1,760 -9.1 -8.1Mexico 10.89 13.65 13.06 12.36 13.95 12.66 -9.3 2.4Argentina 3.151 3.454 3.799 3.979 4.302 4.353 1.2 9.4Peru 2.999 3.136 2.890 2.808 2.697 2.673 -0.9 -4.8 Hungary 172.83 188.30 187.96 208.15 243.28 222.14 -8.7 6.7Poland 2.47 2.96 2.86 2.96 3.44 3.15 -8.5 6.5Russia 24.57 30.53 30.31 30.57 32.19 29.35 -8.8 -4.0Turkey 1.17 1.54 1.50 1.54 1.88 1.80 -4.7 16.8 China 7.30 6.82 6.83 6.59 6.29 6.33 0.5 -4.0India 39.38 48.58 46.40 44.70 53.01 50.28 -5.1 12.5Israel 3.85 3.78 3.79 3.52 3.81 3.77 -1.1 6.9

Source: Bloomberg and Reuters.* Up to March 15.

27


Monetary policy decisions

15.Sofarin2012,mostcentralbankshavemaintainedtheirinterestratesunchangedinacontextofuncertaintyabouttheevolutionofEurope’sfinancialcrisis.Ofthe32countrieswedoafollow-upon,14didnotmodifytheir interestratesand8lowered their rates (Brazil standsout in the lattergroupwith a rate cutof 125bps.).Incontrast,sofarthisyearColombiahasraiseditsrateby50bps.duetothedynamismofitseconomicactivitysinceQ4-2011andtotheacceleratedgrowthofcredit.

Table 8MONETARY POLICY INTEREST RATE

Accumulated change (bps.) Sep.08 Dec.08 Dec.09 Dec.10 Dec.11 Mar.12 Dec.11 Dec.10 Dec.09 Sep.08 Countries that have kept rates in the first quarter of 2012 Australia 7.00 4.25 3.75 4.75 4.25 4.25 0 -50 50 -275 BCE 4.25 2.50 1.00 1.00 1.00 1.00 0 0 0 -325 Canada 3.00 1.50 0.25 1.00 1.00 1.00 0 0 75 -200 South Korea 5.25 3.00 2.00 2.50 3.25 3.25 0 75 125 -200 United States 2.00 0.25 0.25 0.25 0.25 0.25 0 0 0 -175 Hungary 8.50 10.00 6.25 5.75 7.00 7.00 0 125 75 -150 India 9.00 6.50 4.75 6.25 8.50 8.50 0 225 375 -50 Iceland 15.50 18.00 10.00 4.50 4.75 4.75 0 25 -525 -1,075 Japan 0.50 0.10 0.10 0.10 0.10 0.10 0 0 0 -40 Malaysia 3.50 3.25 2.00 2.75 3.00 3.00 0 25 100 -50 Mexico 8.25 8.25 4.50 4.50 4.50 4.50 0 0 0 -375 New Zealand 7.50 5.00 2.50 3.00 2.50 2.50 0 -50 0 -500 Pakistan 13.00 15.00 12.50 14.00 12.00 12.00 0 -200 -50 -100 Peru 6.50 6.50 1.25 3.00 4.25 4.25 0 125 300 -225 Poland 6.00 5.00 3.50 3.50 4.50 4.50 0 100 100 -150 United Kingdom 5.00 2.00 0.50 0.50 0.50 0.50 0 0 0 -450 SouthAfrica 12.00 11.50 7.00 5.50 5.50 5.50 0 0 -150 -650 Switzerland 2.75 0.50 0.25 0.25 0.25 0.25 0 0 0 -250 Taiwan 3.50 2.00 1.25 1.63 1.88 1.88 0 25 63 -163 Turkey 16.75 15.00 6.50 6.50 5.75 5.75 0 -75 -75 -1,100 Countries that have increased rates in the first quarter of 2012 Colombia 10.00 9.50 3.50 3.00 4.75 5.25 50 225 175 -475 Countries that have reduced rates in the first quarter of 2012 Brazil 13.75 13.75 8.75 10.75 11.00 9.75 -125 -100 100 -400 Chile 8.25 8.25 0.50 3.25 5.25 5.00 -25 175 450 -325 Philippines 6.00 5.50 4.00 4.00 4.50 4.00 -50 0 0 -200 Indonesia 9.25 9.25 6.50 6.50 6.00 5.75 -25 -75 -75 -350 Israel 4.25 2.50 1.25 2.00 2.75 2.50 -25 50 125 -175 Norway 5.75 3.00 1.75 2.00 1.75 1.50 -25 -50 -25 -425 Serbia 15.75 17.75 9.50 11.50 9.75 9.50 -25 -200 0 -625 Sweden 4.75 2.00 0.25 1.25 1.75 1.50 -25 25 125 -325 Thailand 3.75 2.75 1.25 2.00 3.50 3.00 -50 100 175 -75 Countries that have not met in the first quarter of 2012 China 7.20 5.31 5.31 5.81 6.56 6.56 0 75 125 -64 Uruguay 7.25 7.75 6.25 6.50 8.75 8.75 0 225 250 150

Source: Reuters and Bloomberg.

28


Terms of trade and prices of commodities

16.During 2011 the prices of commodities were favored by the high internationallevelsofliquidity,lowinventorylevels,andsomesupplyconstraints,particularlyin thefirst semesterof theyear. This trendwasoffsetby the liquidationofnoncommercialpositionsgeneratedby thehigher risk aversionassociatedwith theEurozonecrisisandfearsoflowerglobalgrowth.

In2011theterms of trade increased5percentgiventhatthepricesofourexportsproductsrosemorethanthepricesofourimports,particularlyinthefirstsemesteroftheyear.InQ4-2011,therecoveryoftermsoftradeisexplainedbythegreaterdownwardcorrectionobservedinthepricesofimports,especiallyfoodimports.

Thepricesofourexportsrecordedariseof20percentin2011.Theriseinthepriceofgoldstandsoutsincethisrisewasfavoredbyinvestors’increaseddemandforgoldasahedgeasset inacontextofhigh international liquidityandglobal riskaversion.Thepricesofimportsrose14percent,mainlyduetotheriseinthepricesofcrudeandfoodproductssuchasmaizeandsoybeanoil.

Sofarthisyear,termsoftradehavecontinuedtoshowtheupwardtrendinitiatedin November, mainly as a result of the rising price of copper that is driven byfavorabledataofgrowthandmanufacturingactivity inUSAandChina.Becauseaslightpricecorrection isestimated for the restof theyear, termsof tradeareforeseentodeclineby1.4percentonaveragein2012andtoriseby0.4percentin2013.

Onaverage,exportpriceswouldregisteralowerdeclinein2012duemainlytothehigherpricesofcopperexpectedtodayincomparisontotheonesestimatedinourReportofDecember.Ontheotherhand,importpriceswouldshowaslightlyhigherdeclinethanpreviouslyestimated,inlinewiththelowerexternalinflationexpectedwhichwouldbepartiallyoffsetbytheupwardadjustmentinfoodprices.

Graph 20TERMS OF TRADE, EXPORT AND IMPORT PRICE INDICES: JANUARY 2007 - FEbRUARY 2012

(1994=100)

400

350

300

250

200

150

100

50Jan.07 Jan.08 Jan.09 Jan.10 Jan.11Jul.07 Jul.08 Jul.09 Jul.10 Jul.11 Jan.12

TermsoftradeExportpriceindexImportpriceindex

Dec. 2011 Jan. 2012Termsoftrade 138.1 137.3Exportpriceindex 330.0 327.6Importpriceindex 238.9 238.6

29


Graph 21TERMS OF TRADE: 2001 - 2013

(%change)

*Forecast.

2001

-1.7

2002

3.1

2003

1.3

2004

9.9

2005

5.6

2006

26.7

2007

3.4

2008

-14.4

2009

-2.8

2010

17.9

2011

5.4

2012*

-1.4

2013*

0.4

Table 9 TERMS OF TRADE: 2010 - 2013

(Annualaveragedata) Executed 2012 2013 2010 2011 IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 Terms of trade 1/ 17.9 5.4 -5.8 -1.4 0.6 0.4

Price of exports 1/ 29.9 20.0 -6.1 -1.9 1.2 0.9 Copper(US$centsperpound) 342 400 345 382 346 385 Zinc(US$centsperpound) 98 100 91 93 94 95 Lead(US$centsperpound) 98 109 94 97 97 100 Gold(US$perounce) 1,225 1,570 1,675 1,675 1,675 1,675 Price of imports 1/ 10.1 13.8 -0.3 -0.5 0.6 0.5 Oil(US$perbarrel) 79 95 100 105 100 106 Wheat(US$perton) 195 280 249 257 259 272 Maize(US$perton) 157 262 232 243 221 223 Soybeanoil(US$perton) 859 1,191 1,102 1,200 1,107 1,217 1/Averageannual%change.

17. Thehighavailabilityofinternationalliquidityasaresultoflowinterestratesallowedthedemandforcommoditiesasalternativeinvestmentassetstoincreaseinthefirsthalfof2011.However,thedeteriorationoftheinternationalcontextassociatedwithfearsthattheEuropeancrisismightintensifygeneratednetoutflowsofthesemarketsinSeptemberandDecember.AnoutflowofUS$7.7billionofthefundsthatmanageinvestmentsincommoditieswasobservedinDecember,asaresultofwhichtheamountof investments in2011wasUS$15billion(vs.US$67billion in2010),the lowestlevelregisteredsince2002.However,this lowerflowwasnotreflectedindeclinesin the prices of commodities, since the latter found support in supply constraints(metalsandfoodproducts)andingeopoliticaltensions(crude).Theinvestmentfundswith investments in commodities recovered in January2012whenanet inflowofUS$3.7billionwasregistered.Intoday’scontextofhighavailabilityofliquidity,noncommercialpositionsareexpectedtoincreaseinthemarketthisyear.

30


Graph 22COMMODITIES INVESTMENT FLOWS

(BillionsofUS$)

1513108530

-3-5-8

-10

Source:BloombergandBarclaysCapital.

Apr.09 Dec.09 Aug.10 Apr.11 Dec.11

Copper

18. In2011thepriceofcopperincreased17percentandrecordedanaveragepriceof US$ 3.43 per pound in December, but showed a downward trend during agreatpartoftheyear.Inthefirsttwomonthsofthisyear,thepriceofcopperhasreversedthistrendrising11percent.

AfterreachingahistoricalnominalaveragerecordofUS$4.48apoundinFebruary2011duetosupplyconstraintsinproducingcountrieslikeChile,Indonesia,China,andPeru,thepriceofcopperregisteredadownwardtrenduntilNovembergivenfearsofaglobalrecessionassociatedwiththeworseningofEurope’sdebtcrisis.In November-December 2011, this price recovered due to supply problems inproducingcountries(temporaryclosureofmineGrasberginIndonesia,productioninterruptionsduetoastrikeinmineCerroVerdeinPeruandtotechnicalfailuresinmineCollahuasiinChile).

So far this year, the price of copper has been favored by better-than-expecteddataofgrowthandmanufacturingactivity inUSAandChinaand therefore it isestimatedthatthispricewillstabilizeintheforecasthorizonatahigherlevelthantheoneconsideredinourpreviousInflationReport.

Graph 23COPPER: JANUARY 2007 - DECEMbER 2013

(ctv.US$/pd.)

IR ForecastDec. 11 Avg. Annual % chg.2010 342 46.62011 402 17.42012 345 -14.22013 346 0.4Mar. 12 Avg. Annual % chg.2010 342 46.62011 400 16.92012 382 -4.62013 385 1.0

IRDec.11 IRMar.12

Average2002-2006 1512007-2012* 325*UptoFebruary2012.

450

400

350

300

250

200

150

100

50

0Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13

31


Zinc

19.TheaveragepriceofzincinFebruary2012wasUS$0.93/pound,whichreflectsanincreaseof8percentsofarthisyear(thatis,ahigherrisethanthe1percentriseregisteredin2011).

Like the price of copper, the price of zinc showed a downward trend during

mostof2011,affectedbyfearsoflowerglobaleconomicactivityandbyahigherproduction of refined zinc, as well as by the lower dynamism of consumptionin Japan in a context in which inventories registered their maximum historicallevels. This downward trend was offset by supply constraints in China (due toenvironmentalregulations)andinAustraliaandUSA(duetotechnicalproblems).

The rise in thepriceof zinc in thefirst twomonthsof theyear is explainedbyahigher speculativedemandsupportedby theannountcement that some largemineswillbeclosedinCanadaandIrelandinthenexttwoyears,aswellasbyamorepositiveoutlookforgeneraleconomicactivityinUSA.

Itisestimatedthatthepriceofzincwillstabilizearounditscurrentprice(asforeseeninourpreviousreport).ThesupplyconstraintsinproducingcountrieslikeChinawouldbeoffsetbyChinaandUSA’shigherproductionofrefinedzincestimatedfor2012.

Graph 24ZINC: JANUARY 2007 - DECEMbER 2013

(ctv.US$/pd.)

IR ForecastDec.11 Avg. Annual % chg.2010 98 30.82011 100 2.02012 91 -8.72013 94 2.6Mar.12 Avg. Annual % chg.2010 98 30.82011 100 1.72012 93 -7.12013 95 2.8

IRDec.11 IRMar.12



Gold

20.Thepriceofgoldrecordedanincreaseof28percentin2011andclosedtheyearwithanaveragepriceofUS$1,642/troyounceinDecember2011.Inthefirsttwomonthsof2012,thepriceofgoldrose6percent.

Theupward trendthatgoldshowedduringmostof2011wassustainedby theincreaseddemandforthismetalasanalternativeinvestmentassetandasahedgeassetinacontextofrisinguncertaintyabouttherecoveryoftheglobaleconomyduetoEurope’sdebtcrisis.ThepriceofgoldreachedamaximumlevelinSeptember

32


(withanaveragepriceofUS$1,773/troyounce)duetotheworseningofthecrisisinEuropeandtotheU.S.creditdowngrading.Then,inthelastquarteroftheyear,thepricecorrecteddownwardsreflectingthestrongsalesassociatedwithcloseofbooks,portfolioadjustments,andlowerdemandfromjewelersandtheindustrialsector,aswellasbyagreaterpreferenceforliquidityandtheliquidationofnoncommercialcontractsinDecember.

TheincreaseinthepriceofgoldsofarthisyearisexplainedbythedepreciationofthedollarandbytheperceptionofriskgeneratedbythedelayintheapprovalofthesecondrescuepackageforGreece.Moreover,priceswerealsopropelledbyfearsofinflationgeneratedbytheriseinthepriceofoil.

Thepriceofgoldisestimatedtoremainhighintheforecasthorizoninacontextofuncertaintyandincreasedpurchasesofthismetalbyemergingcountries.

Graph 25GOLD: JANUARY 2007 - DECEMbER 2013

(US$/tr.oz.)

IR ForecastDec.11 Avg. Annual % chg.2010 1,225 25.82011 1,577 28.72012 1,675 6.22013 1,675 0.0Mar.12 Avg. Annual % chg.2010 1,275 25.82011 1,570 28.12012 1,675 6.72013 1,675 0.0IRDec.11 IRMar.12

Average2002-2006 4272007-2012*1,088*UptoFebruary2012.

2,0001,8001,6001,4001,2001,000

800600400200


Graph 26GOLD PRICE AND S&P-500 VIX INDEX

(January2007-February2012)

Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12May.07 May.08 May.09 May.10 May.11Sep.07 Sep.08 Sep.09 Sep.10 Sep.11

2,0001,8001,6001,4001,2001,000

800600400200

0

70

60

50

40

30

20

10

0

Gold(US$/tr.oz.-rightaxis)VIX-leftaxis.

Source:Bloomberg.

Oil

21.ThepriceofWTIoilrose20percentin2011,recordinganaverageofUS$98perbarrelinDecember.Inthefirsttwomonthsof2012,thepriceofoilrose4percent.

33


Theprice rise in2011 isexplainedby thecontractionofsupplyassociatedwithsocial conflicts in the Middle East and North Africa (especially in Libya, whereoilexportsweredrasticallyreduced),terroristattacksinNigeria,andgeopoliticaltensionsbetweenIranandtheWest.

ThepriceofcrudereacheditspeakinApril(US$110perbarrelonaverage),declininggraduallythereafteruntilitpostedanaveragelevelofUS$86abarrelinSeptemberduetoexpectationsof lowerglobaldemand inOECDcountries,especially in theEUduetotheimpactofthedebtcrisis.Onthesupplyside,therecoveryofLibya’sproductionandexports towards theendofNovembercontributed to reduce thepriceofoil.

Sinceend2011thepriceofcrudewasboostedbythegeopoliticalsituationbetweenIranandtheWest.InFebruaryofthisyear,IranannouncedabanonoilsalestoEuropeanoilcompanies,generatinginthiswayexpectationsofalowersupplyofcrude.

Intheforecasthorizonthepriceofoilisexpectedtoshowsimilarlevelstothoseobserved today, but higher than the ones estimated in the Inflation Report ofDecember.TheworseningofthetensionsbetweenIranandtheWestrepresentariskfactorontheupsideinthiscentralscenario.

In contrast with 2008, when the prices of crude reached historical maximumlevels,theglobaleconomyiscurrentlymorevulnerabletoasharppricerisesinceeconomicrecoverycouldbeaffected.

Graph 27WTI OIL: JANUARY 2007 - DECEMbER 2013

(US$/bl)

IR ForecastDec.11 Avg. Annual % chg.2010 79 28.72011 95 19.82012 100 5.22013 100 0.0Mar.12 Avg. Annual % chg.2010 79 28.72011 95 19.82012 105 10.22013 106 1.1

IRDec.11 IRMar.12



Food products

22. In2011, thepricesof foodstuffs recorded increasedexplainedbothby supplyfactors(climatefactorsandconstrainsinproducingcountries)andbythedemandofemergingcountries inacontextofhighliquidityandtightglobal inventories.However,likeinthecaseofothercommodities,thepricesoffoodproductswereaffectedinthesecondhalfoftheyearbythedeteriorationoftheglobalriskbalance

34


whichledinvestorstoliquidatetheirpositionsinriskyassets.Thus,in2011,FAO’sindexofrealfoodpricesregisteredanaverageincreaseof26percent.Inthefirsttwomonthsof2012, foodpricescontinueshowinganupwardtrendandFAO’sindexhasrisen5percentsofarthisyear.

Graph 28FAO REAL FOOD PRICE INDEX*

(Base2002-2004=100)

Average2002-2006 1052007-2012* 161

Average:2004-2012

*UptoFebruaryof2012.

240

220

200

180

160

140

120

100Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12

*TherealpriceindexistheindexofnominalpricesdeflatedbytheunitvalueofmanufacturesoftheWorldBank.

According to the World Agricultural Supply and Demand Estimates of the USDepartment of Agriculture (USDA) of March 2012, the situation in global foodmarketsshowsan improvement (less tightness) in thecaseofwheatgiven thatglobal inventories at the end of the 2011/2012 farming period would increase5percentcomparedwiththepreviouscropyear.Ontheotherhand,theglobalmarket of soybean oil would show tighter conditions this farming period sinceinventorieswoulddeclineby9percent.

Table 10USDA: BALANCE OF GLOBAL SUPPLY AND DEMAND

(Millionstons)

2009/10 2010/11 2011/12 % change (3) (2) (1) (2) / (3) (1) / (2)

MAIZE Initial stock 147.5 144.2 129.1 -2.3 -10.5Production 819.2 829.2 865.0 1.2 4.3Global supply 966.8 973.4 994.0 0.7 2.1Total consumption 822.6 844.4 869.5 2.6 3.0Final stock 144.2 129.1 124.5 -10.5 -3.5

WHEAT Initial stock 167.1 202.3 199.5 21.1 -1.4Production 685.6 651.5 694.0 -5.0 6.5Global supply 852.6 853.8 893.5 0.1 4.6Total consumption 650.3 654.4 683.9 0.6 4.5Final stock 202.3 199.5 209.6 -1.4 5.1

SOYBEAN OIL Initial stock 2.9 3.1 3.0 3.7 -1.6Production 38.8 38.8 38.8 0.0 0.0Global supply 41.8 41.9 41.8 0.3 -0.1Total consumption 38.2 41.0 42.1 7.2 2.7Final stock 3.1 3.0 2.7 -1.6 -9.0

Source:USDepartmentofAgriculture-WorldAgriculturalSupplyandDemandEstimates(WASDE)March2012.

35


Maize

23. In2011thepriceofmaizerecordedanincreaseof67percent.InDecember,theaveragepricewasUS$234pertonandinFebruary2012ithitUS$251,asaresultofwhichithasregisteredavariationof7percentsofarthisyear.

Inearly2011thepriceofmaizewasboostedbytheintensificationoftheeffectsofLaNiñainsomeofthemainproducingcountriesandthenbyUSAandChina’sgrowingdemandformaizetoproduceethanol.Inthesecondhalfoftheyear,thepriceofmaizecorrecteddownwardsinlinewithhigherriskaversion.

Sincethelastmonthsof2011,thepriceofmaizehasbeenfavoredbyexpectationsof a lowerglobal supplydue to fearsof a lowerproduction in SouthAmericanproducingcountries(mainlyArgentina)asaresultoftheloweryieldsthatwouldbecausedbyLaNiñaevent.

However, since maize-sown areas are expected to increase in USA this year,thepricesofmaize in the forecast horizon are estimated to showadownwardcorrectiontosimilarlevelstothoseforeseeninourInflationReportofDecember2011,thatis,todecline8percentrelativetotheaveragepricein2011.

Graph 29

IR ForecastsDec.11 Avg. Annual % chg. 2010 157 12.82011 263 67.42012 232 -11.92013 221 -4.7Mar.12 Avg. Annual % chg.2010 157 12.82011 262 66.92012 243 -7.52013 223 -8.3


875

870

865

860

855

850

845

400350300250200150100500

135

130

125

120

115

110

105

100

MAIZEUSDA: ESTIMATES FOR 2011/2012 CROP YEAR

(MILLION TONS)

MAIZE: JANUARY 2007 - DECEMbER 2013(US$/MT)

IRDec.11IRMar.12

Jan.07 Jan.08 May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.Jan.09 Jan.10 Jan.11 Jan.12 Jan.13

ProductionFinalstock(rightaxis)

Wheat

24.The internationalpriceofwheat rose44percent in2011,recordinganaveragepriceofUS$236pertonatthecloseofDecember.Inthefirsttwomonthsof2012,thepriceofwheathasrisen4percent.

Inthefirstpartof2011,thepriceofwheatwasfavoredbytheevolutionofthe

priceofmaize(asubstituteproduct),aswellasbyRussiaandUkraine’srestrictionsontheirexports.However,theinternationalpriceofwheatshowedadownwardtrendduring theyeardue to theUSDA’ssuccessiveupward revisionsofglobalproductionandduetoincreasedcompetitionininternationalmarkets.

36


Year-to-date,thepriceofwheathasresumedarisingtrendasaresultofunfavorableclimateconditionsinEuropeanproducingcountriesandexpectationsthatRussiaandUkrainewillestablishrestrictionsontheirexports(onlyUkraineimplementedthem).Thepriceofwheatisthereforeexpectedtoincreaseslightlyrelativetoitscurrent levels and the ones estimated in our last Inflation Report. Nonetheless,onaverageterms,in2012thepriceofwheatwoulddecline8percentcomparedtotheaveragepricein2011,inlinewiththeexpectedglobalinventoriesof210milliontonsestimatedbyUSDAforthe2011/2012cropyear(thisfigureisclosetotherecordlevelobtainedinthe1999/2000cropyear).

Graph 30

IR ForecastsDec.11 Avg. Annual % chg. 2010 195 1.32011 281 44.32012 249 -11.52013 259 4.0Mar.12 Avg. Annual % chg. 2010 195 1.32011 280 43.72012 257 -8.32013 272 5.7

Average2002-2006 1402007-2012* 239*UptoFebruary2012

450400350300250200150100500

700695690685680675670665660655650645

220

210

200

190

180

170

160

WHEAT: JANUARY 2007 - DECEMbER 2013(US$/MT)

WHEATUSDA: ESTIMATES FOR 2011/2012 CROP YEAR

(MILLION TONS)

IRDec.11IRMar.12

Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13


May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.

Soybean oil

25.Thepriceofsoybean oil showedanaverageincreaseof39percentin2011andrecordedalevelUS$1,107/toninDecember.Duringthefirsttwomonthsof2012,thepriceofsoybeanoilhasrisen4percent.

The rise observed in this price in 2011 is mainly explained by the increasesregistered in the firstmonthsof the year (due to the effects of LaNiña and totherisesinthepriceofcrude),becausetheaveragepriceofsoybeanoilfollowedadownward trend sinceMay–except inSeptember–that intensified inOctoberwhenthispricefell6percentduetothefavorablesoybeanyieldobtainedinUSA.

InJanuary-February2012,thepriceofsoybeanoilhasshownarisingconduct,inlinewithexpectationsofalowersoybeanproductioninSouthAmericancountries.Likeinthecaseofmaize(especiallyinArgentinaandBrazil),thereareconcernsthattheadverseclimateconditionsofLaNiñaeventmayhaveaffectedtheyieldofsoybean.

It is estimated that the level of prices of soybean oil will be similar to thoseobservedtoday,buthigherthantheonesconsideredinourpreviousReportduetothehigherpricesofoilforeseenandthelowerproductionofsoybeanexpectedbyUSDAforthe2011/2012period.

37


Graph 31

IR ForecastsDec.11 Avg. Annual % chg.2010 859 17.92011 1,191 38.52012 1,102 -7.42013 1,107 0.4Mar.12 Avg. Annual % chg.2010 859 17.92011 1,191 38.62012 1,200 0.72013 1,217 1.4


1,600

1,400

1,200

1,000

800

600

400

200

0

43.5

43.0

42.5

42.0

41.5

41.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

SOYbEAN OIL: JANUARY 2007 - DECEMbER 2013(US$/MT)

SOYbEAN OILUSDA: ESTIMATES FOR 2011/2012 CROP YEAR

(MILLION TONS)

IRDec.11IRMar.12

Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13


May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.

BOX 1GREECE’S SECOND BAILOUT PACkAGE AND DEBT RESTRUCTURING PROGRAM

Atransactiontorestructurethepublicdebtwiththeprivatesector,knownasthePSI(PrivateSectorInvolvement),wasagreedinthesecondhalfofFebruarybetweentheEuropeanUnion(EU),theInternationalMonetaryFund(IMF),andacommitteerepresentingprivateholdersofGreekbondsas part of the conditions that will allow Greece’s access to a package of €130 billion. The approval of this package by the European Union and the IMF should take place prior to the maturity of bonds for €14.5 billion on March 20. The new program is expected to reduce the debt to GDP ratio from 164percent(2011)to120.5percentby2020.

To this end, the Greek government had to meet a series of preconditions, including the following: approvemeasurestofurtherreducethefiscaldeficitby€325million;initiatetheprocessrequiredtoconstitutionallyprioritizetherepaymentofdebt;havethetermsofPSIpassedbyParliament,includingtheretroactiveintroductionofcollectiveactionclauses(CACs)underwhichthebondswillbe restructured, among others.

PSI terms

After thePSI transactionwas approved byParliament, on February 24 theGreek governmentlaunchedtheofferfortherestructuringofeligiblebonds–undertheGreeklaworunderinternationallaw–foratotalof€206billion,whichrepresentsapproximately60percentofthedebtbalancein2011. The main terms of the PSI are:

• Thebondswillbeexchangedwithanominaldiscountof53.5percent.Oftheremaining46.5percentfaceamount,15percentwillbeexchangedbyshort-terminstruments(1-2years)oftheEuropeanFinancialStabilityFacility(EFSF)and31.5percentwillbeexchangedbynewGreek bonds maturing in 30 years.

• TheamortizationofthenewGreekbondswillbeginin2023(year11)andwillendin2042(year30).

38


• Thenewbondshaveastep-upcoupon(withagraceperiodofoneyear):2percentinthefirstthreeyears(2013-2015),3percentbetween2016and2020,3.65percent in2021,and4.3percent from 2022 onwards.

• Some retroactive CACs have been introduced under the Greek law to ensure a highparticipation of the private sector, given that the program requires that at least 90-95 percent of the eligible debt with the private sector is restructured. If it were necessary to activate theCACs,aquorumof50percentofbondholdersandamajorityof two thirdsof the eligible debt holders are required. In the case of international bonds governed by internationallaws,themajorityrequiredtointroduceaCACisaquorumof75percentofbond holders.

• ThereisanadditionalwarrantassociatedwiththeevolutionofGDP.Accordingtothisinstrument,1 percent of the additional coupon will be paid as from 2015 if Greece’s GDP shows a positive growthabovecertainlevel(thislevelhasnotbeenspecifiedyet).

• ThenewbondswillbeissuedundertheUKLaw.

Anominalreductionofaround€110billionintheGreekdebtisexpectedtobeachievedwiththePSI.Intermsofthenetpresentvalue(NPV),itiscalculatedthatthiswouldimplyareductionofthedebtofbetween72-76percent(reductionabovethe70percentestimatedpreviously).

On March 9, after the process of voluntary restructuring of the debt written under the Greek law ended,theresultsindicatedaparticipationof86percent(€152billionofthe€177billioneligiblebonds).Withthisresult,thegovernmentactivatedtheCAC,whichwouldinvolvethefullparticipationof creditors under the Greek law. In addition to this, it was reported that so far bondholders of about €20billion–of the€29billion ineligiblebonds–of thedebtwrittenunder international lawhadalreadydecidedtojointheprocess,asaresultofwhichtotalparticipationwas96percent.Whatstill remains to be seen is the participation of creditors with debt written under international law whowilldecidetojointheprocessbeforetheexpirationdate(March23),aswellaswhethertheparticipationrateenablestheactivationofinternationalCACsornot,andwhetherthegovernmentdecides to exercise them or not.

Official participation

The Greek bonds purchased by the European Central Bank and the central banks in the Eurozone under theSecurityMarketProgram (SMP),whichhaveanestimatedvalueof€45billion,wereswappedbynewGreekbonds(withthesameconditionstheyhadbefore)topreventthattheybeincluded as part of the debt eligible for the PSI. Since these bonds were purchased at a discount on the secondary market, the earnings generated because of this discount would be returned to the Greek government in the way of a discount on theinterestrateontheloansgrantedbyEUgovernmentsaspartoftheirfirstaidpackageof€110billion. It is estimated that this reduction would contribute to reduce the debt-to-GDP ratio by 1.8 percentagepoints towards2020and that itwould reducefinancingrequirementsby€1.8billionduring the rescue program.

39


II. Economic activity

26. InspiteofthelessfavorableinternationalcontextobservedduetothedebtcrisisaffectingseveralcountriesintheEurozone,in2011thePeruvianeconomygrew6.9percent.Aftergrowingatarateof7.8percentinthefirstsemester,economicactivityinthecountrygrew6.1percentinthesecondsemester,converginginthiswaytowardsratesclosertotheeconomy’spotentialoutputlevel.

Graph 32GDP: 2004-2013

(Real%change)

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2013*

5.0

6.87.7

8.99.8

0.9

8.8Average2004-2011:6.9%

6.95.7

6.3

Graph 33DOMESTIC DEMAND: 2004 - 2013

(Real%change)

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2013*

3.85.8

10.311.8 12.3

-2.8

13.1

Average2004-2011:7.7% 7.2

5.96.5

Inseasonallyadjustedterms,GDPrecordedanannualgrowthof4.7percent inQ4-2011, after having registered a growth rate of 6.0 percent in the previousquarter.

40


1Q.08 1Q.09 1Q.10 1Q.112Q.08 2Q.09 2Q.10 2Q.113Q.08 3Q.09 3Q.10 3Q.114Q.08 4Q.09 4Q.10 4Q.11

Graph 34SEASONALLY ADJUSTED GDP AND DOMESTIC DEMAND: 2008 - 2011

(Annualized%change)

14.016.0

7.5

14.2

7.3

13.5

-3.5

-7.6

-3.3

-17.5

-4.4-0.7

6.5

11.6 10.814.7

8.2

14.0 13.3

18.1

6.5

13.8

9.0 8.36.5

4.1 5.2 4.8 6.0 5.1 4.76.6

GDPDomesticdemand

Graph 35GDP: POTENTIAL GROWTH AND ACTUAL GROWTH: 2005-2011

(%changeinthelast4quarters)

12

10

8

6

4

2

0

-2

12

10

8

6

4

2

0

-22010 20112006 2007 2008 2009

PotentialGDP(centralestimate)Observedgrowth

Memo: PotentialGDP is not anobservable variable andhas to be estimated.Becauseof this, thegraph showsuncertaintyaboutitsgrowthrate.Asinthecaseoftheoutputgap(Graph101)andtheinflationforecast(Graph102),eachbandconcentratesaprobabilityofoccurrenceof5%andtotalbandsrepresentaprobabilityofoccurrenceof90%.

Potentialgrowthisestimatedusingstatisticalmethodsofsignalsextractionsimultaneouslywiththeestimationoftheoutputgap(seeGraph101).

27.TherateofgrowthofGDP in2011(6.9percent)wasslightlyhigher thanthe rate projected in our December Report (6.8 percent). The centralforecast scenario for the Peruvian economy in 2012 considers a growthrateof5.7percent,consideringbettertermsoftradeandanimprovementinconsumers’andinvestors’expectationsrelativetotheonesconsideredinourpreviousReport.In2013thePeruvianeconomyisstillprojectedtogrow6.3percent.

28.Aspreviouslymentioned,theeconomy’spotentialgrowthwasslightlyabove6.0 percent at end 2011 and the growth of GDP and domestic demand areforecasttobeclosetotheirpotentialgrowthrateinthenexttwoyears.

41


Projected evolution of expenditure components

29. In2012domestic demand wouldcontinuetoshowamoremoderatepaceofgrowthafterhavingdeclined fromagrowth rateof13.1percent in2010 to a rateof7.2percent in 2011. Domestic demand in 2012 is estimated to record a rate of 5.9percentduemainlytothelowerpaceofgrowththatprivateconsumptionandprivateinvestmentwouldregisterincomparisonwith2011.Thiswouldbeoffsetbyagreaterdynamismofpublicinvestment,whichisestimatedtogrow34.3percent.Withthis,thecontributionofpublicexpendituretogrowthwouldrisefromanegativevalueof-0.7percentagepointstoapositivevalueof2.1percentagepoints.

Table 11GDP AND DOMESTIC DEMAND

(Real%change) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12

1. Domestic demand 13.1 7.2 5.6 5.9 6.1 6.5 a. Private consumption 6.0 6.4 5.6 5.8 5.8 5.8 b. Public consumption 10.0 4.8 5.3 5.3 4.9 5.1 c. Private investment 22.1 11.7 7.0 8.2 8.3 8.7 d. Public investment 27.3 -17.8 33.1 34.3 7.3 7.32. Exports 1.3 8.8 6.0 7.5 7.7 7.73. Imports 24.0 9.8 6.5 8.3 6.6 8.34. GDP 8.8 6.9 5.5 5.7 6.3 6.3

Memo Government expenditure 16.3 -4.2 14.7 15.2 5.9 6.0

IR:InflationReport.* Forecast.

Table 12GDP AND DOMESTIC DEMAND(Contributionstothereal%change)

2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 1. Domestic demand 13.1 7.5 5.8 6.2 6.4 6.8 a. Private consumption 4.1 4.2 3.7 3.9 3.8 3.8 b. Public consumption 0.9 0.5 0.5 0.5 0.5 0.5 c. Private investment 4.2 2.5 1.6 1.8 1.9 2.0 d. Public investment 1.5 -1.1 1.6 1.6 0.4 0.4 e. Inventory variation 1/ 0.2 1.4 0.2 -0.2 -0.2 -0.12. Exports 0.2 1.6 1.1 1.4 1.4 1.43. Imports 4.5 2.1 1.4 1.8 1.5 1.94. GDP 8.8 6.9 5.5 5.7 6.3 6.3MemoGovernment expenditure 2.4 -0.7 2.1 2.1 0.9 0.9

IR:InflationReport.*Forecast.1/%ofGDP.

42


30.In2011private consumption grewatahigherratethanin2010andregisteredagrowthrateof6.4percent(6.0percentin2010).Thisincreaseisbasedonthedynamismof thenationaldisposable income (7.1percent), onhigh consumerconfidencelevels,andonthegrowthofcredit(20.4percent)andemployment(5.4percent).Thegrowthofprivateconsumption isestimated tomoderate inthenextyears,registeringlevelsclosertotheaveragelevelobservedin2004-2011.

Graph 36PRIVATE CONSUMPTION: 2004 - 2013

(Real%change)

*Forecast.

2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2013*

3.64.6

6.4

8.3 8.7

2.4

6.0

Average2004-2011:5.8% 6.4 5.8 5.8

Severalindicatorsreflecttherecentevolutionofprivateconsumption:

a. The Consumer Confidence Index has been on the optimistic side for 23consecutivemonths.

Graph 37CONSUMER CONFIDENCE INDEX: 2008 - 2012

Households’economicsituation

Source:IpsosAPOYO.Elaboration:BCRP.

J.08 J.09 J.10 J.11 J.12M M M M MM M M MJ J J JS S S SN N N N

Optimistic

56

45

49

44

46

39

36

42 41

38

44

4343

37

46

41

45

53

45

53

48

5551

50

5355 56

53

6158

56

65

5954

53

5959

64

58

59 5959

5659

56

61

68

Pessimistic

47

51

b. Thevolumeof importsofdurableconsumergoodshasshowna fasterpaceofgrowthinthefirsttwomonthsof2012,recordingarateof30percentinJanuaryandarateof41percentinFebruary.

43


Graph 38VOLUME OF IMPORTS OF DURAbLE GOODS: 2008 - 2012

(12month%change)

0

20

-20

40

-40

60

80

30.3

41.4

J.08 J.09 J.10 J.11 J.12M M M MM M M MJ J J JS S S SN N N N

Graph 39URbAN EMPLOYMENT: 2004 - 2011

(%change)

Source:MTPE.

2004

2.7

2005

4.5

2006

7.2

2007

8.3

2008

8.3

2009

1.3

2010

4.2

2011

5.4Average2004-2011:5.2%

c. Thegrowthofemploymentinurbanareas,infirmswith10andmoreworkers,showedafasterpacein2011,risingfromarateof4.2percentin2010toarateof5.4percentin2011.Thisratewashigherthantheaveragegrowthrateofurbanemploymentintheperiod2004–2011.

31.Private investment grew 11.7 percent in 2011. A moderation of growth wasobserved over the year in this variable, which recorded two-digit rates untilQ2 and lower rates thereafter in a context of international uncertainty that ledenterprises to delay their decisions of investments. It is estimated that privateinvestmentwouldregisteralowergrowthratein2012thanin2011,inlinewiththemoderationofthegrowthofdemandforeseenforthisyear.

Several indicators reflect the evolution of private investment:

a. Businessexpectationsof theeconomic situation in the threemonthsaheadhave gradually improved during the second semester of 2011 and haverecordedtheirhighestlevelin11monthsinFebruary.

44


Graph 40EXPECTATIONS AbOUT THE ECONOMY IN THE NEXT 3 MONTHS: 2008 - 2012

SurveyofMacroeconomicExpectations,BCRP.SurveyconductedduringthesecondfortnightofFebruary2012.

J.08 J.09 J.10 J.11 J.12M M M M FM M M MJ J J JS S S SN N N N

Optimistic70 71

67 6974 71

6761

56

44

47

32

38

3335

39

53 51 5363

61

66 69 72 72

71

74

71

75

7171

70

71 70 68 66 65 65

46

49

47

51 535158 56

605758

Pessimistic

b. Economicagents forecast thatGDPwillgrowbetween5.0and5.5percentin2012.Arateofbetween5.6and6.0percentisestimatedfor2013sincegreaterdynamismisexpectedintheeconomyinthisyear.

Table 13SURvEY ON MACROECONOMIC EXPECTATIONS: GDP GROWTH(

(%)

Expectations up to: IR Sep.11 IR Dec.11 IR Mar.12*

Financial entities 2012 5.8 5.5 5.3 2013 6.0 6.0 5.6

Economic analysts 2012 5.6 5.4 5.0 2013 5.9 5.5 5.6

Non-financial firms 2012 6.0 6.0 5.5 2013 6.0 6.0 6.0

* Survey made during the second half of February 2012.

c. Theproductionofelectricitycontinuestoshowahighpaceofgrowth,althoughwithlowerratesthantheonesobservedinthefirstsemesterof2011.

Graph 41ELECTRICITY PRODUCTION: 2008 - 2012

(12month%change)

-4.0

8.0

2.0

14.0

-2.0

10.0

4.0

16.0

0.0

12.0

6.0

8.1

5.67.9

J.08 J.09 J.10 J.11 J.12 F*M M M MM M M MJ J J JS S S SN N N N*Preliminary.

45


Graph 42VOLUME OF IMPORTS OF CAPITAL GOODS: 2008 - 2012

(12month%change)

0

20

-20

40

-40

-60

60

80

100

J.08 J.09 J.10 J.11 J.12M M M MM M M MJ J J JS S S SN N N N F

6.115.9

3.2

Graph 43DOMESTIC CONSUMPTION OF CEMENT: 2008 - 2012

(Annual%change)

-10

-5

0

5

10

15

20

25

30

35

J.08 J.09 J.10 J.11 J.12M M M MM M M MJ J J JS S S SN N N N F

3.84.5

15.5

d. Thevolumeofimportsofcapitalgoodsalsoshowslowergrowthratesthantheonesobservedin2011.

e. Constructionhasshownsignsofarecoveryinthelastmonths,asreflectedinthedomesticconsumptionofcement.

32.The investment projects announced for the period 2012–2013 amount toUS$35.5billion,ahigherfigure than theone reported inDecember (US$33.5billion). Considering the evolution of business expectations and the announcedinvestment, the forecaston thegrowthofprivate investment in2012hasbeenrevisedupwardsfrom7.0to8.2percent.Iftheseinvestmentprojectscrystallized,thegrowthrateofinvestmentintheperiod2012–2013wouldbehigherthan8percent;thatis,higherthantheGDPgrowthrate.

46


Graph 44ANNOUNCED INVESTMENT PROJECTS: 2012-2013

(MillionsofUS$)

Miningandhydrocarbons

21,232

Electricity

4,895

Industry

1,912

Infrastructure

2,260

Othersectors

5,157

Graph 45PRIVATE INVESTMENT: 2004 - 2013

(Real%change)

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

8.112.0

20.123.3

25.9

-15.1

22.1Average

2004-2011:13.5% 11.7

8.2 8.7

Table 14ANNOUNCED INvESTMENT PROJECTS

(MillionsofUS$) 2012 2013 2012 - 2013 IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 Mining 7,360 7,242 7,857 9,002 15,217 16,244Hydrocarbons 2,170 2,232 3,072 2,756 5,242 4,988Electricity 2,714 2,606 2,224 2,289 4,938 4,895Industry 1,040 1,082 640 830 1,680 1,912Infrastructure 1,055 1,211 895 1,049 1,950 2,260Other sectors 2,533 3,045 1,962 2,112 4,495 5,157

TOTAL 16,872 17,418 16,650 18,038 33,522 35,456

Source: Press media and information companies.

47


Table 15ANNOUNCED MAIN INvESTMENT PROJECTS: 2012 - 2013

Sector Company Project name XstrataPerúS.A. LasBambas Minera Yanacocha S.R.L. Minas Conga SociedadMineraCerroVerdeS.A.A. CerroVerde JinzhaoMiningPerúS.A. PampadelPongo China Minmetals Corporation and Jiangxi Copper Company Limited El Galeno AngloAmericanQuellavecoS.A Quellaveco MineraChinalcoPerúS.A. Toromocho XstrataPerúS.A. Antapaccay CompañíaMineraAntaminaS.A. Expansion:Antamina Southern Perú Copper Corp. Peru branch Los Chancas ShougangHierroPerúS.A.A. MarconaMining HudBay Minerals Inc. Constancia CandenteCopperPerúS.A. CañariacoNorte GoldFieldsLaCimaS.A.A. Chucapaca MarcobreS.A.C. MinaJusta Southern Perú Copper Corp. Peru branch Toquepala MitsuiMining&SmeltingCo.Ltda.Perubranch Quechua MineraBarrickMisquichilcaS.A. Expansion:LagunasNorte VolcanCompañíaMineraS.A.A. Expansion:Volcan CompañíaMineraMilpoS.A.A. Magistral Minera Yanacocha S.R.L. Chaquicocha LaArenaS.A. LaArena VolcanCompañíaMineraS.A.A. Rondoni SaviaPerúS.A. LotZ-2B:Perforation,explorationandothers Perenco Peru Limited Exploration Lot 67 and pipeline PetrobrasEnergíaPerúS.A. Lot58andLotX PluspetrolPerúCorp.S.A. ExpansionofPiscoandMalvinasplantsHydrocarbons Cálidda Gas Natural del Perú Expansion of main grid TransportadoraofGasdelPerúS.A.(TgP) Expansionofgasandcapacityoftransportation SK Energy Exploration Lot Z 46 PluspetrolPerúCorp.S.A. ExplorationLots88and56 Contugas Ica pipeline RepsolYPFS.A Lot57-Kinteroni EnergíaAzulS.R.L. HydroelectricplantSantaMaría GeneraciónHuallagaS.A. HydroelectricplantofCerrodeChagila KallpaGeneraciónS.A. HydroelectricplantofCerrodelÁguila FénixPowerPerúS.A. Combinedcyclethermalpowerplant(naturalgas) Norwind Wind energy park Cerro Chocan Electricity EnersurS.A. ExpansionofChilca1 SNPowerPerúS.A. HydroelectricplantCheves KallpaGeneraciónS.A. KallpaIV Egecusco HydroelectricplantsAccoPucará EmpresaAdministradoraChungarS.A.C. HydroelectricplantBeloHorizonte LuzdelSurS.A.A. Gridandinfraestructureexpansion CorporaciónAcerosArequipaS.A. Expansionoflaminationplant(N°2) CementoAndino PlantexpansioninTarma Cementos Portland Cement plant Textiles Camones Expansion of production linesIndustry Cementos Lima Expansion of installed capacity Cementos Otorongo Contruction of cement plant CementosInteroceánicos CementplantArequipa Cementos Pacasmayo Expansion of plant AmericasPotashPeru Phospatesplant TASA Modernizationofplantsandpurchaseofnewships ConsorcioAPMTerminalsCallao ModernizationofNorthPier LíneaAmarillaS.A.C. ParqueRimacexpressway OdebrechtPerúIngenieríayConstrucciónS.A.C. IIRSASouthSection3:Inambari-lñapari ChancayPortS.A. Multipurposepier Infrastructure ConcesionariaVialdelSolS.A.-COVISOL Trujillo-SullanaSolHighway AutopistadelNorteSAC Pativilca–PortofSalaverryRoadNetworkNo.4 TrenLimaLínea1 OperationandMaintenance:Acquisitionofrollingmaterial Terminal Internacional del Sur Expansion of Port of Matarani CoviPeru RoadNº6:Pucusana-CerroAzul-Ica Terminales Portuarios Euroandinos Expansion of Port Paita TelefónicadelPerúS.A. OpticalfiberprojectatLosAndes AméricaMóvilPerúS.A.C. Expansion of infrastructure, capacity and technological innovation Other sectors GrañayMonteroVivienda(GMV) Housingprojects BesalcoS.A. Realstate Cencosud New superpmarkets and malls

48


33.Public investment declined 17.8 percent in 2011. A greater level ofimplementationwasobserved in the investmentprojectsof regionaland localgovernments, as foreseen in our previous Inflation Report. Public investmentwould show a significant recovery in 2012, returning to more sustainablegrowthratesin2013.Consideringtheevolutionofprivateinvestmentandpublicinvestment,itisestimatedthattheratiooffixedgrossinvestment-to-GDPwouldbeover26percentin2013.

Graph 47GROSS FIXED INVESTMENT: 2004 - 2013

(%ofGDP)

*Forecast.

2004

17.9

2005

18.4

2006

19.5

2007

21.5

2008

25.9

2009

22.9

2010

25.1

2011

24.1

2012*

25.7

2013*

26.2

Publicinvestment Privateinvestment

20.319.919.619.217.7

21.518.216.415.515.1

2.8 2.9 3.13.4

4.35.2

5.9 4.5 5.8 5.8

Graph 46PUbLIC INVESTMENT: 2004 - 2013

(Real%change)

6.1

13.8

20.7 18.9

33.6

21.2Average

2004-2011:15.6%

27.3

-17.8

7.3

34.3

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

34.The forecaston thegrowthofexports showsaslightlygrowing trendafter the8.8percentincreaseregisteredin2011,whichwasinfluencedbya20.2percentgrowthinnontraditionalexports.Theforecastconsiderstheonsetofoperationsinsomecopperminingprojects–i.e.,theexpansionsofSouthernandAntamina–andtheevolutionofexternaldemand,asaresultofwhichexportswouldgrowatahigherratethantheaverageratein2004–2011.Themoderationofgrowthofdomesticdemand,ontheotherhand,wouldbereflectedinalowerdemandforimports.

49


GDP by sectors

35.Showingafasterpaceofgrowththantheaveragegrowthrateintheperiod2004–2010(3.7percent),theproductionofprimary sectors grew4.4percentin2011.Adifferentiatedconductwasobservedinthedifferentsectors.Fishingrecordedagrowthrateof29.7percent,showinganincreaseinfishcatchforbothhumanandindustrialconsumption.Theproductioninthesubsectorofagriculturealsogrewdespitethecoldweatherconditionsthataffectedtheproductionofsomecrops,especially in the second half of the year, while the production in the livestocksubsectorgrew5.2percentreflectingmainlyahigherconsumptionofbeef.Ontheotherhand,growthinmetallicminingdecreasedforthesecondconsecutiveyearduetoalowerproductionofzinc,silver,andlead.

Therateofgrowthofprimarysectorsin2012hasbeenreviseddownwardsfrom4.6percentinourpreviousreportto3.3percent.Thefactorsconsideredforthisdownwardrevisionintheagriculturalsectorincludetheadverseeffectsoflonger-

Graph 49IMPORTS OF GOODS AND SERVICES: 2004 - 2013

(Real%change)

*Forecast.

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

9.6 10.9 13.1

21.4 20.1

-18.6

24.0Average

2004-2011:11.2% 9.88.3 8.3

Graph 48EXPORTS OF GOODS AND SERVICES: 2004 - 2013

(Real%change)

*Forecast.

15.2 15.2

0.8

6.9 8.2

-3.2

1.3

Average2004-2011:6.8%

8.87.5 7.7

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

50


than-normal periods of cold temperatures and the intensity of rains during themonthsofFebruaryandMarchonsomecrops.Forexample,thelowproductionof mango due to the negative effect of La Niña on the yield of this crop wasaggravatedbyintenserains.Nonetheless,othercropslikericewerefavoredbythegreateravailabilityofwater.Moreover,someexport-orientedcropssuchascoffee,olive,grapes,andcottonwouldshowhighgrowthrates.

According to informationprovidedby Imarpeandsomefishingcompanies, thefishingsectorwould reduce itsquotaofanchovycatch toabout6million tons,afterhavingextractednearly7millionmetrictonsofanchovyin2011.

TheminingandhydrocarbonssectorwouldregisteralowerratethanforeseeninourpreviousReportduetolowerproductioninthecaseofbothmetallicminingand hydrocarbons extraction despite the expansion of Southern and Antamina,theonsetofoperationsatXstrataTintaya’scopperprojectofAntapaccay,andtheproductionofgoldatTantahuatayandLaArena.Thelowervolumesconsideredinthecaseofothermetalsarebasedontheproductionrecordedinthefirstmonthsoftheyearandontheestimatesofthecompaniesinvolved.

Theproductionofthesubsectorofhydrocarbonswasalsoreviseddownwardsdueto the lower extraction of crude projected given the exhaustion of Pluspetrol’slot I-AB in Loreto. This lower extraction of crude would be offset by a higherproductionofnaturalgasinPluspetrol’slots88and56.

Productioninprimarysectorswouldrecovertowards2013asaresultofboththeonsetofminingprojects,suchasToromocho,andnormalclimateconditionsthatwouldallowamoderategrowthinthesectorofagricultureandarecoveryinthefishingsector.

Graph 50PRODUCTION IN PRIMARY SECTORS: 2004 - 2013

(Real%change)

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

3.2

6.1

5.0

2.1

7.4

1.0 1.1

Average2004-2011:3.8%

4.43.3

6.7

51


36.Non-primary sectors grew7.4percentin2011,showingaslightlylowerratethan the average rate of 7.5 percent registered in 2004–2010. The growthrates of non-primary sectors moderated over the year after the high ratesrecordedin2010,especiallyinthesectorsofnon-primarymanufacturingandconstruction.

Theprospectsforgrowthinthesectorofmanufacturingin2012arebasedonthebettertermsoftradeconsideredtodayandonthetrendregisteredbydomesticdemandinbothconsumptionandinvestment.Thedemandforconsumergoodssuchasfoodproducts,beverages,andtextileswouldbedrivenbybetterconsumerexpectationsandbybetterincomesforthepopulation,whiletheimplementationofworksbylocalandregionalgovernmentswouldbedrivenmainlybyincreasedgovernment spending.Moreover, the announcementsof increased investmentsin housing compounds and malls would bring about a higher production ofconstructionmaterials,suchascement,glass,iron,andsteel.

In this context of higher spending in public and private investment, growth inthe construction sector hasbeen revisedupwardsdue to the signsof recoveryobservedduringthefirstmonthsoftheyear.

Thedynamismofnon-primarysectorsisexpectedtocontinuein2013whenthesesectorswouldregistergrowthratesclosetotheeconomy’spotentialgrowth.

Graph 51PRODUCTION IN NON PRIMARY SECTORS: 2004 - 2013

(Real%change)

* Forecast.

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

5.4

7.08.4

10.4 10.3 10.3

0.8

Average2004-2011:7.5% 7.4

6.1 6.2

Asreflected intheBCRPsurveyonmacroeconomicexpectations, in Januarytheindicatorofutilizationofinstalledcapacityinnon-primarymanufacturingshowedaslightly lower level than in theprevious twomonths,witha rateclose to theaveragerateinthesecondsemesterof2011.

52


Graph 52RATE OF INSTALLED CAPACITY UTILIZATION OF NON PRIMARY MANUFACTURING

(%)

818079787776757473727170

J10 J11 J12M MM MJ JS SN N

78.0

79.878.8

77.8 77.7

Source:BCRP’sSurveyofMacroeconomicExpectations.

Table 16GROSS DOMESTIC PRODUCT BY ECONOMIC SECTORS

(Real%change) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12

Agriculture and livestock 4.3 3.8 5.2 4.0 4.3 4.3Agriculture 4.2 2.8 5.8 3.8 3.7 3.7Livestock 4.4 5.2 4.8 4.6 4.8 4.8

Fishing -16.4 29.7 -2.0 -4.7 2.8 2.8

Mining and hydrocarbons -0.1 -0.2 4.4 2.8 10.6 10.7Metallic mining -4.9 -3.6 4.3 3.2 9.7 9.0Hydrocarbons 29.5 18.1 5.3 1.0 14.0 18.5

Manufacturing 13.6 5.6 4.9 4.9 6.2 6.2Raw materials -2.3 12.3 4.0 3.4 6.3 6.3Non-primary industries 16.9 4.4 5.1 5.1 6.2 6.2

Electricity and water 7.7 7.4 5.5 5.5 5.6 5.9

Construction 17.4 3.4 8.8 11.3 7.6 7.6

Commerce 9.7 8.8 5.7 5.9 5.4 5.4

Other services 8.0 8.3 5.3 5.8 6.3 6.3

GDP 8.8 6.9 5.5 5.7 6.3 6.3

Memo:

Primary GDP 1.1 4.4 4.6 3.3 6.6 6.7Non-Primary GDP 10.3 7.4 5.6 6.1 6.2 6.2


53


Graph 53NON-PRIMARY MANUFACTURING: 2004 - 2013

(Real%change)

*Forecast.

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

7.2 8.5 8.5

14.0

8.9

-8.5

16.9

Average2004-2011:7.5%

4.46.2

5.1

Graph 54CONSTRUCTION: 2004 - 2013

(Real%change)

*Forecast.

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

4.7

8.4

14.816.6 16.5

6.1

17.4

Average2004-2011:11.0%

3.4

11.3

7.6

37.Everygrowthforecastmaybeaf fectedbypossibleeventsthatcandiverttheforecastfromitscentralscenario.Inthecurrentcontextofincreaseduncertainty,the materialization of some risks could imply a dif ferent GDP growth ratethan the one originally forecast. In a scenario of risks that have a domesticorigin,bothhouseholdandbusinessexpectationsdeteriorateandgenerateanegative ef fect on the growth of consumption and investment. Likewise, amore critical international environment would imply a lower global growththat would af fect both traditional and non-traditional Peruvian exports andwouldgenerateanegativeimpactonthecountry’seconomicactivity.Theriskscenarios considered in this Report are discussed in the chapter Balance ofRisks.

54


Memo:ThegraphshowstheprobabilityofoccurrenceofGDPgrowthforecastsinthefuture,thevaluesofwhichwereestablishedcombiningstatisticalanalysis(usingdataasofDecember2011)andthesubjectiveperceptionoftheBCRP.GDPgrowthisdefinedasthepercentagechangeofthemovingaverageinfourquarterscomparedtothesamequarterofthepreviousyear.Thus,thefigureinQ4coincideswiththeGDPgrowthrateintheyear.

Thegraphconsistsof18bands,eachbandwithaprobabilityof5%thattheprojectedvaluemayfallwithinit.Thus,ineachperiodoftheforecasthorizon,eachpairofbandswiththesameshadeconcentratesaprobabilityof10%.Thiscanbeinterpretedasthat10ofevery100possiblevaluesoffutureGDPgrowthvaluesareexpectedtofallwithinthedarkestbands(locatedinthecenter),10areexpectedtofallwithintheclearerbandsadjacenttothedarkestones,other10areexpectedtofallwithintheevenclearerbandslocatedaboveandbelowthesecondgroupofbands,andsoonuntil90ofthe100valuesaredistributedinthegraph.Theremaining10valueswouldfalloutsidethebands.

Thebaselinescenariopathiscontainedinthedarkerbands.ThechapteronthebalanceofrisksdiscussestheriskscenariosusedfortheinflationforecastinGraph104.ThebalanceofrisksforGDPgrowthatend-2012showsaslightdownwardbias,thatis,theprobabilitythatGDPgrowthwillbebelowtheforecastconsideredinthebaselinescenarioisslightlyhigherthantheprobabilitythatitwillbeabovethisforecast.

Graph 55FORECAST OF GDP GROWTH: 2012-2013

(Interanual%change)

12

10

8

6

4

2

0

12

10

8

6

4

2

02010 2011 2012 20132006 2007 2008 2009

BOX 2ELECTRICITY SECTOR:

SUPPLY - DEMAND BALANCE AT THE NATIONAL AND REGIONAL LEvELS, 2012 - 2013

In 2011 the effective power of Sistema Eléctrico Interconectado Nacional (SEIN) amounted to6,444 MW. Given that the maximum demand in 2011 was 4,961 MW, the system’ reserve margin at year end was 30 percent1.

The reserve margin measures excess supply as a percentage of demand: a positive reserve margin implies a surplus of electricity that guarantees an unlimited power supply at the national level under optimal conditions of operation and without any weather, operational, or transmission constraints.

However, the supply that may actually be provided is negatively affected over the year by different factors,suchasasub-optimaloperationofthesystem(e.g.generationortransmissionfailures),hydrologicalconditions(e.g.dryseasonorscarcerainsbetweenMayandNovember),operational

1 (Effectivepower–maximumdemand)/(Maximumdemand).

55


conditions (e.g. maintenance programs and constraints in the supply of fuel/transportation ofnaturalgas),aswellasbylimitationsinthecapacityofthetransmissionsystem.AccordingtotheComitédeOperaciónEconómicadelSistema(COES),thereservemarginwouldrangebetween8and 12 percent in 2012 and between 8 and 23 percent in 2013.

These reserve estimates include the energy that will be generated with the onset of operations at two coldreservepowergenerationplants–oneplantinthenortharea2,inTalara(200MW)andtheotherplant in the south area3, in Ilo(564MW)–sinceSeptember2013.Thesedual thermalgenerators–whichoperatebothwithdieselandnaturalgas–areexpectedtoreinforceSEIN’scapacitytosecureacontinuoussupplyofelectricitygiventhat,despitetheirhigher-than-averagefixedandvariablecosts,their startup and synchronization time to provide electricity in case of contingencies is only 30 minutes.

AsregardstheSEINareas,deficitsbetweentheregionalmaximumdemandandlocalgenerationof electricity would be observed in the north and south regions of the system during 2012. Because SEIN has a positive reserve margin nationally due to the surplus registered in the center region4 whichwouldbyfaroffsetanyregionaldeficit,noriskofanelectricityrationingisforeseenif thesystem operates under optimal conditions and if there are no electricity transmission constraints.

2 Tumbes,Piura,Lambayeque,Cajamarca,LaLibertad,andAncash.3 Apurimac,Cuzco,Arequipa,Puno,Moquegua,andTacna.4 Huanuco,Ucayali,Lima,Pasco,Junin,Ica,Huancavelica,andAyacucho.

SEIN: SUPPLY - DEMAND(MW,Reservemarginin%)

7,000

6,000

5,000

4,000

3,000

2,000

1,000

02012Flood(Jan-Apr)

8%

2012Drought(May-Nov)

7%

2012(Dec)

12%

2013Flood(Jan-Apr)

8%

2013Drought(May-Nov)

18%

2013(Dec)

23%

Memo:Thesupplyandthereservemarginareadjustedbyclimatologicalandoperationalconstraints.Source:COES.Elaboration:BCRP.

SEIN – ZONES NORTH, CENTER AND SOUTH: SUPPLY – DEMAND(MW,Reservemarginin%)

1,500

1,200

900

600

300

0

-300SEIN

12%

23%

12% 12%

-10%

16%

-10% -2%

27% 24%

-20%

24%

2012 2013

-20% -20%SEIN(s/RFG) North North(s/RFG) Center South South(s/RFG)

Memo:Thesupplyusedtocalculatethereservewasadjustedbyafactorof15percentduetooperationalandhydrologicalconditions.Source:COES.Elaboration:BCRP.

Demand Reserve

56


These regionaldeficitswouldbe reversedatend2013with theonsetofoperationsat thecoldgeneration reserveplants (CGR), aswell aswith severalwindgenerationprojects in thenorth(110MW)andthehydroelectricpowerplantofMachuPicchuII(100MW)inthesouth.Assumingthat there will be no restrictions for the transmission of electricity in the north and south regions, this additional supply in 2013 could actually be supplied and there would be no risk of rationing. However,thelowerrelativeefficiencyofCGRscomparedtootherpowergenerationtechnologies,such as hydroelectric power plants or combined cycle power plants, will imply an impact on electricity rates.

In order to complement the CGR, it is essential to ensure in the short-term that the SEIN networks are able to transmit the electricity required to and within the north and south areas in a timely and secure manner. However, risks of partial interruptions of supply are observed today mainly in the south region due to the congestion registered by the main transmission grids of this area to import electricity from the center region and to transmit energy in the southern region.

Withoutnewinvestmentsintransmissionprojects,thissituationwouldbecomemoresevereinthefuture given that the demand for electricity in the south will increase in the medium-term with the onsetofoperationsofseveralminingprojectsinthenextfiveyears.

SEIN: MINING PROJECTS IN THE SOUTH(Demand,MW)

Project Departament 2012 2013 2014 2015 2016

Total - South 98 105 318 837 1,005Antapaccay Cusco 90 90 90 90 90Expan.Concentr.ToquepalaandCuajone Moquegua 8 8 44 44 44LasBambas Apurímac 7 61 147 147Expan.CerroVerde Arequipa 100 440 440Constancia Cusco 23 90 90Quellaveco Moquegua 10 114Chucapaca - Cañahuire Moquegua 9 35Chapi Moquegua 7 26Quechua Cusco 19

Source: COES. Elaboration: BCRP.

Therefore,itisessentialtoensuretheimplementationofthreetransmissionprojectsinthesouthernregion of SEIN that currently show delays in the operation of the transmission lines involved. These projectsarenecessarytostrengthenthetransmissionofelectricitytoandinsidethisregion.

• Center–SouthFlow:Reinforcementofthecoastalinterconnectionbetweenthecenter(Lima)andsouthregions(Moquegua)requiredforthesustainabilityofSEIN.

• Intra – South Transmission Grid: Required to transmit the electricity generated by new generation projects due to start operations between 2013 and 2015 (C.H.Machu PicchuII,C.H.SantaTeresa,andC.T.Quillabamba)andtoreinforcetheflowbetweenCuzcoandArequipa.

57


SEIN: PROJECTS OF TRANSMISSION LINES WITH DELAYS(South)

Line Tension Coverage Start*

MachuPicchu–Abancay-Cotaruse 220kV Intra-South:Cusco-Apurímac Feb.2013Tintaya–Socabaya 220kV Intra-South:Cusco-Arequipa Apr.2013Chilca–Marcona–Montalvo 500kV Centro-South:Lima-Moquegua Aug.2013

* Date of entry into operation of concession contracts as. Source: COES. Elaboration: BCRP.

Someofthemainreasonsaccountingforthedelaysofnotlessthansixmonthsthattheseprojectsshow in their implementation are uncertainty about the scope and application of the Prior Consultation Law(Chilca-Marcona-Montalvo)andabouttheimplicationsoftheexpansionofprotectedareasof theMachuPicchu-Choquequirao reserve approved by theMinistry for EnvironmentalAffairs(MachuPicchu-Abancay-Cotaruse).

EvenwiththeoperationoftheCRGatend2013,thepostponementofthesetransmissionprojects,together with the limitations observed today in the transportation of gas natural, shows a balance inwhichthereareconsiderablerisksofpartialandtransitoryrationingofelectricityformajorclientsduring 2012 and 2013 due to transmission constraints and/or to SEIN failures.

58


III. Balance of payments

38.Peru’sexternalaccountscontinuetoshowlowdeficitlevelsinthecurrentaccountduebothtothehighpricesofcommoditiesobservedsincethemiddleofthepreviousdecadeandduetotheincreaserecordedinthevolumeofexports–particularlynon-traditionalexports–inthecountry’scurrentcontextofdiversificationofproductsandmarkets.Between2006and2011,thecurrentaccountdeficithasbeen0.4percentofGDPonaverage.Thisdeficithasbeencoupledbysignificantflowsoflongtermprivatecapitals,whichhavecontributedtoensurethesustainabilityofthebalanceofpaymentsinthemediumterm.

39.In 2011 the current account deficit in the balance of payments amounted toUS$2.267billion,afigureequivalentto1.3percentofGDP(in2010thedeficitwasequivalentto1.7percentofGDP).Toagreatextent,thisresultreflectsthebetter evolution of exports, which grew 8.5 percent in terms of volume and20.0percent intermsofpricescomparedtothepreviousyear.Onthesideofthefinancialaccount,theflowsofforeigndirectinvestmentanddisbursementsforprojectsmaintainedsimilarlevelstothoseobservedin2010,buttherewasalowerflowoflongtermbankdisbursementsandofnon-residents’purchasesofassets.

40.Acurrentaccountdeficitof1.5percentofGDP is forecast for2012. This lower

deficitthantheoneforeseeninourDecemberreport(2.2percent)reflectsmainlythe improvementobserved in the termsof tradedue to the rise in thepriceofcommodities,whichwouldbeoffsetbyahigherfactorincomeassociatedwiththehigherpricesofexports.In2013thecurrentaccountdeficitwouldbeequivalentto1.8percentofGDP,lowerthantheoneestimatedinourReportofDecember(2.1percentofGDP).

Graph 56CURRENT ACCOUNT OF THE bALANCE OF PAYMENTS: 2004-2013

(%ofGDP)

*Forecast.2004 2005

0.0

1.4 1.4

0.2

-1.7 -1.3 -1.5 -1.8

-4.2

3.1

2006 2007 2008 2009 2010 2011 2012* 2013*

59


41.Exportsin2011amountedtoUS$46.268billion,whichrepresentsanincreaseof30.1percentcomparedto2010.Thevolumeofexportsgrew8.5percentduetothegrowthofexportsoffishmeal(19.3percent),coffee(27.8percent),andnon-traditionalproducts (20.1percent), especially agricultural, fishing, andchemicalproducts.

Peru’s exports have increasingly diversified in recent years and Latin AmericancountrieshavebecomethemaindestinationofPeruviannon-traditionalexports.Becauseofthis,thecountry’sshareofexports-to-GDPhasrisenfrom13percentatthebeginningofthe2000sto26.2percentin2011,thehighestlevelregisteredduringallthisperiod.

Table 17BALANCE OF PAYMENTS

(MillionsofUS$) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 I. CURRENT ACCOUNT BALANCE -2,625 -2,267 -4,258 -2,955 4,418 -3,935 % of GDP -1.7 -1.3 -2.2 -1.5 -2.1 -1.8 1. Trade Balance 6,750 9,302 6,862 9,065 8,152 9,968 a. Exports 35,565 46,268 45,093 48,660 49,548 53,425 b. Imports -28,815 -36,967 -38,231 -39,595 -41,397 -43,456 2. Services -2,345 -2,132 -2,342 -2,409 -2,489 -2,722 3. Investment Income -10,055 -12,636 -12,245 -13,028 -13,774 -14,825 4. Current transfers 3,026 3,200 3,467 3,416 3,694 3,643 Of which: Remittances 2,534 2,697 2,955 2,903 3,181 3,129

II. FINANCIAL ACCOUNT 13,595 6,978 7,058 9,955 7,218 7,935 Of which: 1.PrivateSector(longandshortterm) 13,887 8,467 6,626 8,714 7,261 8,049 2. Public Sector -1,022 -104 412 886 -48 -118

III. BALANCE OF PAYMENTS (=I+II) 10,970 4,711 2,800 7,000 2,800 4,000

Memo:Grosslong-termexternalprivatefinancing MillionsUS$ 12,090 11,309 8,873 9,837 11,080 11,050 %ofGDP 7.9% 6.4% 4.6% 4.9% 5.3% 5.1%

Balance of NIRs MillionsUS$ 44,105 48,816 52,405 55,816 55,205 59,816 %ofGDP 28.7% 27.6% 27.1% 28.0% 26.3% 27.7%


60


Table 18TRADE BALANCE

(%change) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 1. Value: Exports 31.9 30.1 -0.8 5.2 9.9 9.8 Traditional products 34.2 29.5 -3.6 3.5 9.1 8.9 Non-traditional products 23.5 32.6 8.5 10.7 12.5 12.9 Imports 37.1 28.3 4.5 7.1 8.3 9.8

2. Volume: Exports 1.9 8.5 5.6 7.3 8.6 8.9 Traditional products -2.5 5.2 5.4 6.6 8.4 8.6 Non-traditional products 16.2 20.1 6.3 9.5 9.2 9.5 Imports 24.5 12.8 5.7 7.8 7.7 9.2

3. Price: Exports 29.9 20.0 -6.1 -1.9 1.2 0.9 Traditional products 37.5 23.2 -8.6 -2.9 0.6 0.2 Non-traditional products 6.0 10.6 2.0 1.1 3.0 3.1 Imports 10.1 13.8 -0.3 -0.5 0.6 0.5


42.Theforecastforexportsin2012hasbeenrevisedupwardsfromUS$48.5billiontoUS$48.7billion,duemainlytoapriceeffectresultingfromthehigherpricesofcommoditiesrelativetotheonesconsideredinourpreviousReport.Exportsin2013areestimatedtoamounttoUS$53.4billion.

In terms of volume, exports would increase 7.3 percent in 2012 (5.6 percent

wasestimated inourpreviousReport),given thathighervolumesofexportsoffishmeal andfishoil andofnon traditionalproducts areexpected in a scenarioofhighergrowthinourtradingpartners.In2013,thevolumesofexportswouldgrow8.9percent,mainlyasaresultoftheonsetofoperationsinsomenewminingprojects,suchasToromocho.

2004 2005 2006 2007 2008 2009 2010* 2011 2012* 2013*

Graph 57EXPORTS OF GOODS: 2004-2013

(BillionsofUS$)

Memo:Totalexportsalsoincludesotherexports.*Forecast.

12.83.5

9.2

17.4

4.3

12.9

23.8

5.3

18.5

27.9 26.96.3 6.2

21.5 20.6

31.535.6

46.348.7

53.4

7.5

7.6

10.1 11.212.7

23.8 27.7 35.837.1

40.4

TraditionalexportsNontraditionalexports

In2012-2013thevolumeofnontraditionalexportsisexpectedtogrowatanaveragerateof9.5percentduetotherecoveryoftheglobaleconomyandtoPeru’sgreater

61


accesstointernationalmarketsasaresultofthetradeagreementsalreadysignedorcurrentlybeingnegotiated(15agreementsarealreadyinforce,5willbeeffectiveinthenearfuture,and4arebeingnegotiated).Withthis,thevolumeofexportsin2013wouldbeequivalentto2.7timesthevolumeofexportsregisteredin2003.

Graph 58NON TRADITIONAL EXPORTS

Volumeindex(1994=100)

*Forecast.

326383

430469

531

452522

627653

713

2013*2004 2005 2006 2007 2008 2009 2010* 2011 2012*

43. Importsin2011were28.3percenthigherthanin2010andamountedtoUS$36.967billion. The average volume of imports grew 12.8 percent, mainly as a result ofhighervolumesofimportsofdurableconsumergoods,industrialinputs,andcapitalgoods(excludingconstructionmaterials).Thisincreaseinthevolumeofimportsisconsistentwithaneconomyinexpansionthatneedstoincreaseitsinvestmentlevelsandacquireorrenewcapital,aswellaswiththepopulation’sbetterlevelsofincomethatreflectinanincreaseddemandfordurableconsumergoods.

In2012thevalueofimportswouldreachUS$39.6billionduetothegrowthofimportsintermsofvolume–8percent,ahighergrowththanpreviouslyestimated–,especiallyin thecaseof capitalgoods, in linewith thehigherprivate investmentandhigherprivateconsumption foreseen. Imports in2013wouldamount toUS$43.5billion,reflectinganincreaseof9.2percentinthevolumeofimportsofcapitalgoods.

2004 2005 2006 2007 2008 2009 2010* 2011 2012* 2013*Memo:Totalimportsalsoincludesotherimports.*Forecast.

Graph 59IMPORTS OF GOODS: 2004 - 2013

(BillionsofUS$)

19.6

28.4

21.0

14.812.1

9.8

2.0

5.4

2.3

6.6

2.6

8.0

4.0

10.1

4.5

14.6

3.2

10.4

28.8

5.5

14.0

CapitalgoodsInputsConsumergoods

37.0 39.643.5

6.7 7.3 8.2

18.319.4 20.5

2.43.1

4.1

5.9

9.2

6.8

9.1

11.712.5

14.3

62


44.Therefore, the forecast on the surplus in the trade balance in 2012 has beenrevisedupwardsconsideringthatbettertermsoftradeandhighervolumesthantheonesestimatedinourpreviousReportarenowprojected.Thus,thetradesurplusforecasthasbeenrevisedfromUS$6.9billion(InflationReportofDecember)toUS$9.1billion.

In2013,thetradesurpluswouldrisetoUS$10.0billioninacontextwheretermsoftradewouldremainstableandtheworldeconomywouldgrowatahigherratethanin2012.

Graph 60TRADE bALANCE 2004-2013

(MillionsofUS$)

*Forecast.

3,004

5,286

8,9868,503

2,569

5,9516,749

9,302 9,0659,968

2013*2004 2005 2006 2007 2008 2009 2010* 2011 2012*

Table 19TRADE BALANCE

(MillionsofUS$) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 Exports 35,565 46,268 45,093 48,660 49,548 53,425Of which: Traditional products 27,669 35,837 34,011 37,105 37,117 40,400 Non-traditional products 7,641 10,130 10,709 11,212 12,048 12,659

Imports 28,815 36,997 38,231 39,595 41,397 43,456Of which: Consumer goods 5,489 6,692 7,195 7,290 7,810 8,187 Inputs 14,023 18,255 18,033 19,428 19,078 20,516 Capital goods 9,074 11,665 12,564 12,472 14,048 14,328

TRADE BALANCE 6,750 9,302 6,862 9,065 8,152 9,968


63


Financial account

45. In2011 the long termprivatefinancialaccount,whichamounted toUS$9.930billion,was lower byUS$3.421billion than in 2010. This drop in the financialaccount resultedboth fromthedeclineobserved in loans to thefinancialsector(downbyUS$1.544billion)inacontextofinternationaluncertaintyandfromthedecline registered in termsofnon-residentspurchasesofgovernmentbonds inthedomesticmarket(downbyUS$2.504billion).

Areductionwasobservedinbanks’shorttermexternalliabilitiesinacontextofbanks’re-compositionoftheirexternalfundingaimedatincreasinglongtermandreducingshorttermfunding.Anincreasewasalsoobservedintheexternalassetsofthenon-financialsector.ThesetwomovementsresultedinanegativeflowofaboutUS$1.463billionintheshorttermcapitalsaccount.

Thefinancialaccount in2012wouldbehigher thanestimated inourDecemberreport (US$6.6billion)andwouldamount toUS$8.6billion.Thisdifference isexplainedmainlyby theevolutionobserved in thefirstquarter so far this year:significantcapitalinflowsfromportfoliooperationscarriedbyprivatefirms,longtermdisbursementsforthefinancialsector,andnon-residents’acquisitionofbothsovereignbondsandofotherassetsinthesecondarymarket.

Giventhesecapitalinflowsandwiththepurposeofpreventingexcessivevolatilityintheforeignexchangemarket,theCentralBankintervenedinthismarketbuyingFCforatotalofUS$3.678billioninthefirsttwomonthsoftheyearandanotherUS$800millioninthefirstdaysofMarch.

Graph 61PRIVATE SECTOR EXTERNAL FINANCING 1/

(BillionsofUS$)

1/Foreigndirectinvestmentspluslongtermdibursments.*Forecast.

2.33.2

4.2

9.8 10.3

7.7

12.311.4

8.9

11.1

2013*2004 2005 2006 2007 2008 2009 2010* 2011 2012*

64


Graph 62FOREIGN PORTFOLIO INVESTMENTS IN THE COUNTRY

(MillionsofUS$)

*Forecast.

-51

897

380

1,515

559

55

3,284

441

2,110

762

2013*2004 2005 2006 2007 2008 2009 2010* 2011 2012*

46.AtFebruary2012,internationalreservesamountedtoUS$53.94billion.Thislevelofreserves,whichgivesthePeruvianeconomyahighresponsecapacitytofacepossiblerealandfinancialshocks,isequivalentto30.4percentofGDP,backsup90.8percentoftotalliquidityindepositoryentities,andisequivalentto6.1timespublicandprivateexternaldebtshorttermliabilities.Peru’sinternationalreservesareamongthehighestintheregion.

Table 20PRIvATE SECTOR FINANCIAL ACCOUNT FLOWS

(MillionsofUS$) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12

1. ASSETS -1,051 -856 -1,617 -2,361 -3,232 -2,672 Direct investment abroad -215 -111 0 0 0 0 Portfolio investment abroad -836 -745 -1,617 -2,361 -3,232 -2,672

2. LIABILITIES 14,402 10,786 8,243 10,915 10,493 10,721 Foreign direct investment in the country 7,328 7,659 7,335 6,731 8,772 8,150 Foreign portfolio investment in the country 3,284 441 362 2,110 462 762 Capital participation 87 147 0 0 0 0 Other liabilities 3,198 293 362 2,110 462 762

Long-term loans 3,790 2,687 546 2,074 1,259 1,808 Disbursements 4,977 3,760 1,538 3,106 2,308 2,900 Amortization -1,187 -1,074 -992 -1,032 -1,050 -1,092

3. Total 13,351 9,930 6,626 8,554 7,261 8,049

* Forecast.

65


BOX 3GROWTH AND DIvERSIFICATION OF NON-TRADITIONAL EXPORTS

(1996 – 2011)

Theeconomicliteraturehighlightstheroleofthegrowthanddiversificationofexportswithaddedvalue as a factor that contributes to sustained economic growth5: contexts of increasing openness andtradediversificationarebasedonfirmsdomiciledinPeruwhichcreatemoreefficientprocesses,carry out innovations, adapt technology, adopt more demanding quality standards, and invest in human and physical capital.

Non-traditionalexports(NTX)maybedefinedasthoseexportproductswhichhaveahigherdegreeoftransformationorincreaseinaddedvalue.Incomparisontotraditionalexports(TX),whicharemainly the result of the exploitation of primary resources, NTX tend to generate a greater impact on GDP,productivity,incomes,andemployment.ThesignificantgrowthanddiversificationofPeru’sNTXobservedinthelastfifteenyearsisworthanalyzinginmoredetail.

Growth of exports with added value

Peru has been showing increasing trade openness in recent years: total exports and imports of goods and services as a percentage of GDP has recorded unprecedented levels with this ratio rising from31.2 in1996 to53.4percent in2011.Exportsaccountsignificantly for thecountry’sincreasing trade openness since they have grown by a real annual rate of 7.1 percent on average duringthisperiod,showingahighergrowthratethanGDPinthesameperiod(4.9percent).

This growth of exports is partially due to the positive performance of NTX. Between 1996 and 2011, NTX recorded an annual average growth of 13.1 percent and the value of NTX, which increased

5 Various studies suggest that trade openness is a positive factor for the growth of productivity and for economic growth(Edwards,1997;FrankelandRomer,1999).Ontheotherhand,theliteraturehighlightstheroleofdiversificationof thesupplyofexportablegoodsasameanstoreducerisksanddecreasethevolatilityoftraditional tradeflows(GhostandOstry,1994;BleaneyandGreenaway,2001).Moreover,severalstudiessuggest that theconcentrationofexportsona limitedgroupofproducts (e.g.primarygoods)canhaveanegativeeffectoneconomicgrowth(SachsandWarner,2000;Al-Marhubi,2000;Hesse,2006;LedermanandMaloney,2007;IllescasandJaramillo,2011.

Table 21NIR INDICATORS

2006 2010 2011 Feb. 2012

NetInternationalReserves(NIR,millionsofUS$) 17,275 44,105 48,816 53,940NIR/GDP*(%) 18.7 28.7 27.7 30.4NIR/Shorttermdebt*(#oftimes) 2.9 5.2 5.3 6.1NIR/TotalLiquidity(%) 80.2 90.6 89.1 90.8

*Accumulatedatthepreviousquarter.

66


oversix-foldinthepast15years–fromUS$1.59billionin1996toUS10.13billionin2011–,nowexceedsUS$10billion.IncontrastwithTX,theevolutioninthevalueofNTXismainlyexplainedby thegreater volumesof theseexports,which reflects a growing real penetrationofPeruvianproducts with added value in international markets.

Diversification of exports with added value

ThediversificationofNTX is two-fold: there isadiversificationofNTX in termsofnewmarketsandadiversificationofNTXintermsofnewproducts.Inthelastfifteenyears,thediversificationof Peruvian exports has been marked by the strong growth of the supply of exports through new products.In2011,goodsthatwerenotexportedin1996accountedfor29percent(US$2.98billion)ofthetotalvalueofNTX(asreflectedintariffsub-items).

EXPORTS OF NON-TRADITIONAL PRODUCTS BY COUNTRY OF DESTINATION(MillionsofUS$)

Country 1996 2001 2006 2011 Change96/11 Flow United States 482 793 1,760 2,340 1,858Venezuela 58 115 328 892 834Colombia 83 113 396 824 741Ecuador 58 96 229 615 557Chile 73 138 233 594 521Spain 101 147 299 485 384Netherlands 71 40 149 430 359Bolivia 77 90 180 428 351Brazil 36 50 149 353 317China 3 20 137 331 328France 44 48 157 232 188Mexico 30 64 127 218 188Italy 36 50 126 188 152Germany 94 59 78 178 84United Kingdom 36 40 103 169 133Belgium - Luxemburg 32 11 47 143 111Argentina 20 16 40 136 116Japan 68 48 73 134 66Canada 13 16 43 96 83South Korea 14 13 48 94 80Panama 12 24 28 91 80Hong Kong 25 18 38 81 56Haiti 0 9 39 72 72Dominican Republic 3 13 29 59 57Russia 3 3 6 59 56Others 162 216 577 1,251 1,089 Total 1,590 2,183 5,279 10,130 8,541

Source:Aduanas.Elaboration:BCRP.

67


Asregardsexports’diversificationintermsofmarketsofdestination,thenumberofcountriesto

which Peru exports non-traditional products has increased from 139 to 183 in the last 15 years.

While the destination of Peruvian exportswas already quite diversified in 1996, today 44 new

countries import Peruvian products with added value, even though these new markets import

relativelysmallamountsofNTX(atotalofUS$53millionin2011).

Therefore, the main destinations of NTX in 2011 are similar to the main destinations of these

exportsin1996.TheUnitedStatesandAndeancountries–CAN,includingVenezuela–arestillvery

important destinations for Peruvian NTXs: their contribution to the growth of NTX was 52 percent.

Otherdestinationsthathavecontributedsignificantlytothegrowthofnon-traditionalexportsare

Chile (US$ 594 million in 2011), Spain (US$ 485 million), the Netherlands (US$ 430 million),

Brazil(US$353million),China(US$331million),France(US$232million),andMexico(US$218

million).Thesecountriesaccountforover75percentofgrowthrecordedbynon-traditionalexports

since 1996.

It is also important to highlight the growth of NTX to some countries, such as China, South Korea,

and Canada, which were not among the main destinations of Peruvian NTX in 1996 and now are

among the 25 most important destinations of these exports. Coincidentally, all of these countries

have signed trade agreements with Peru over the past few years.

Asmentionedpreviously, the diversification ofPeruvianNTX ismainly explained by exports of

new products. In 1996, exports included 2,676 different items, while in 2011 this number reached

4,429(growthof65percent).Moreover,1,753ofthesenewitemsconcentrated29percentofNTX

in 2011.

If we analyze the main 50 tariff sub-items of non-traditional exports, it is clear that their composition

haschangedsignificantlybetween1996and2011.Theevolutionofthemainexportsischaracterized

by their:

• Diversification: 15 of the 50 tariff sub-items with higher export value in 2011 did not register

exports in 1996. Today these sub-items show an export value of US 1.26 billion and account for

15 percent of the total growth of NTX in this period.

• Strong growth: the top 50 tariff sub-items include 17 sub-items which have recorded an

accumulatedgrowthofover5,000percent (28percentofaverageannualgrowth).Someof

thesetariffsub-items,whoseexportvalueamountstoUS$1.99billion,accountfor22percent

of the total growth of NTX in the period.

68


EXPORTS OF NON TRADITIONAL PRODUCTS BY PRODUCT(MillionsofUS$)

Item 1996 2001 2006 2011 Change 96/11 Flow Fresh grapes 4 11 51 301 297Copper wire 25 40 242 298 273Fresh asparagus 27 64 187 292 266Phosphates of calcium, unmilled 1 0 0 236 235Frozen giant squid 0 29 91 231 231Othercottont-shirts(menandwomen) 0 23 82 200 200Zinc: of lesser purity 0 1 99 200 200Frosen giant squid 1 1 56 199 198CottonT-shirts-monochromatic(menandwomen) 60 83 212 174 114Fresh avocado 0 3 39 164 164Prepared asparagus 92 81 105 141 49Frozen vieras 0 11 37 135 135Colourlacques(carmine) 20 11 20 131 111Canned artichokes 0 1 66 123 123Other plates, print sheets and polymers strip of propylene 0 0 0 119 119Fresh Mangos 11 27 59 115 104Food for shrimps and prawns 0 10 35 94 94Evaporated milk 1 5 52 94 93Paprika 0 16 74 87 87Sulfuric acid 6 3 3 87 80T-shirtsandshirtsofcotton(men)-withpartialopening(monochromatic) 33 19 37 85 51Zinc oxide 7 7 60 82 75Coloringmatterofcochineal(carminicacid) 7 5 16 82 75Otherfrozenfish(ex.anchovyandmackerel) 0 0 0 78 78Ceramicfloors 4 4 19 69 65Prepared piquillo peppers 0 0 0 66 66Organic banana 0 2 27 64 64Raw cocoa: other uses 0 0 0 63 63Tails of frozen shelled shrimp 33 6 34 58 25Barsofrefinedcopper 3 13 28 57 54Frozenfilletsofotherhakespecies 0 0 0 56 56Ripsandfriezesforparquetflooringofotherspecies 0 0 0 56 56Articlesfortheconveyanceorpackingofplastic 1 31 49 56 55Othert-shirtsandblouses(women/girls) 12 18 61 56 44Printed sheet of polyethylene 0 1 16 56 56Iron bars for construction 3 7 21 55 52Othervegetablespreparedinvinegar(ex.chillipeppers) 0 2 11 50 50Noodles 0 6 10 49 48Other compounds of silver 0 0 3 48 48Polyethylene of ethylene 0 0 12 48 48Frozen asparagus 12 15 27 48 36T-shirtsandshirtsofcotton(men)-withpartialopening(polychromatic) 0 9 27 47 47Other prepared vegetables 0 0 0 46 46Commercial catalogs 0 5 28 46 45Tops of alpaca 0 0 28 44 44Fresh onions 6 12 17 43 37Mresh mandarins 1 4 15 40 40Sweet cookies 0 4 21 40 40T-shirtsandshirtsofcotton(men)-withoutpartialopening 36 34 115 39 3T-shirtInteriors(exceptofacrylicfibers) 0 1 15 36 36Others 1,185 1,558 3,073 5,048 3,863 Total 1,590 2,183 5,279 10,130 8,541


69


Non-traditional exports: Fundamentals and pending agenda

For a small open economy like Peru, the growth and diversification of exports with addedvalue depends basically on endogenous factors, such as the country’s degree and evolution of competitiveness, at the macro level, and of business competitiveness, at the micro level.

Peru’sexportsbegantogrowatafasterpace inthe1990swhensomefirstgenerationreforms(e.g.unilateraltariffreduction)wereintroducedandthengrewsubstantiallyinthelastdecadewiththeconsolidationof tradeopennessasaStatepolicy (e.g. free tradeagreements). In thisway,at themacro level trade liberalizationwasconsolidatedwithmacroeconomicstability(fiscalandmonetarydiscipline),stableregulationsforinvestment,financialsoundness,andtheimprovementof national competitiveness, all of which contributed to gradually generate a business climate in the country oriented towards a model of growth based on private investment and exports. In addition to this, at the micro-level the country saw improvements in productivity and a gradual modernization of the private export sector towards business models based on quality and differentiation, which have been key to explain the growth of NTX. However, there are still many outstanding challenges inthisareasince,justasin1996,mostcompaniesexportlessthanUS$5million.

While factors of an exogenous nature, such as the evolution of exchange rates may play a role NUMBER OF COMPANIES ACCORDING TO THE vALUE OF THEIR NON TRADITIONAL EXPORTS

Sales range 1996 2001 2006 2011 LowerthanUS$5Millions 3,321 4,033 6,112 7,006BetweenUS$5and10Millions 45 37 85 158BetweenUS$10and20Millions 21 32 55 83BetweenUS$20and30Millions 4 14 18 26BetweenUS$30and40Millions 4 5 10 19BetweenUS$40and50Millions 0 2 7 15MorethanUS$50Millions 0 0 14 25

Total companies 3,395 4,123 6,301 7,332

Non-traditional Exports (US$ Millions) 1,590 2,183 5,279 10,130


in the case of exports of a few products or in the case of exports for a few destinations, recent empirical evidence on Peru’s exports suggests that variations in the real foreign exchange rate havehadnosignificantimpactonthegrowthofPeruvianNTX.Furthermore,thispossibleeffecthasevenbeenreducedduepreciselytothegrowingdiversificationthatPeruvianexportfirmsaredeveloping in terms of countries and of the products they export6.

However, given their still high potential of growth –only 22percent ofPeruvianexports are non-traditionalproducts–,thependingagendatofosterthisgrowthiswideandrequirestheimplementationofpendingreforms(e.g.propertyrights,judicialsystem,qualityofeducation,infrastructure,technology,competitioninthefinancialsystem,flexiblelaborlaws,eliminationofbureaucraticbarriers),aswellasthe generation and consolidation of opportunities to strengthen production linkages.

6 Potencial y Limitantes de las Exportaciones No Tradicionales, Nota de Estudios No. 15, BCRP, 2008.

70


IV. Public finances

47.Year2011wascharacterizedbyagrowthofgovernmentrevenuesconsistentwith the good performance of economic activity and the high prices of ourcommodities. Some limits on public spending were established in the firstmonthsoftheyeartorecoverafiscalspacedeemednecessaryinascenarioofhighuncertainty in internationalmarketsassociatedwiththeevolutionoftheexternal financial crisis, especially in Europe. Some measures were adoptedtowards the end of the year to reverse the negative growth rates of publicexpenditure,especiallyinvestment,whichhadbeenregistereduntilQ3.Thesemeasures and the risk that the unspent resources would not be reallocatedto thebudgets of dif ferentgovernmentministries led to a stronggrowthofspendinginDecember.

As a result of this, in 2011 the non financial public sector (NFPS) recorded aneconomic surplus of 1.9 percent of GDP, which contrasts with the deficitregistered in 2010 (0.3 percent). This balance resulted, on the one hand, fromtheincreaseofthecurrentrevenuesofthegeneralgovernment(upbyareal13.6percent)and,ontheotherhand,fromtheslowdowninthegrowthofspending,whichgrewbyareal1.9percent(versus11.8percentin2010).

Graph 63ECONOMIC bALANCE OF THE NON FINANCIAL PUbLIC SECTOR: 2004-2013

(%ofGDP)

*Forecast.

2004

-1.1

2005

-0.3

2006

2.3

2007

2.9

2008

2.4

2009

-1.3

2010

-0.3

2011

1.9

2012*

1.1

2013*

1.4

48.Afiscalsurplusof1.1 percent of GDP isforecastfor2012.Thisbalanceisconsistentwithamoderategrowthofcurrentrevenuesandwithagrowthofnonfinancialexpenditure thatwould be reflecting that both local and regional governmentsareovercomingthebudget implementationproblemsthey faced in2011giventhatnewauthoritiestookofficeinprovinceandregionalmunicipalities.TheresultestimatedforthisyearisslightlyhigherthantheoneconsideredinourDecember

71


The forecast scenario estimates a balance of 1.4 percent of GDP in theNFPSin2013,takingintoaccountvariationsinrevenuesandexpendituresthat aremore consistentwith a long term trend. It isworthpointingout,however,thatthescenarioonwhichthisforecastisbasedmaybeaf fectedbytheevolutionofthepricesofourcommoditiesandbythedemandforourexports.Ifanyofthelatterdeclined,thiswouldimplydeteriorationintheresultsforeseen.

Evolution of fiscal revenues

49. In 2011 the current revenues of the general government amounted to 21.0percent of GDP, which means that these revenues grew by a real 14 percent.Within tax revenues–whichgrew13percent–, income taxshowed thehighest

Table 22NON FINANCIAL PUBLIC SECTOR

(%ofGDP)

2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 1. General government current revenues 1/ 20.0 21.0 21.0 21.2 21.0 21.2 Real % change 18.6 13.6 4.6 5.5 6.6 6.3

2. General government non financial expenditure 19.2 18.1 18.9 18.9 18.4 18.7 Real % change 11.8 1.9 10.7 9.6 3.6 5.4 Of which: a. Current 13.1 13.0 12.8 12.9 12.4 12.7 Real % change 8.4 7.2 2.6 3.6 3.1 4.5 b. Gross capital formation 5.5 4.7 5.7 5.6 5.6 5.7 Real % change 20.8 -7.7 33.6 25.1 4.8 7.1

3. Others 0.0 0.1 0.0 0.0 0.0 0.0

4. Primary balance (1-2+3) 0.9 3.0 2.1 2.3 2.6 2.4

5. Interests 1.2 1.2 1.2 1.1 1.1 1.1

6. Overall Balance -0.3 1.9 1.0 1.1 1.5 1.4

Memo:1.Centralgovernmentcurrentrevenues(billionsofS/.) 87.0 102.1 109.0 111.2 118.3 120.62.Centralgovernmentnon-financialexpenditure(billionsofS/.) 83.4 87.8 98.0 99.4 103.5 106.8

1/ The central government includes the ministries, national universities, public agencies and regional governments. The general government has a wider coverage that includes the central government, social security, regulators and supervisors, government charity organizations and local governments.


Report (1.0 percent of GDP) due to the higher growth expected in the currentrevenuesofthegeneralgovernmentasaresultofthehigherpricesforeseenforourexportsofminerals.

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Table 23 THIRD CATEGORY INCOME TAX 1/ (Millionsofnuevossoles) 2010 2011 Real % change

TOTAL REvENUES 14,652 19,321 27.6

Mining 4,831 6,290 26.0Other Services 2/ 4,526 5,716 22.2Manufacturing 1,891 2,505 28.2Commerce 1,926 2,492 25.2Hydrocarbons 864 1,474 65.1Construction 507 706 34.7Fishing 80 87 5.2Agricultureandlivestock 26 50 86.1 1/ Non including income tax regularization, non residential rents.2/Includesrealestateactivities,ofbusinessandrent,telecommunications,financialintermediation,health,socialservices,tourismand

hospitality, generation of electricity and water, and others.Source: Sunat.

50.Moreover, in2011theVATgrew10percent inrealterms.Thisgrowth,whichwas the result of a 9 percent growth in the domestic VAT and a 12 percentgrowthintheexternalVAT,wasregisteredalthoughtheVATratewasreducedfrom19 to18percentsinceMarch1,2011.Non-tax revenuesalsoshowedaremarkablegrowth(16percent),particularlyinthecaseofoil,gas,andminingroyaltieswhichgrewbyareal44percentduetotheeffectofthehighpricesofcrudeandminerals.

ItshouldbepointedoutthattheseroyaltieswereincreasedinQ4-2011whenthetaxtreatmenttoroyaltiesonmining7weremodifiedandthatthereforethisincreaseispartiallyreflectedinthisquarter.Therevenuesfromthenewminingroyalty,thespeciallevyonmining,andthespecialtaxonminingamountedtoS/.265million.ThisamountcorrespondstotheaccrualsofobligationsofOctoberwhichwererecordedinthemonthsofNovemberandDecember,aswellassomeadvancedpaymentsthatminingcompaniesmadefortheiraccruedoperationsinNovember.

7 The lawmodifying theLawonMiningRoyalties (LawN°29788), the lawestablishing theSpecialTaxonMining(LawN°29789)andthelawestablishingthelegalframeworkfortheSpecialLevyonMining(LawN°29790)werepublishedonSeptember28,2011.

growth(26percent),favoredbytheriseinthepriceofcommoditiesinthecaseoftheminingandhydrocarbonssectors.Theincometaxalsoshowedanimportantgrowthinthesectorsofmanufacturing(28percent),commerce(25percent),andotherservices(22percent).

73


Table 24GENERAL GOvERNMENT CURRENT REvENUES

(%ofGDP) 2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 TAX REvENUES 15.2 15.9 15.8 15.9 15.8 15.9Income tax 5.9 6.9 6.7 6.8 6.7 6.7Value added tax 8.2 8.3 8.5 8.5 8.5 8.5Excise tax 1.1 1.0 1.0 0.9 1.0 0.9Import duties 0.4 0.3 0.3 0.3 0.3 0.3Other tax revenues 1.4 1.4 1.5 1.5 1.5 1.5Tax returns -1.8 -2.0 -2.0 -2.1 -2.0 -2.1NON TAX REvENUES 3.0 3.3 3.4 3.5 3.5 3.5CONTRIBUTIONS 1.8 1.9 1.8 1.8 1.8 1.8

TOTAL 20.0 21.0 21.0 21.2 21.0 21.2

* Forecast.

In2012 thecurrent revenuesof thegeneralgovernmentwouldgrowbya real5.5percent,asaresultofwhichtherevenue-to-GDPratiowouldbe21.2percent,slightlyhigherthanin2011(21.0percent).ThepaceofgrowthprojectedforthecurrentrevenuesofthegeneralgovernmentinthisReportishigherthantheoneconsideredinourReportofDecemberduetothehigherprices foreseenforourmainmineralexports.Thevariationprojectedfor2012considersthattheimpactofthetaxmeasuresadoptedin2011wouldbefullyobserved,thatis,observedinthetwelvemonthsoftheyear,onlyinthetaxrevenuesof2012.

In2013thecurrentrevenues-to-GDPratiowouldremainat21.2percentinacontextinwhichtheeconomywouldgrowatratesclosetoitspotentiallevelofgrowth.Itisworthpointingoutthattheforecastsfor2012and2013considerthecurrenttaxstructure.

51. Increasing significantly compared to2010 (5.9percentofGDP), revenues fromtheincome tax amountedto6.9percentagepointsofGDPin2011.Thisincrease

Graph 64GENERAL GOVERNMENT CURRENT REVENUES: 2004-2013

(%ofGDP)

*Forecast.

2004

17.5

2005

18.2

2006

19.9

2007

20.7

2008

21.2

2009

18.9

2010

20.0

2011

21.0

2012*

21.2 21.2

2013*

74


wasassociated,onthesideoflegalentities,withthehigherpaymentoftaxesfromminingcompaniesduetothehigherpricesofexportmetals,aswellaswiththehigherratiosusedbycompaniesforpaymentsonaccount8ofthistaxduringtheyear.Additionally,revenuesfromwork-relatedincometaxalsoshowedpositiveresultsduetothegrowthofformalemploymentduring2011.Aslightlydownwardtrendisestimatedfor2012and2013intherevenuesfromthistaxinGDPtermsduetotheexpectedevolutionofthepricesofmineralsintheseyears.

52.Revenuesfromthevalue added tax (VAT),themainsourceoftaxrevenues,grew

byareal10percent,asaresultofwhichtheratioofthistaxgrewfrom8.2to8.3percentinGDPtermsin2011eventhoughtherateofthistaxwasloweredfrom19to18percentthisyear.ThepositiveperformanceofthePeruvianeconomyandthemeasuresadoptedtoexpandthetaxbase,amongwhichtheextensionofthetaxwithholdingsystemtootherproductsstandsout,havecounterbalancedtheimpactof the reductionof this tax rate. Themeasures aimedat expanding the taxbasewillreflectinthefollowingyears,allowingtheVATtoincreaseinGDPtermsby0.2percentagepointsin2012and2013incomparisonwiththelevelrecordedin2011.

8 The monthly payments that companies make as payments on account of the income tax are determined on the basis of a ratio applied to the net income in the month. The ratio, in this case, is obtained by dividing the taxforfiscalyear2010bythecompany’stotalnetincomeinthesameperiod.

Graph 65INCOME TAX AND EXPORT PRICE INDEX: 2004-2013

2004

3.8

Incometax(left) Exportpriceindex(right)8

7

6

5

4

3

2

400350300250200150100500

%GDP Index(1994=100)

2005 2006

6.1

2007

6.8

2008

6.5

2009 2010

5.9

2011

6.9

2012*

6.8

2013*

6.7

4.3

5.3

*Forecast.

Graph 66 VALUE ADDED TAX

(%ofGDP)

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

6.8 7.0 7.1 7.58.5

7.7 8.2 8.3 8.5 8.5

75


53. In 2011 revenues from tariffs on imports fell from 0.4 to 0.3 percent of GDP(26percentinrealterms),reflectingthereductionsoftariffratesimplementedinDecember2010andApril2011,whichreducedtheeffectivetariffsbyupto1.3percent.Thetradeagreementssignedwithothercountries,whichimpliednilorverylowtariffratesforsomeproductshavealsoaffectedtheevolutionoftheserevenues,althoughtoalowerextent.Theseeffectshavebeenpartiallyoffsetbythegrowthofimportsduringtheyear.Therevenuesfromimportdutiesareexpectedto remain at similar levels in the next years since no further tariff reduction isforeseen.

Graph 67IMPORT DUTIES AND EFFECTIVE RATE: 2004-2013

2004

Importduties Effectiverate1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

9.08.07.06.05.04.03.02.01.00.0

%GDP %

2005 2006

0.9

2007

0.7

2008

0.5

2009 2010

0.4

2011

0.3

Effectiverate

2012*

0.3

2013*

0.3

1.2

0.4

*Forecast.

54.The revenue from theexcise tax,whichwas equivalent to1.0percentofGDPin2011,waslowerby0.1percentagepointsthantherecordedin2010.Inrealterms, this represents adeclineof 2percent as a result of thedrop registeredin revenue fromtheexcise taxon fuels (10percent)due to the tworeductionsestablishedontherateofthistaxinJanuaryandJuneoflastyear.Thiseffectwaspartiallyoffsetbyahighercollectionoftheexcisetaxonothergoods–particularlybeers, liqueurs, soft drinks, and cigarettes–, which rose 7 percent. In 2012 theexcisetaxisexpectedtodeclineinGDPtermsgiventhatthereductionoftherateoftheexcisetaxonfuelsinJune2011impliesanegativevariationintherevenuesfromthistaxinthefirstsemesterof2012.

Graph 68 EXCISE TAX(%ofGDP)

*Forecast.2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*

1.9

1.61.3 1.3

0.91.1 1.1

1.0 0.9 0.9

76


Evolution of public expenditure

55. In2011 thenonfinancial expenditureof thegeneralgovernmentwasequal to18.1percentofGDP,anamountthatrepresentedadropof1.1percentagepointscomparedtotheoneregisteredin2010(19.2percent).Thisdropwasbasicallyrecordedinthegrosscapitalformationofthegeneralgovernment,whichfellfrom5.5percentofGDPto4.7percent.Eventhoughthisdeclineofexpenditurewasobservedinthethreelevelsofgovernment–national,regional,andlocal–,localgovernmentsregisteredthehighestdrop(16percent).Thedeclineinthecaseofregionalgovernmentswas10percentand4percent inthecaseof thenationalgovernment.

Table 25GENERAL GOvERNMENT NON FINANCIAL EXPENDITURE

(Real%change) 2010 2011 1Q. 2Q. 3Q. 4Q. Year 1Q. 2Q. 3Q. 4Q. Year I. CURRENT EXPENDITURE 21.5 9.2 3.0 3.3 8.4 3.4 7.9 8.1 8.6 7.2 National government 26.0 9.6 1.6 2.1 8.5 6.9 9.6 11.3 3.6 7.7 Regional governments 6.0 3.7 2.7 0.8 3.2 -0.2 2.2 1.3 21.4 6.9 Local governments 24.2 16.1 11.5 14.6 16.1 -11.8 6.9 2.4 17.8 5.3 II. CAPITAL EXPENDITURE 25.6 49.0 21.3 5.0 20.2 -22.3 -15.9 -21.5 5.5 -9.6 National government 31.2 85.8 25.6 19.1 35.7 7.3 3.6 -6.5 -11.1 -3.5 Regional governments 50.9 45.1 26.9 -5.4 17.6 -10.4 -26.4 -28.2 13.3 -9.5 Local governments 11.7 17.0 15.6 -2.1 8.1 -59.7 -38.7 -30.5 19.5 -16.4 III. TOTAL EXPENDITURE 22.3 19.3 8.2 3.9 11.8 -2.0 0.3 -1.2 7.4 1.9 National government 26.7 22.1 5.5 6.1 13.5 6.9 8.1 7.8 -0.4 5.2 Regional governments 12.9 13.7 9.6 -1.7 7.4 -2.3 -6.7 -8.5 18.2 1.6 Local governments 17.9 16.6 13.9 3.3 11.3 -34.7 -17.7 -17.3 18.9 -7.3

Table 26GENERAL GOvERNMENT NON FINANCIAL EXPENDITURE

(Contributiontothereal%change) 2010 2011 1Q. 2Q. 3Q. 4Q. Year 1Q. 2Q. 3Q. 4Q. Year I. CURRENT EXPENDITURE 17.1 6.9 2.2 2.1 5.9 2.7 5.4 5.6 5.4 4.9 National government 13.9 4.8 0.8 0.9 4.1 3.8 4.5 5.2 1.5 3.6 Regional governments 1.0 0.6 0.4 0.1 0.4 0.0 0.3 0.2 2.4 0.9 Local governments 2.2 1.5 1.0 1.1 1.4 -1.1 0.6 0.2 1.4 0.5 II. CAPITAL EXPENDITURE 5.2 12.5 6.0 1.9 5.9 -4.7 -5.1 -6.8 2.1 -3.0 National government 2.6 8.5 2.5 2.6 3.9 0.7 0.6 -0.7 -1.8 -0.5 Regional governments 1.6 2.2 1.6 -0.4 1.0 -0.4 -1.5 -1.9 1.0 -0.6 Local governments 1.1 1.8 2.0 -0.3 1.0 -5.0 -4.1 -4.1 2.8 -2.0 III. TOTAL EXPENDITURE 22.3 19.3 8.2 3.9 11.8 -2.0 0.3 -1.2 7.4 1.9 National government 16.5 13.3 3.2 3.5 8.0 4.4 5.0 4.4 -0.2 3.1 Regional governments 2.6 2.7 1.9 -0.3 1.5 -0.4 -1.3 -1.7 3.4 0.3 Local governments 3.2 3.3 3.0 0.7 2.4 -6.0 -3.5 -3.9 4.3 -1.5

77


Themeasuresadoptedbythegovernmentinthefirsthalfof2011toensurethatthefiscal ruleestablished in the FinancialBalanceActwouldbemet–a surplusof 2 percent of GDP in the first semester–, together with the difficulties facedby the new authorities of the regional and local governments in the executionof their budgets –particularly in terms of investments– led to negative growthratesinexpenditureinmostoftheyear.Twoemergencydecrees9wereenactedinSeptemberandinOctobertostimulategovernmentspendingandreversethedecliningtrendofexpenditure.

Thesemeasures,associatedinturnwiththeriskthatthebudgetsofthedifferentgovernment sectors would not be allocated the resources assigned to them,contributedalsotothefactthatexpenditureinthegeneralgovernmentregisteredhigh ratesofgrowth inDecember (localgovernments increased their spendingbyareal39percent, regionalgovernments increaseditby29percent,andthenationalgovernmentby12percent).Thesesignificantvariationstranslatedintoagrowthof7percentinthenonfinancialexpenditureofthegeneralgovernmentin Q4-2011, thus allowing the reversal of the negative trend that expenditureshoweduntilthen.Finally,nonfinancialexpenditureatend2011was2percent.Bycomponents, currentexpendituregrew7percent,whilecapitalexpendituredeclined10percentduetoaweakexecutionofinvestmentprojects.

56.A realgrowthof10percent isestimated innonfinancialpublicexpenditure in

2012.ThenominalamountprojectedisconsistentwiththeoneconsideredintherevisedMultiannualMacroeconomicPlanofAugust2011, andalso includesanadditionalexpenditurefortheexecutionofthefiscalcontingencyplanexpressedinemergencydecrees054and058.Itisworthpointingoutthatthescopeofthesedecreesinvolvednotonlyyear2011,butalsoyear2012,andthereforeincluded

9 EmergencyDecreeN°054-2011datedSeptember20andEmergencyDecreeN°058-2011datedOctober26,2011.

Graph 69GENERAL GOvERNMENT NON FINANCIAL EXPENDITURE: 2004-2013

(Real%change)

*Forecast.

2004

4.7

2005

10.2

2006

7.0

2007

10.8

2008

11.1

2009

10.7

2010

11.8

2011

1.9

2012*

9.6

2013*

5.4

78


measuressuchasmovingforwardtheprocessesofselectionofprojectsfor2012andestablishing the continuityof investments,whichmeans that the resourcesforinvestmentprojectsthathavenotbeenaccruedbyDecember31,2011,maybeincludedinthe2012budget.In2013nonfinancialexpenditurewouldgrow5percent,inlinewithalongtermgrowthtrend.ItshouldbepointedoutthattheforecastsonpublicexpenditureconsideredinthisbaselinescenarioareconsistentwiththefiscalrulesonthedeficitandgrowthofexpenditurecontainedintheFiscalResponsibilityandTransparencyAct.

Graph 70NON FINANCIAL CURRENT EXPENDITURE OF THE GENERAL GOVERNMENT: 2004-

2013(Real%change)

*Forecast.2004

4.3

2005

9.7

2006

3.5

2007

9.2

2008

5.6

2009

3.2

2010

8.4

2011

7.2

2012*

3.6

2013*

4.5

Graph 71GENERAL GOVERNMENT CAPITAL EXPENDITURE: 2004-2013

(Real%change)

* Forecast.2004

7.0

2005

12.9

2006

24.8

2007

17.7

2008

32.7

2009

34.1

2010

20.2

2011

-9.6

2012*

25.0

2013*

7.3

Structural economic balance and fiscal impulse

57.Thestructural economic balance is thebalancethatwouldbeobtained ifGDPwereatitstrendlevelandifthepricesofmineralandhydrocarbonsexportswereattheir longtermvalues.Thisbalanceiscalculatedisolatingtheeffectsthatthebusiness cycle and the higher prices of mining and hydrocarbon exports haveon the revenuesof thegeneralgovernment.This indicatorwasnegativeby0.5percentofGDPin2011.Itisestimatedthatin2012thisbalancewoulddeteriorateandshowadeficitof1.2percentofGDP,resumingadownwardtrendthereafterin2013.

79


58.Thechangeinthestructuralbalancedeterminesthefiscalimpulse.Thisindicatorallowsus to isolate theef fectof fiscalpolicyondomesticdemandexcludingthe ef fects of the economic cycle. In 2011 the fiscal policy has played acontractiveroleduetotheslowdownregisteredinthepaceofgrowthofpublicexpenditure. The opposite situation, that is, an expansionary fiscal positionwouldbeobservedin2012giventhegrowthofpublicspendingprojectedforthisyear.

Graph 72CONVENTIONAL AND STRUCTURAL bALANCE

OF THE NON FINANCIAL PUbLIC SECTOR: 2004-2013(%ofGDP)

*Forecast

Memo:Thestructuralbalanceincludesadjustmentsintheoutputgapandthetermsoftradeconsideringaperiodof15yearsforthereferenceprice.

2004

-1.1-0.4

2005

-0.8-0.3

0.2

-0.6

2006

2.3

2007

2.9

2008

2.4

2009

-1.3-1.6

-0.5

-2.32010

-0.3-1.0 -1.2

-0.6

2011

1.9

StructuralbalanceConventionalbalance

2012*

1.1

2013*

1.4

Graph 73FISCAL IMPULSE: 2004-2013

(%ofGDP)

*Forecast.Memo:Thefiscalimpulseisthechargeinthestructuralbalance,whichisanindicatorofhowthefiscalpositionaffectstheeconomiccycle.

2004

0.10.4

-1.0

0.80.6

0.9 0.8

-1.8-2.1

0.70.6

Expans

iveCo

ntract

ive

-0.5-0.5

2005 2006 2007 2008 2009 2010 2011

IRDec.11IRMar.12

2012* 2013*

Financial requirements

59.Becauseof the lowerfinancial requirementsof thepublicsectorassociatedwiththefiscalsurplusrecordedin2011,noexternalfinancingwasobtainedviabondissuances.Thefinancing requirements of the public sector for2012and2013wouldbenegativebyUS$534millionandUS$1.09billion,respectively,inlinewiththepositivefiscalresultsthatwouldbeobtainedintheseyears.

80


60. In January2012,theMinistryofFinance(MEF)placedbonds inthe internationalmarketforanequivalentofUS$1.1billion,ofwhichUS$500millioncorrespondedtothereopeningofPeru’s2050GlobalBondandUS$600milliontothereopeningofthe2031SovereignBond.The2050GlobalBond,thedebtinstrumentwiththelongestmaturityissuedbyourcountry,concentratedthehighestmarketdemand.Theyieldrateofthisbondwas5.372percent,whiletheyieldrateofthesovereignbondwas6.875percent.

61.Asregardthecompositionofthedebtbycurrencies,marketrisksassociatedwithfluctuationsintheforeignexchangeratehavebeendecreasingsincetheshareofthedebtinforeigncurrencydeclinedto53percentatend2011.Asregardsthetypeofrate,in2011thefixedratedebtrepresented86percentofthetotaldebt,aratioveryclosetotheonerecordedin2009and2010.

Table 27FINANCIAL REQUIREMENTS OF THE NON-FINANCIAL PUBLIC SECTOR AND ITS

FINANCING 1/(MillionsofUS$)

2010 2011 2012* 2013* IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 I. Uses 2,000 -1,851 -136 -534 -1,595 -1,088 1.Amortization 1,496 1,365 1,672 1,634 1,566 1,852 a. External debt 952 831 1,170 1,164 946 1,227 b. Domestic debt 543 535 503 470 620 625 Of which: Recognition bonds 263 193 255 242 210 210 2. Overall balance 504 -3,217 -1,809 -2,168 -3,161 -2,940 (negativesignindicatessurplus) II. Sources 2,000 -1,851 -136 -534 -1,595 -1,088 1. External 1,532 1,108 1,221 1,228 1,130 1,1282. Bonds 2/ 835 436 1,487 1,598 576 5853. Internal 3/ -367 -3,395 -2,843 -3,361 -3,302 -2,801

Memo: Balance of gross public debt BillionsofUS$ 36.0 38.3 38.8 39.6 39.0 39.5 %ofGDP 23.4 21.7 20.1 19.9 18.6 18.3Balance of gross public debt 4/ BillionsofUS$ 17.8 14.5 12.4 12.2 8.6 8.8 %ofGDP 11.5 8.2 6.4 6.1 4.1 4.1

IR:InflationReport.* Forecast.1/ The effect of exchanging treasury bonds for longer-maturity bonds, as well as the effect of placements made for the prepayment of both

internal and external operations has been isolated in the case of amortization and disbursements.2/ Includes domestic and external bonds.3/Apositivesignindicatesawithdrawaloroverdraftandanegativesignindicateshigherdeposits.4/DefinedasthedifferencebetweengrosspublicdebtandNFPSdeposits.Source: BCRP, MEF.

81


62.Thegross and thenetdebtwill continue todeclinedue to thegrowthof botheconomic activity and public sector deposits. At end 2012 the gross debt isexpected to reach19.9percentofGDP,while in2013 this ratiowouldbe18.3percentofGDP.Thenetdebtwouldalsoreproducethistrend,decliningfrom8.2percentofGDPin2011to4.1percentofGDPin2013.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Graph 75PUbLIC DEbT bALANCE bY RATE TYPE

(%)

48 45 43 39 37 26 25 15 13 14

52 55 57 61 6374 75

85 87 86

Fixedrate Variablerate

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Graph 74PUbLIC DEbT bALANCE bY CURRENCY

(%)

Nationalcurrency Foreigncurrency

8585 8578 76 63 63 60 55 53

1515 15 22 2437 37 40 45 47

Graph 76PUbLIC DEbT: 2004-2013

(%ofGDP)

* Forecast.

2004

44.3

36.1 37.7

30.1 33.0

24.129.7

17.8

24.1

12.5

27.1

14.2

23.4

11.5

21.7

8.2

19.9

6.1

18.3

4.1

2005 2006 2007 2008 2009 2010 2011

GrossdebtNetdebt

2012* 2013*

82


BOX 4METHOD USED TO CALCULATE THE STRUCTURAL BALANCE

The structural balance is a non-observable variable that measures the economic balance that theaccountsof thenonfinancialpublicsector (NFPS)wouldshow ifeconomicactivityand theprices of mineral and hydrocarbon exports were at their trend or potential levels. The following methodological criteria are taken into account to estimate the structural balance:

• ThestructuralbalanceisestimatedfortheoverallbalanceoftheNFPS.• Thetaxrevenuebaseusedtomaketheadjustmentforthepricecycleofmetalandhydrocarbon

exports includes the third category income tax and the royalties from the sectors of mining and hydrocarbons.

• Nocyclicaladjustmentismadeinthegeneralgovernmentexpendituresandtheprimarybalanceof State-owned enterprises.

• The reference price used to calculate structural revenue is the average of the internationalprices of minerals and hydrocarbons in 15 years.

Implementation

Therevenuesofthegeneralgovernment(IGGt)arebrokendownintorevenuesfromtheminingandhydrocarbonssectors(IMt)andtherestofthegeneralgovernmentincome(RIGGt).

In turn, the revenues from the mining and hydrocarbons consist of payment on account and regularization of the corporate income tax –third category income tax– paid by these sectorsPCIRMt and RIRMt,respectively)androyalties(RMt).

Theseresourcesareadjustedbythecycleoftheinternationalpricesofmineralsandhydrocarbonsto obtain their structural value. Thus, the “structural” level of these variables can be expressed as:

Where PCIRMte, RIRMt

e and RMte are the “structural” component of payment on account

of tax income, regularization of tax income, and royalties paid by the sectors of mining and hydrocarbons, respectively, PMt is the price index ofmining (and hydrocarbon) exports

10 and xxxxx is the reference or long-term value, which is estimated as a moving average of export

10 ALaspeyresindexwith2010asbaseyearisusedforthepricesofminingexports,whilethepriceofcrudeoilintheGulfCoast(WestTexasIntermediateprice)isusedforthepricesofhydrocarbons.

PCIRMte = PCIRMt

a PMt

e( ) PMt

RMte = RMt

g PMt

e( ) PMt

RIRMte = RIRMt

a PM

et-1

t-1( ) PM

83


prices in a period of 15 years11.Inthisway,theratioreflectsthegapofexportpricesrelativeto the reference value

Itshouldbenotedthatboththepaymentonaccountandtheregularizationofincometaxareadjustedwithanelasticity(a)estimatedbasedonregressionsoftaxrevenueandinternationalprices.Thevalueof this parameter is currently 2.7 for the mining sector and 2.1 for the hydrocarbons sector. Furthermore, theregularizationofincometaxisadjustedforthepricegapexistinginthepreviousperiodtoreflectthefact that it is a payment that corresponds to the operations carried out at the time.

On the other hand, revenue from mining and gas royalties, which does not include payments for regularizationtotaxpayments,isadjustedconsideringaunitaryelasticity(i.e.g=1).

Therevenuesofthegeneralgovernment(IGGt)areadjustedfortheeffectsofthebusinesscycleas follows:

Where IGGte is the structural component of the revenues of the general government, Yt is real GDP,

and YteisrealpotentialGDP.Inthisexpressiontheratioreflectstheoutputgap,whichmeasures

the business cycle. Thus, if economic activity is above the potential level, structural revenues will be lower than the ones observed, and vice versa.

Parameter bt measures the elasticity of the revenue of the general government relative to GDP. This elasticity changes in each period according to the composition of tax revenues. The elasticity for 2012 is estimated at 1.212.

Theeconomicbalanceofthenon-financialpublicsectorcanbeexpressedas:

Where GNFt, RPEEt and IDPtrepresentthenon-financialexpenditureofthegeneralgovernment,theprimary balance of State-owned enterprises, and the service of public debt interests, respectively. Thesevariablesarenotadjustedbytheeconomiccycleorexportprices.

Therefore,thestructuraleconomicbalanceofthenon-financialpublicsectorcanbedefinedas:

In other words, the structural economic balance is the value of the economic balance after deducting the cyclical components of tax revenues that depend on the business cycle and on international prices.

11 Theaverageiscalculatedbasedontheactualpricesofexportcommodities,deflatedbytheUSCPI.12 Thiselasticityistheweightedaverageoftheelasticitiesofincometax,tariffs,VAT,excisetax,othertaxes,

social contributions, tax returns, non-tax revenues, and capital income. The weight given to the elasticity of eachelementreflectstheresource’sshareintermsofthetotalrevenuesofthegeneralgovernment.

IGGte= IGGt

b Yt

e t( )Yt

Yte

Yt

REt= IGGt - GNFt + RPEEt - IDPt

REte= REt + (PCIRMt

e - PCIRMt) + (RIRMt

e - RIRMt) + (RMt

e - RMt) + (IGGt

e - IGGt)

PMte

PMt

84


Theprimarystructuralbalanceofthenon-financialpublicsectorisestimatedas:

Finally, the fiscal impulse, indicator measuring the expansionary or contractionary fiscal policypositionduringaspecificperiod,isestimatedas:

In other words, if the structural primary balance increases, this would imply that discretionary measuresarebeingimplementedtoconsolidatefiscalaccountsandthatthefiscalpolicypositioniscontractionary(negativefiscalimpulse),whereasifthestructuralprimarybalancedeclines,thefiscalpolicypositionisexpansionary(positivefiscalimpulse).

BOX 5RECENT AMENDMENTS TO THE FUEL PRICE STABILIZATION FUND

The Fuel Price Stabilization Fund13 (FPSF)operatesundera “priceband” schemeset onabi-monthly basis by OSINERGMIN, the entity supervising investments in energy and mining. The ruletodeterminethemagnitudeofadjustmentinthepricebandsspecifiesthattheimpactofsuchadjustmentonconsumerpricesshouldnotbehigherthan5percent,except inthecaseofLPGwhere the limit is 1.5 percent.

OSINERGMIN publishes every week the benchmark price for each type of fuel that is used to determine the compensations paid by the FPSF or the contributions paid to the Fund. This benchmarkpriceisbasedontheconceptofimportparityprice(IPP),exceptinthecaseofLPGwhich uses an ad-hoc parity price. The IPP is calculated by adding all the costs associated with anefficientoperationofimportingfueltothecountrytotheaveragepriceofafuelintherelevantmarket(theU.S.GulfCoast)inaperiodoftendays.InthecaseofLPG,thereferencepriceistheFOBpriceofexportsinPisco(whichisassumedtobeequaltothepriceofLPGinMontBelvieu,USA),plusthecostofmoreefficienttransport,storage,anddispatchoperationstodeliverthisfuelto the port of Callao.

The FPSF plays an important role in macroeconomic terms since it mitigates the volatility of the domestic prices of fuels. On the one hand, it contributes to stabilize the production costs of many industries, thereby reducing the distortions in relative prices that are generated when fuel prices varyandthepricesofendproductsarenotadjustedrapidlybecauseofnominalrigidities.Ontheother hand, since fuels are part of the consumer basket, the Fund mitigates changes in households’ real incomes, smoothing consumption and increasing wellbeing.

13 TheFPSFwascreatedbyEmergencyDecree010-2004inSeptember2004.AccordingtoE.D.060-2011ofDecember 2011, the Fund is effective until December 31, 2012.

RPte= REt

e + IDPt

IFt = -(RPte - RP

e )t-1

85


The literature is clear in pointing out a negative relationship between the growth of the international prices of fuels and economic activity14.ThismaybeverifiedinthecaseofthePeruvianeconomywhere it is estimated that a fuel price shock of 10 percent can reduce the economy’s rate of annual growth of by up to 0.3 percentage points.

The government has opted to reduce the coverage of the FPSF to improve the focus of its impact: 95 and 97 octane gasoline and gasohol were withdrawn from the Fund’s coverage in October and all industrial oils and petrol were withdrawn from this coverage in December. LPG has been theonlyproductwhichhashadnopriceadjustmentslastyearbecausetherehavebeennopriceadjustmentsinitspricebands.Thishasraisedtheamountofcompensationsassociatedwiththisproduct.

AdditionalamendmentstotheFPSFhavebeenapprovedatendFebruary:

• Residualpetroleumfuels:Thesefuelsusedinisolatedelectricitygenerationsystemsareagainincluded in the coverage of the Fund.

14 ThewoksofHamilton (2008)Oil and the macroeconomy, New Palgrave Dictionary of Economics and Kilian(2008)The Economic Effects of Energy Price Shocks, Journal of Economic Literature. Vol. 46 offer a comprehensive revision of the existing literature.

FUELS PRICES IN THE THIRD WEEk OF MARCH(S/.pergallon)

Internal Price Parity Forward(+) Net weekly Compensation(+)/ Collection 2/ price Band Price / Compensation Contributions(-) Weekly by ISC of Lower Higher Osinergmin Lagged (-) Factor (Mill. of S/. Participation (Mill. of S/. Refinery bound bound % (S/. per gallon) per week) % per week) Gasoline84 7.86 7.76 7.86 8.70 -10.7% 0.84 0.8 3.3% 1.2Gasoline90 8.24 8.14 8.24 9.04 -9.7% 0.80 0.3 1.2% 0.6Gasoline 95 1/ 9.35 0.0Gasoline 97 1/ 9.51 0.0Gasohol84 7.98 7.88 7.98 8.62 -8.0% 0.64 1.8 7.2% 3.1Gasohol90 8.35 8.23 8.33 8.94 -7.1% 0.61 2.2 9.0% 5.5Gasohol 95 1/ 9.49 1.3Gasohol 97 1/ 9.64 1.1DieselB52500ppm 9.37 9.27 9.37 9.77 -4.3% 0.40 7.3 29.4% 24.3DieselB550ppm 9.62 9.27 9.37 9.77 -1.6% 0.40 2.5 10.2% 6.4ResidualN°61/ 7.77 0.3ResidualN°5001/ 7.68 0.5Liquifiedgas 3.65 3.57 3.69 4.56 -24.9% 0.87 9.2 37.2% 0.0

Fuels Used for Electricity Generation

DieselB5GE 9.03 8.93 9.03 9.77 -8.2% 0.74 0.3 1.3% 0.5Residual6GE 6.83 6.73 6.83 7.77 -13.8% 0.94 0.3 1.1% 0.1

Total 24.8 100.0% 44.9

1/ Currently these fuels are outside of the coverage of the Fund of Stabilization of Prices of Fuels.2/ Estimates based on annual demand of fuels.

86


• LPG:ThepricebandsofLPGforvehiclesandfordirectusewillbeadjusteduptoamaximumvariationof5percentinthebands(fromApril2012),whilethepricebandsofbottledLPGwillbeadjusteduptoamaximum1.5percentintheendprice(fromAugust2012).

• FPSFcoverage:FromAugust,ifthereferencepriceofgasolineandLPGforvehicleanddirectuse is higher than the price band by less than 5 percent, such products will not be covered by theFund.Inadditiontothis,asfromAugusttheFundwillonlycoverdieselforvehicleuseandfor the generation of electricity in isolated systems.

• Socialinclusion:Criteria,amounts,andmechanismswillbeestablishedtodelivercompensationsto vulnerable families that use LPG in containers of up to 10 Kg. This mechanism, which will startoperatingaftertheimplementationofthepricebandadjustmentinAugust,willbefinancedthrough the budget of the Ministry of Energy and Mines.

87


V. Monetary policy63.Between December and March the Board of the Central Bank maintained the

reference rate at 4.25 percent. This level of the policy rate, which reflects amonetarystanceconsistentwiththeanticipatedconvergenceofinflationtowardsthetolerancerange in thesecondhalfof thisyear, takes intoaccount the lowerdynamism projected in the world economy, the persistence of uncertainty ininternationalfinancialmarkets,andthereversalofthesupplyshocksthataffectedinflationduring2011.

TheBCRPcommuniquésonthemonetaryprogramhavealsoemphasizedthatfutureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationand itsdeterminants,which reflectsamoreneutralbalanceof risks for inflationthantheoneconsideredinourInflationReportofDecember2011.Thischangeinthebalanceofriskstakesintoaccounttherecentevolutionoftheglobaleconomy,whichhasshownabetter-than-expectedperformanceeventhoughconsiderablelevels of uncertainty are still observed vis-à-vis the evolution of internationalfinancialmarketsandtheoutlookforglobalgrowthintheyear.

Graph 77bCRP REFERENCE INTEREST RATE

(%)

4.25

7.06.56.05.55.04.54.03.53.02.52.01.51.0

7.06.56.05.55.04.54.03.53.02.52.01.51.0

Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12Jul.06 Jul.07 Jul.08 Jul.09 Jul.10 Jul.11

RECENT EvOLUTION OF THE POLICY INTEREST RATE:January – March 2012

January: The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.

This decision takes into account the lower growth being recorded by some components of expenditure,thecurrentinternationalfinancialrisks,andthefactthattheriseofinflationhasbeenmainlyassociatedwithtemporarysupplyfactors.Futureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationanditsdeterminants.

88


February: The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.

This decision takes into account the lower growth being recorded by some components of expenditure,thecurrentinternationalfinancialrisks,andthefactthattheriseofinflationhasbeenmainlyassociatedwithtemporarysupplyfactors.Futureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationanditsdeterminants.

March: The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy reference rate at 4.25 percent.

This decision takes into account the lower growth being recorded by some components of expenditure, the current international financial risks, and the rise of inflation associatedmainlywithtemporarysupplyfactors.Futureadjustmentsinthereferenceinterestratewilldependontheevolutionofinflationanditsdeterminants.

64.TheCentralBankhasalsomaintainedtheratesofreserverequirementsindomesticcurrencyandforeigncurrencyunchangedsincemid-2011.AtthecloseofFebruarytheaveragerateofreserverequirementsinnuevossoleswas14.5percentwhilethis rate indollarswas38.6percent. These rateshavecontributed tomoderatethegrowthofcreditandincreasethefinancialsystem’scapacitytofacepossiblescenarioswithsevereliquidityconstraints.

Graph 78

RESERVE REQUIREMENTS IN DOMESTIC CURRENCY(%)

RESERVE REQUIREMENTS IN FOREIGN CURRENCY(%)30

25

20

15

10

5

0Jan.06 Jan.06Jan.07 Jan.07Jan.08 Jan.08Jan.09 Jan.09Jan.10 Jan.10Jan.11 Feb.12 Jan.11Jul.06 Jul.06Jul.07 Jul.07Jul.08 Jul.08Jul.09 Jul.09Jul.10 Jul.10Jul.11 Jul.11 Feb.12

60

55

50

45

40

35

30

25

20

25.0

14.7 38.5

55.0

Marginalreserves Averagerequiredreserves

65.Between December 2011 and February 2012 the short term prime rates indomestic currency remained stable around 5.3 percent, a level consistentwiththemonetarypolicyposition.Thereisagreaterrelationshipbetweenthissegment’sinterestrateandthemonetarypolicyinterestratebecausethereisa

89


Graph 7990-DAY CORPORATE PRIME RATE VERSUS INTERbANk OVERNIGHT RATE

IN DOMESTIC CURRENCY: SEPTEMbER 2007 - FEbRUARY 2012

8.5

7.5

6.5

5.5

4.5

3.5

2.5

1.5

0.5

%

Sep.07 Jan.08 Jan.09 Jan.10 Jan.11May.08 May.09 May.10 May.11Sep.08 Sep.09 Sep.10 Sep.11 Feb.12

5.32

4.25

InterbankrateinDC90-daycorporateprimerateinDC

66.Mostoftheotherlendingratesinthefinancialsystemalsoremainedatsimilarlevels,withoutshowingsignificantchanges.Theexceptionsincludedtherateonloanstomicrobusinesses,whichincreasedfrom23.2percentinDecemberto23.7percent inFebruary,andtherateonconsumer loans,which fell from38.5to35.7percentinthesameperiod.Thevariationsinthesetypesofcreditreflecttheevolutionofcreditriskandcompetitionconditionsintherespectivecredit markets. The interest rate on mortgages remained stable around 9.4percent.

Table 28INTEREST RATE BY TYPE OF CREDIT 1/

(%)

Domestic currency

Corporate Large Medium-size Small Microbusinesses Consumption Mortgages enterprises firms businesses

Dec.10 4.6 5.9 10.3 23.3 27.2 40.7 9.3Mar.11 5.4 7.5 11.1 24.6 32.5 38.4 9.4Jun.11 6.4 8.1 10.9 23.6 31.9 39.9 9.7Sep.11 6.1 7.9 10.9 23.6 32.9 36.1 9.6Oct.11 6.0 7.8 10.8 23.2 32.8 37.2 9.6Nov.11 6.0 7.4 11.1 23.0 32.9 38.3 9.5Dec.11 6.0 7.4 11.2 23.2 33.0 38.5 9.4Jan.12 5.9 7.4 11.4 22.9 32.9 37.3 9.4Feb.12 6.0 7.2 11.4 23.7 33.1 35.7 9.4

Accumulated change (bps)

Feb.12-Jan.12 9 -17 -3 79 20 -155 -1Feb.12-Dec.10 146 138 108 44 593 -492 6

1/Annualactiveinterestratesontheoperationscarriedoutinthelast30workingdays.

lowerpremiumforcreditriskassociatedwiththistypeofcreditandalsobecauseitisshorttermcredit.

90


67.Short termdeposit rates indomesticcurrencydeclinedslightly in JanuaryandFebruary.Thus,theinterestrateon30-daydepositsfellfrom3.9to3.7percent,while the interest rates on 31-day to 180-day deposits fell from 4.1 to 4.0percent.

Table 29INTEREST RATES IN NUEvOS SOLES

(%)

Deposits Rate on 31 to Rate on 181 to up to 30 days 180-day term deposits 360-day term deposits Dec.10 2.2 2.9 3.8Mar.11 3.1 3.0 4.0Jun.11 4.3 3.6 4.3Jul.11 4.2 3.9 4.5Aug.11 4.1 4.2 4.6Sep.11 4.1 4.3 4.6Oct.11 4.1 4.3 4.7Nov.11 4.0 4.2 4.7Dec.11 3.9 4.1 4.7Jan.12 3.8 4.0 4.7Feb.12 3.7 4.0 4.7

Difference(bps)(Feb.12-Dec.11) -13.8 -9.8 0.2

68.Thecorporateprimerateinforeigncurrencyrosefrom2.60percentinDecember2011to2.96percent inFebruary, reflectingbanks’ loweravailabilityof liquidityin foreign currency due in part to the BCRP purchases of dollars in the foreignexchange rate market. In the first months of the year the Central Bank boughtforeigncurrencyforatotalofUS$3.68billion.

Graph 8090-DAY CORPORATE PRIME RATE VERSUS INTERbANk OVERNIGHT RATE

IN DOMESTIC CURRENCY: SEPTEMbER 2007 - FEbRUARY 2012

12.0

10.0

8.0

6.0

4.0

2.0

0.0

%

Sep.07 Jan.08 Jan.09 Jan.10 Jan.11May.08 May.09 May.10 May.11Sep.08 Sep.09 Sep.10 Aug.11 Feb.12

2.96

1.00

InterbankrateinFC90-daycorporateprimerateinFC

12.72

91


69. In January Peru placed bonds for US$ 1.1 billion in the international market, ofwhichtheequivalentofUS$600millionwasplacedindomesticcurrencyatarateof6.875percentandwithamaturityof19years,whichincreasedtheyieldcurveof sovereign bonds to some extent. Around 80 percent of this placement waspurchasedasGlobalDepositaryNotes(GDN)bynonresidentinvestors.Reflectingtheincreasedriskperceivedinemergingcountries,adownwardmovementwasobservedintheyieldcurvesinceFebruary.

Graph 81SECONDARY MARkET OF SOVEREIGN bONDS 1/

1/Endofmonthyield.

0 5 10 15 20 25 30

7.0

6.5

6.0

5.5

5.0

4.5

4.0

3.5

Yiel

d (%

)

Maturity (Years)

Jan.12

Nov.11Feb.12

Graph 82SOVEREIGN bOND (bTP) HOLDINGS bY NON RESIDENTS

(Millionsofnuevossoles)

Dec.10

10,663

MillionsS/.(leftaxis) %Total(rightaxis)

15,00014,50014,00013,50013,00012,50012,00011,50011,00010,50010,000

50.0% 45.0%40.0% 35.0%30.0%25.0%20.0% 15.0% 10.0% 5.0% 0.0%

Jan.11

10,944

Feb.11

10,809

Mar.11

10,690

Apr.11

10,694

May.11

10,521

Jun.11

10,642

Jul.11

11,058

Aug.11

11,476

Sep.11

11,572

Oct.11

11,446

Nov.11

11,640

Dec.11

11,651

Jan.12

11,882

Feb.12

13,64637.9% 40.4%47.4%

70.Longtermratesindollarsalsorose.Theinterestratesoncorporateloans,credittolargeandtomedium-sizedcompaniesrosefrom3.0to3.6percent,from5.4to5.5percent,andfrom8.9to9.3percent,respectively.Moreover,therateonconsumerloansincreasedfrom22.0percentinDecember2011to22.8percentinFebruary.

92


Table 30INTEREST RATE BY TYPE OF CREDIT 1/

(%)

Foreign currency

Corporate Large Medium-size Small Microbusinesses Consumption Mortgages enterprises firms businesses

Dec.10 3.3 5.5 8.6 14.2 14.8 19.4 8.1Mar.11 3.6 5.6 9.3 16.3 16.7 20.9 8.3Jun.11 3.6 5.3 9.3 15.6 16.3 21.3 8.5Sep.11 3.3 5.5 8.8 15.4 19.5 21.2 8.3Oct.11 3.0 5.3 8.4 15.1 19.0 21.7 8.2Nov.11 3.1 5.3 8.6 15.4 17.4 22.4 8.2Dec.11 3.0 5.4 8.9 15.0 19.2 22.0 8.2Jan.12 3.6 5.4 9.0 15.4 18.8 22.4 8.3Feb.12 3.6 5.5 9.3 15.5 18.8 22.8 8.2

Accumulated change (bps)

Feb.12-Jan.12 7 7 27 10 3 39 -8Feb.12-Dec.10 32 -5 68 125 398 339 5

1/Annualactiveinterestratesontheoperationscarriedoutinthelast30workingdays.

71.Furthermore,90-daydepositinterestratesinforeigncurrencyincreasedfrom0.7percentinDecemberto1.0percentinFebruary,reflectingaloweravailabilityofliquidityindollarswhichisinpartexplainedbythelowergrowthofdepositsinforeigncurrencyduetothelowerpaceofdollarizationofdepositsobservedinthefirstmonthsof2012.Banks’increaseddemandfordollarsasaresultofthedynamismofcreditinFCobservedparticularlyinJanuaryaddedontothisloweravailabilityoffundinginFC.

Table 31INTEREST RATES IN US DOLLARS

(%)

Deposits Rate on 31 to Rate on 181 to up to 30 days 180-day term deposits 360-day term deposits Dec.10 0.9 1.2 1.7Mar.11 1.4 1.1 1.7Jun.11 0.5 1.1 1.7Jul.11 0.6 1.0 1.7Aug.11 0.7 1.0 1.6Sep.11 0.8 1.0 1.6Oct.11 0.6 1.0 1.6Nov.11 0.6 1.0 1.6Dec.11 0.7 1.0 1.6Jan.12 0.9 1.1 1.6Feb.12 1.0 1.1 1.6

Difference(bps)(Feb.12-Dec.11) 36.3 12.7 3.0

93


Currency in circulation and credit

72.Showing a recovery compared to January, average currency has been growingat a rate of 17.1 percent in the last 12 months at February, in line with someindicatorsofeconomicactivity.In2012currencywouldgrow17.5percent,whichisconsistentwiththegrowthofGDPandthededollarizationofbanks’ liabilitiesthatisbeingobservedinthisquarter.

Graph 83CURRENCY AVERAGE

(%changecomparedtothesameperiodofthepreviousyear)

CURRENCY Dec.07 Dec.08 Jun.09 Dec.09 Jun.10 Dec.10 Mar.11 Jun.11 Oct.11 Nov.11 Dec.11 Jan.12 Feb.12*Originalseries(millionsofnuevossoles) 13,971 16,705 15,926 18,342 19,394 23,007 22,606 23,356 24,732 24,789 26,179 26,705 26,616Monthlyflows(millionsofnuevossoles) 1,219 886 127 1,266 301 1,481 -121 243 53 57 1,389 526 -88Annual%change(millionsofnuevossoles) 28.0 19.6 4.3 9.8 21.8 25.4 23.0 20.4 17.7 15.2 13.8 15.0 17.1Monthlyseasonallyadjusted%change 2.0 -0.6 1.4 0.7 2.0 0.5 0.5 1.3 0.7 0.3 -0.7 3.2 2.3Monthly%change 9.6 5.6 0.8 7.4 1.6 6.9 -0.5 1.1 0.2 0.2 5.6 2.0 -0.3*Preliminary.

Jan.09 Jan.10 Jan.11May.09 May.10 May.11Sep.09 Sep.10 Sep.11 Feb.12

18,4

13,8

9, 9

6, 54, 3 4, 3

5, 6 6, 6 5, 8 6, 47, 9

9, 811,7

13,6 15,0

18,220,8 21,8 22,1 22,7 23,7

25,6 26,1 25,4 25,524,0 23,0 22,2

21,1 20,419,3 19,7 19,8

17,715,2

13,8 15,017,1

73. In2011,credittotheprivatesectorgrew18.9percent.Thispaceofgrowthhasdeclined slightly in thefirstmonthsof 2012, this indicator recording an annualgrowthof18.0percentinFebruary.Bycurrencies,inFebruarycredittotheprivatesectorinnuevossolesrecordedanannualgrowthrateof19.0percent,ahighergrowthratethantheonerecordedbycreditindollars(16.7percent).

Graph 84CREDIT TO THE PRIVATE SECTOR

(%changecomparedtothesameperiodofthepreviousyear)

30

25

20

15

10

5

0

Credit Dec.09 Dec.10 Mar.11 Jun.11 Sep.11 Oct.11 Nov.11 Dec.11 Jan.12 Feb.12MonthlyFlow 422 1,537 1,165 1,158 962 1,571 1,660 1,706 213 759Annual%change 17.6 21.2 21.3 20.7 20.2 21.1 20.6 20.4 19.6 19.0Monthly%change 0.7 2.3 1.6 1.5 1.2 2.0 2.1 2.1 0.3 0.9

MonthlyFlow 304 432 372 83 106 106 272 561 252 -142Annual%change 0.0 20.8 21.0 22.8 20.6 17.8 17.1 17.3 18.4 16.7Monthly%change 1.7 2.0 1.7 0.3 0.4 0.4 1.1 2.2 1.0 -0.6

MonthlyFlow 1,242 2,704 2,168 1,381 1,250 1,857 2,393 3,220 894 374Annual%change 8.8 21.0 21.2 21.7 20.4 19.6 19.0 19.0 19.1 18.0Seasonallyadjustedmonthly%change -0.8 1.9 0.3 0.4 1.4 1.6 1.6 1.3 0.0 3.0Monthly%change 1.2 2.1 1.7 1.0 0.9 1.3 1.6 2.2 0.6 0.2

Nuevos Soles

US Dollars

Total

28,326,2

24,6

21,719,7

17,515,7

14,211,8

9, 6 9, 0 8, 8 9, 210,4

11,613,4

14,916,2 17,2 17,3

19,4 20,2 19,921,0 20,8 21,2

22,0 22,5 21,720,6 21,5 20,4

19,6 19,0 19,0 19,118,0

Jan.09 Jan.10 Jan.11May.09 May.10 May.11Sep.09 Sep.10 Sep.11 Feb.12

20,9

94


Likein2011,credittohouseholdshasbeenshowinggreaterdynamismthancredittoenterprisesso far thisyear.This isparticularlyevident in thecaseofmortgages,whichhavegrownby1.6and1.5percentinJanuaryandFebruary,respectively(andrecordinganannualgrowthof27.2and26.5percent).Thegreaterdynamismofcredittohouseholdsreflectsnotonlyhighconsumerconfidence,butalsotheimprovementregisteredintermsofdisposableincomes,whichhasbeenfavoredbythesustainedgrowth of formal employment and by historically low interest rates. On the otherhand,credittocompaniesgrew0.4and-0.3percentinthefirsttwomonthsoftheyearandaccumulatedanannualgrowth rateof17.2and15.9percent.This lowerpaceofgrowthismainlyexplainedbythelowerdynamismofcreditforforeigntradeactivities,whichgrewby3.5percentinJanuaryand0.7percentinFebruary.

Graph 85CREDIT bY TYPE OF LOANS: JANUARY 2010 - FEbRUARY 2012

(12month%change)

Jan.10 Jan.11 Feb.12

Corporateloans Consumerloans Mortgageloans30

25

20

15

10

5

0Apr.10 Apr.11Jul.10 Jul.11Oct.10 Oct.11

26.5

19.419.4

15.9

Excluding credit for foreign trade operations, corporate loans increased 18.7percentinannualtermsinJanuaryand17.4percentinFebruary.Itisworthpointingout thatcredit tosmallandmedium-sizedenterprises recordedgrowthratesof27.5and21.5percent,respectively,inthemonthofFebruary.

74. Inadditiontolowinterestratesinthefinancialsystemandtherecoveryofbusinessconfidence,thisevolutionreflectstheaccessofdomesticfirmstocredit.Accordingtotheaccess-to-creditindicatorelaboratedonthebasisofthesurveyscarriedoutby BCRP, firms’ access to credit has improved and gone from a level of 62 inDecember2011toalevelof67inFebruary2012.

Graph 86STATUS OF ACCESS TO CREDIT OF THE COMPANIES

Sep.10 Sep.11 Feb.12Nov.10 Nov.11Mar.11 May.11 Jun.11Jan.11

80

70

60

50

40

30

20

64 63 63 65 64 64 65 63 61 63 61 62 61 63 63 62 6467

Difficult access

Easy access

95


Itshouldalsobepointedout thatbetween JanuaryandFebruary2012,agroupofPeruviannon-financialcompanies issuedsecurities inthe internationalmarkettofinance someof their investments.MiningcompanyVolcan issuedbonds forUS$600millions–ofwhichUS$35.5millionwereplacedinthelocalmarket–ataninterestrateof5.375percentandwithamaturityof10years,reachingademandofUS$5billion.CamposolbecomethefirstPeruvianagroindustrialcompanytoissue bonds in the international market with an issuance of US$ 125 million in5-yearbondsatarateof9.875percent.Moreover,CementosPacasmayoplacedAmerican Depositary Shares (ADS) for US$ 230 million in the New York StockExchange,increasingitscapitalby17.5percent.

Theaccumulatedflowof credit to theprivate sector in the last12monthsasapercentageofGDPhasremainedat5.0percent,asimilarleveltotheoneobservedatend2010andin2011.Thus,credittoGDPatendFebruaryhasremainedaround30percentofGDP.

Graph 87ANNUAL FLOW OF CREDIT TO THE PRIVATE SECTOR

(%ofGDP)

1998 1999 2000 20062001 20072002 20082003 20092004 2010 2011 20122005

1.5

0.4

0.7

2.6

2.0

0.0

0.4

2.3

0.6

2.1 2.2

0.2 1.9 2.7

0.6

4.2

0.62.3

0.6

2.81.8

2.9 2.8

NuevosSoles USDollars

-0.3-0.3 -0.8 -0.3

0.2-0.4 -0.5

Creditisestimatedtogrow14.5percentthisyear,inlinewithanexpansionof5.7percentineconomicactivityandwithincreasedaccesstobankingservicesinthecountry(thelatterwouldgrow32percent).

75. In2011,thedollarizationofcredittotheprivatesectorfellfrom46.3percentatend2010to45.2percent,withcredittohouseholdsshowingthehighestdeclinein termsofdollarizationratio (downfrom26.0percent to25.1percent). In thiscredit group, the segment of mortgage loans was the one that registered thefastestpaceofdedollarization(thedollarizationratiodeclinedfrom51.6percentto48.8percent).Moreover,thedollarizationratioofcorporateloansfellfrom56.3percentto55.6percent.

In February the dollarization ratio of credit continued to fall and recorded 44.2percent, in linewith the trendsobserved in thedollarizationof liquidity,whichdeclinedfrom37.2percentinDecember2011to36.0percentinFebruary2012.Thefasterpaceofdedollarizationobservedin liquidity inthefirstmonthsofthe

96


yearreflects,inpart,higherconfidenceinthedomesticcurrencyafteruncertaintypartially subsided in international financial markets, as well as a reversal in theincreaseddemandforforeigncurrencyobservedlastyearduetohigheruncertaintygeneratedbytheelections.

Graph 88PERU: LIQUIDITY AND CREDIT DOLLARIZATION RATIO: 1992 - 2012

(%oftotalcreditandtotalliquidity)

90

80

70

60

50

40

30Mar.92 Jun.94 Mar.01 Dec.07Sep.96 Jun.03 Mar.10 Feb.12Dec.98 Sep.05

44.2

36.0

CreditLiquidity

Monetary operations

76.The Central Bank’s operations were mainly oriented at maintaining adequateliquidity levels and the flowof operations in themoneymarket.High levels ofliquidityinthebankingsystem,whichwasreflectedinbanks’increasedpreferenceforacquiringBCRPCertificatesofDeposit(CDBCRP)withmaturitiesofupto1year,contributedtothis.

Table 32SIMPLIFIED BALANCE SHEET OF THE BCRP

(As%ofNetInternationalReserves) Net Assets Dec. 11 Feb.12I. Net International Reserves 100% 100% (US$48,816mills.) (US$53,315mills.)Net Liabilities II. Total public sector deposits 38.0% 37.8% Indomesticcurrency 24.3% 23.7% Inforeigncurrency 13.8% 14.1%

III. Total reserve requirements 27.7% 24.6% Indomesticcurrency 9.7% 9.2% Inforeigncurrency1/ 18.0% 15.4%

Iv. BCRP Instruments 13.1% 18.1% CDBCRP 10.3% 13.4% CDVBCRP 0.0% 0.0% CDRBCRP 0.0% 0.0% CDLDBCRP 0.0% 0.0% Termdeposits 2.8% 4.8%

v. Currency 20.7% 18.6%

vI. Other 0.5% 0.8%

1/ Includes banks’ overnight deposits at the Central Bank.

97


In this context, between December 2011 and February 2012, the Central Bankwithdrew liquidity for a total of S/. 8.64 billion, mainly through issuances ofBCRPcertificatesofdeposit(S/.5.49billion)andthroughoperationsofovernightdeposits(S/.3.15billion).Inthisperiod,thepublicsectorincreaseditsdepositsattheCentralBankbyS/.3.82billion.

As a result of these operations, the share of BCRP-issued instruments in totalliabilitiesincreased.Asthetableaboveshows,theshareofmonetaryinstrumentsin the international reserves increased from 13.1 percent in December to 18.1percentinFebruary2012.Ontheotherhand,theshareoftotaldepositsforreserverequirementsdeclined from27.7 to24.6percent,mainlydue to thedeclineofdeposits in foreigncurrency since the latter fell from18.0 to15.4percentasaresultofthehigherBCRPinterventionamountintheforeignexchangemarketandthededollarizationofliabilities.(CHECK).

Foreign exchange rate

77.BetweentheendofNovemberandtheendofFebruary,thenuevosolappreciated1.0percentinnominaltermsagainstthedollar(theexchangeratemovedfromS/.2.701perdollartoS/.2.675perdollar).Twotrendscontributedtothis:ontheonehand,thehigherpaceofdedollarizationobservedindeposits,especiallyinthecaseofthedepositsoffirmsassociatedwiththeminingsectorandinthedepositsofsmalldepositorsand,ontheotherhand,lowerglobalriskaversionwhichcontributedtostrengthen most of the currencies of emerging countries after some of the mostsevererisksassociatedwiththedebtcrisisintheEurozonesubsided.

Graph 89INTERVENTION IN THE FOREIGN EXCHANGE MARkET AND EXCHANGE RATE

Nov.1130 19 06 24 0905 22 11 27 1409 28 16 01 1714 03 19 06 22 27

326

211 242 244293

489

Jan.12 Feb.12Dec.11

NetmaturityofCDRBCRP

NetpurchasesofUSdollars

NetissuanceofCDLDBCRP

Exchangerate

2.752.742.732.722.712.702.692.682.672.662.65

500

300

100

-100

-300

-500

Nuev

os s

oles

per

US$

Mill

ions

of U

S$

78.Duringthisperiod,thesupplyofdollarsinthelocalmarketcamemainlyfromprivatecompanies,whosenetsalesofforeigncurrencyamountedtoUS$2.93billion,and,toalesserextent,fromnonresidentinvestorsandpensionfunds,whosenetsalesofforeigncurrencyamountedtoUS$458millionandUS$313million,respectively.

98


Ontheotherhand,banks reduced their foreignexchangepositiongeneratinganadditionalsupplyofdollarsofUS$107million.Inthiscontext,theBCRPintervenedintheforeignexchangemarketpurchasingdollarsforatotalofUS$3.82billionwiththeaimofreducingthevolatilityoftheexchangerate.

Graph 90FOREX MARkET FLOWS

(MillionsofUS$)

6,0005,0004,0003,0002,0001,000

0-1,000-2,000-3,000-4,000-5,000-6,000

SUPP

LYDE

MAN

D

Pensionfunds Nonresidents BancodelaNaciónandfinancialcompanies

Privateinvestors

Internationalposition

Intervention

-758

313 571 458

-316

11

2,783 2,789

-63

107

-2,218

-3,678

4Q.111Q.12(UptoFebruary29)

79. Intheforwardmarket,banks’netpurchasesofdollarsincreasedsignificantlyduringtheperiodduemainlytothematurityofforwardsalescontractsnegotiatedintheperiod when the European crisis deepened in September 2011. Thus, betweenendNovemberandendFebruary,thebalanceofnetforwardpurchasesofforeigncurrencyincreasedbyUS$1.29billion,fromanegativebalanceofUS$163milliontoapositivebalanceofUS$1.12billion.

Graph 91bALANCE OF NET FORWARD PURCHASES AND EXCHANGE RATE(BalanceinmillionsofUS$andexchangerateinsoles/USdollar)

3,000

2,000

1,000

0

-1,000

-2,000

-3,000

3.350

3.250

3.150

3.050

2.950

2.850

2.750

2.650Feb.08 Feb.09 Feb.10 Feb.11 Feb.12Aug.08 Aug.09 Aug.10 Aug.11

BalanceofnetforwardpurchasesExchangerate(rightaxis)

80.TheBCRPsurveyonmacroeconomicexpectationsfor2012-2013showsthatthefinancialsystemexpectsaforeignexchangerateofbetweenS/.2.65andS/.2.68perdollarin2012andofbetweenS/.2.64andS/.2.66perdollarin2013.

99


Table 33SURvEY ON MACROECONOMIC EXPECTATIONS: EXCHANGE RATE

(S/.perUS$)

Survey as of: Sep.11 Dec.11 Feb.12Financial entities 2012 2.70 2.70 2.65 2013 2.70 2.68 2.65Economic analysts 2012 2.65 2.65 2.65 2013 2.70 2.64 2.64Non-financial firms 2012 2.70 2.70 2.68 2013 2.80 2.75 2.69Average 2012 2.68 2.68 2.66 2013 2.73 2.69 2.66

81.BetweenDecember2011andFebruary2012,therealmultilateralexchangeraterosefrom92.4to94.3,whichrepresentedadepreciationof2.0percent inrealterms.Thiswasduetothefactthatthenuevosolappreciatedlessthantheothercurrencies. Thus, while the nuevo sol appreciated 1 percent in this period, theBrazilianrealappreciated8.0percent,theChileanpesoappreciated7.7percent,andtheColombianpesoappreciated8.8percent.

Graph 92MULTILATERAL RER

(IndexDecember2001=100)

110

105

100

95

90

85

801996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

February2012:94.29%Chg.Feb.12/Dec.11:2.04

Periodaverage100.4

82.Between December 2011 and February 2012, Peru’s international reservesincreased by US$ 4.26 billion and amounted to US$ 53.31 billion on February29, 2012. These high levels of international reserves provide the country withadequatelevelsofinternationalliquiditytofacepossiblescenariosofturbulenceininternationalfinancialmarkets.

Thisincreaseininternationalreserves,whichwasmainlytheresultofpurchasesofforeigncurrencybytheCentralBank(US$5.13billion)andpublicsector’shigher

100


deposits at theBCRP (US$768million),wasoffsetby thewithdrawalofbanks’deposits(US$1.72billion).

Asregardsthecompositionofinternationalreserves,atthecloseofFebruarytheforeignexchangepositionoftheCentralBankrepresented70percentofinternationalreserves,whilebanks’depositsandpublicsector’sdepositsrepresented15and14percentofinternationalreserves,respectively.

Graph 93NET INTERNATIONAL RESERVES

(BillionsofUS$)

60

50

40

30

20

10

0Dec.02Dec.01 Dec.10 Dec.11 Feb.12Dec.06Dec.05Dec.04Dec.03 Dec.07 Dec.08 Dec.09

2120

1177533

3128

171413

10109

23

33

44

32 33

38

49

54NIRInternationalposition

BOX 6DEBT AND SYSTEMIC RISk: THE ROLE OF MACROPRUDENTIAL INSTRUMENTS

Because of the international financial crisis, central banks all over the world have becomeincreasingly aware of the importance of implementing measures that can reduce the formation of systemicriskinthefinancialsystem.Oneoftheaspectsthathasgeneratedmoreconcernamongmonetaryauthoritiesistherapidgrowthoffinancial institutions’degreeof leverage,especially ifthis leverage is generated by a rapid growth of short-term liabilities in foreign currency

InPeru,with thepurposeof preventingand limiting the formationof such risks in the financialsystem, the Central Bank maintains a rate of 60 percent of reserve requirements for local banks’ shorttermliabilities(upto2years)withforeignbanks.Thisrateofreserverequirementshasnotonlyenabledbanksinthedomesticfinancialsystemtoaccumulateahigherlevelofliquidityinforeigncurrency,buthasalsogeneratedincentivesforfinancialinstitutionstochangethecompositionoftheir external liabilities from short-term to long-term liabilities

101


As the followinggraphshows,after reserve requirementswere raisedsince themid-2010s, theshare of long-term liabilities relative to total external liabilities has increased from 45 percent in July 2010 to 81 percent in February 2012. This higher share of long-term liabilities in terms of banks’ external funding has played an important role in offsetting the impact of European banks’ credit constraints associated with the process of deleveraging generated by increased regulatory requirements in the Eurozone.

EXTERNAL LIAbILITIES OF THE bANkING(BalanceinmillionsofUS$andratioin%)

12,000

10,000

8,000

6,000

4,000

2,000

0

1009080706050403020100

Jan.10 May.10 Sep.10 Jan.11 May.11 Sep.11 Jan.12Jan.07 May.07

30

Startofincreaselongtermfinancingduetochangesintheregulationsofreserve

requirementsforlongtermexternalliabilities

17

50

82 84 87

Sep.07

Longtermexternalliabilities Shorttermexternalliabilities Longtermexternalliabilites/Totalexternalliabilites

Jan.08 May.08 Sep.08 Jan.09 May.09 Sep.09

45

81

This constraint in European banks’ supply of credits generated a cut in short term loans for emerging countriesinQ4-2011.InthecaseofPeru,banks’lowerdependenceonshort-termexternalcreditsignificantlyoffsettheimpactofthisshockondomesticfinancialconditions.Theinterestratesonshort term loans in foreign currency have remained stable during this period and, most importantly, the supply of credits has not been affected.

Inthesamewayasarapidgrowthinbanks’leveragethroughshort-termliabilitiesexposesfinancialentitiestoabruptandunforeseencutsincapitalflows,increasingthelikelihoodofagreatersystemicrisk,arapidgrowthoffirmsandhouseholds’deleveragingthroughshorttermloansindollarsalsoincreases the likelihood of cuts in the supply of credit as well as the possibility of unexpected increases in the foreign exchange rate.

In Peru, credit in foreign currency has increased 17.4 percent in the last year, showing a greater paceofgrowththaninpreviousyears–particularlyinthecaseofcorporateloans–favoredbythe low international interest rates and by greater access to financial markets. This growth of credit in dollars highlights the importance of implementing other macro-prudential measures aimed at promoting firms’ and families’ awareness of the risks of borrowing in foreign currency. Given the greater exposure to systemic risk that the nature of loans in dollars generates for businesses and households, such measures may include, for example, limits on loan-to-value ratios or limits on loans based on the income of borrowers and increased provisions for loans in foreign currency.

102


BOX 7FINANCIAL DOLLARIZATION:

DIFFERENCE BETWEEN NATURAL PERSONS AND LEGAL ENTITIES

Financial dollarization has been declining persistently in Peru since the 1990s and more intensely sincethe2000s,wheninflationtargetingwasadoptedbytheCentralBankofPeru.Monetarystability–lowinflationlevels–makesthedomesticcurrencymoreattractivebothasmeansofpaymentandasastoreofvalue.Thisisreflectedinthereductionoftheratiooffinancialdollarization,whichhasfallen from 78 percent in 2000 to 44 percent in February 2012 in the case of credit and from 65 percent to 36 percent in the case of liquidity in the same period.

In spite of this clear trend, some market segments show a transient reversal of this tendency duringperiodsofhighuncertainty,suchasduringtheinternationalfinancialcrisisin2008and2009and,morerecently,whenthefiscalproblemsintheEurozoneworsened.Itshouldbepointedout,however, that not all economic agents have reacted in the same way vis-à-vis these transitory episodes of greater uncertainty.

Asillustratedinthegraphbellow,legalentitieshaveshowngreatersensitivitytoepisodesofincreaseduncertaintyinfinancialmarketsin2011,asreflectedinthefactthattheirratiosofdollarizationincreasedby6percentagepointsbetweenMarchandJune2011(andfrom50percentinDecember2010to56percentinJune2011).Bytypeofdeposits,termdepositshaveshowngreatervolatilityintheirratioofdollarization, which soared by almost 10 percentage points in the same period. Natural persons, on the other hand, have continued to de-dollarize their deposits, the ratio of dollarization of these deposits having declined from 43 percent at the end of 2010 to 38 percent in December 2011. The deposits of naturalpersonsreflectverylittlesensitivitytotheepisodesofgreateruncertaintydiscussedabove.

More recently, between December 2011 and February 2012, legal entities have reversed in part the increase observed in their ratios of dollarization as they have returned to the level observed in October 2010.

DOLLARIZATION OF DEPOSITS OF NATURAL AND LEGAL PERSONS: 2010-2012(%)

60

55

50

45

40

35

30Jan.10 Jun.10 Nov.10 Apr.11 Sep.11

52.6

43.5

37.4

Feb.12

Naturalpersons Legalpersons Total

103


BOX 8MICROPRUDENTIAL AND MACROPRUDENTIAL INSTRUMENTS

The goal of achieving financial stability was initially sought through the implementation ofmicroprudentialpoliciesthatcontributedtocontroleventsoffinancialstressthatwerespecifictodifferentfinancialinstitutions.Theaimwastoprotectconsumersfromtheimpactsoftheseevents.Afterwards, and as a result of events associatedwith financial crises,macroprudential policieshavebeenimplementedwiththeaimofpreventingandcontrollingthesystemicfinancialrisksthatcould affect the level of real economic activity if these risks materialized.

The recent international financial crisis has highlighted how essential it is for central banksand regulatory organizations to adopt macro prudential policies and to go beyond the purely microeconomic approach of traditional prudential regulations. Empirical evidence shows that the individual soundness of banks is not enough to ensure the overall soundness of the financialsystemandtoachievefinancialstabilityasaresultofthis.

Acknowledgingthenecessityofmacroprudentialpoliciesisbasedonacceptingthefactthatfinancialmarkets have limitations in regulating themselves and on recognizing the fact that systemic risks mayarisefromanexcessivepro-cyclicality inthefinancialsystemandfromverylargeandhighlyinterdependent institutions in the global financial system. In the emerging countries, the crisesexperiencedpreviously–theAsiancrisis,theRussiancrisis,theMexicancrisis,andtheArgentinecrisis–havemademacroprudentialregulationmorerelevant.Thedefinition,scope,andimplicationsof the term “macroprudential” are currently being discussed in academic and political forums.

The term “macroprudential” and the objectives of macroprudential policies

Althoughthereisnoofficialrecordofwhenthetermwasfirstused,Clement(2010)suggeststhatthishappened in 1979 in a meeting of the Cooke Committee, the forerunner of today’s Basel Committee on Banking Supervision. Even though the term is relatively new, the concerns inherent to it were not. In the1970’spoliticianswereworriedabout the implications that the rapidgrowthof thefinancialsystemcouldhaveonmacroeconomicandfinancialstability.Afeatureofthetermmacroprudentialisthatitregainsimportanceaftereventsofeconomiccrises,asthefigurebelowillustrates:

NUMbER OF SEARCH OF THE TERM “MACROPRUDENTIAL”(Thousands)

300

250

200

150

100

50

01994

Source:Google.

35

1995

28

1996

7

1997

39

1998

39

1999

98

Asian and russian crisis

International crisis

2000

70

2001

39

2002

49

2003

35

2004

46

2005

46

2006

53

2007

46

2008

105

2009

245

2010

238

2011

196

104


Objectives of macroprudential and microprudential policies

Themost important goal of macroprudential policies is to promote financial stability, the latterbeingunderstoodasthesoundnessrequiredbythefinancialsystemtobeabletofaceinternalandexternal shocks.

Intermsofspecificobjectives,macroprudentialpolicyseekstoaddresstwospecificdimensionsofsystemic risk15: a time dimension, which involves analyzing how risk has evolved over time, and a cross-sectionaldimension,whichhastodowithhowriskisdistributedwithinthefinancialsystemat any point in time.

AccordingtoBorio(2003),themicroprudentialandmacroprudentialapproachestoregulationandsupervisiondifferintermsofobjectivesandintermsofthemodelusedtodescribetherisk.Asregardstheobjectivesofthesepolicies,whilethemacroprudentialapproachseekstolimitepisodesandthecostofaggregatefinancialdistressatthelevelofGDP,themicroprudentialapproachseekstolimitsituationsoffinancialdistressatthelevelofindividualinstitutions.Thus,whilemacroprudentialregulation is developed in the frame of a macro-economic tradition, microprudential regulation is mainly understood in terms of depositor/investor protection.

As regards the model used to describe the risk, macroprudential regulation assumes that therisk is endogenous to the behavior of the financial system,whereasmicroprudential regulationassumes that this risk is exogenous. Other aspects to be considered are the similar exposures that institutionshavewithinthefinancialsystemaswellastheinterconnectionbetweenthesefinancialinstitutions, and the calibration of prudential tools to prevent or control systemic risk.

Perspectiva Macro y micro prudencial

Macroprudential tools

Macroprudentialinstrumentscanbeoftwotypes:toolsspecificallydesignedtomitigatesystemicriskinitstimeandcross-sectionaldimensions,andtoolsthatcanbecalibratedwiththespecificand

15 Additional referenceson thesesubjectsmaybe found inClement (2010),Burunnermeier (2009),BankofEngland(2009),andBorio(2003).

MACRO AND MICRO PRUDENTIAL PERSPECTIvE

Macroprudential Microprudential

Next goal Limitingsituationsoffinancialstress at system level

Limitingsituationsoffinancialstress at individual level

Last goal AvoidlossesatGDPlevel Consumer protection

Risk model Endogenous(Partly) Exogenous

Correlations and common exposures across institutions Important Unimportant

Calibration of prudential controls

Intermsofsituationsoffinancialstress at system level: top-down

Intermsofsituationsoffinancialstress at individual level:bottom-up

Source:Borio(2003).

105


explicitgoalofreducingsystemicrisk.Specificmacroprudentialtoolscanbeclassifiedaccordingtothe taxonomy proposed by BIS in 2008.

MACROPRUDENTIAL INSTRUMENTS

1. Methods of measurement of risk 6. Limits to risk concentratino

2. Financial reports 7. Compensation schemes

3. Regulatory capital 8.Restrictionstothedistributionofprofits

4. Liquidity funding standards 9. Insurance mechanism

5. Guarantee agreements 10.Resolutionandmanagementofflaws

Source:AdaptedBIS(2008).

Thisvarietyof instrumentsseekstominimizetheex-anteandex-postimpactoffinancialcrises.The empirical evidence on the effectiveness of macro-prudential instruments is not abundant and is still being discussed.

BOX 9DEDOLLARIZATION OF THE PENSIONS INCLUDED IN THE PRIvATE PENSION SYSTEM

Theintroductionofadjustablefixed-ratepensionsinsolesasfrom2011hasbroughtaboutarapidprocessofpensions’dedollarization.SinceQ2-2011,newpensionersintheprivatepensionsystem(SPP)arechoosingmostlythepensionplanthatoffersanadjustablepensioninsolesatanannualfixed-rateofnolessthan2percent.InQ4-2011,forexample,90percentofnewpensionerschosepensionplansinnuevossolesfortheirannuities(mostchosethefixed-rateoption).ThispreferenceforpensionplansinsolesimpliesareversalofthetrendobserveduntilQ1-2011,whenover90percent of new pensioners chose pension plans in dollars.

SPP: FLOWS OF CONTRACTS OF PENSION OF RETIREMENT ANNUITY(%.2011)

100908070605040302010

0Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.

US$Readjustable S/.ReadjustableUS$ S/.VAC

Source:SBS.

106


SPP: DOLLARIZATION OF RETIREMENT PENSIONS OFANNUITY GRANTED1

(%.Dec.2009–Dec.2011)

98

96

94

92

90

88

86

84

82Dec.09

1/Therationconsidersthemodalitiesoffamilyannuityandtemporaryincomewithdeferredannuity.Source:SBS.Elaboration:BCRP.

Mar.10 Jun.10 Sep.10 Mar.11 Jun.11 Sep.11 Dec.11Dec.10

Until 2010, pensioners who chose annuity as their pension plan only had the annuity options of pensions in nominal US dollars, inflation-indexed pensions in soles, or a combination of both.Because insurance companies,which are the organizations that provide annuities, did not findenough inflation-indexed securities to cover their pension obligations, they offered an inflation-indexedpensionthatwaslowerthanthepensioninUSdollars(whichdidnotrequiretobeadjustedbyinflation).Thisledpensionerstochoosethelatteroptionduetothegreaterincometheywouldreceiveintheinitialstageoftheirlifeaspensioners(monetaryillusion).However,thisgeneratedtwo problems: on the one hand, pensioners received lower pensions than the ones they should receive due to the appreciatory trend of the foreign exchange rate observed in recent years and, on the other hand, this promoted dollarization in other areas of the economy. Today, current legislation is neutral in terms of currencies since pensions in nuevos soles may alsobeupgraded toanannualfixed rateofno less than2percent.Becauseof this, insurancecompaniescanbemorecertainaboutthetemporalprofileoftheirliabilitiesinthatcurrencyandcanthereforeobtaincoveragefortheirobligationspurchasingfixed-ratebonds.Theycanalsoprovideadjustable pensions in soles that aremore competitivewith the pensions inUS dollars,whichsince2011mustalsobeadjustable.Furthermore,disabilityandsurvivorshippensionswillalsobeincluded in this new pension scheme as from this year.

Asaresultofthis,theratioofdollarizationofpensionannuitiesshowsasteepdeclineafterhavingdropped from 94 percent in March 2011 to 87 percent in December 2011.

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PENSIONS: FORMS OF BENEFIT PAYMENT AT RETIREMENT AND CURRENCIES

Forms of Benefit Payment Before AfterProgrammed Withdrawal Nuevos Soles X X

Family Life Annuity Inflation-indexednuevossoles X X

Family Life Annuity Fixed-rate indexed nuevos soles X

Family Life Annuity US dollars X

Family Life Annuity Fixed-rate indexed US dollars X

Temporary Income with Deferred Life Annuity Nuevossoles(TI)andinflation-indexedsoles(DLA) X X

Temporary Income with Deferred Life Annuity Nuevossoles(TI)andUSdollars(DLA) X

Temporary Income with Deferred Life Annuity Nuevossoles(TI)andfixed-rateindexednuevossoles(DLA) X

Temporary Income with Deferred Life Annuity NuevosSoles(TI)andfixed-rateindexedUSdollars(DLA) X

Mixed Income Nuevossoles(PW)andUSdollars(FLA) X

Mixed Income NuevosSoles(RP)andfixed-rateindexedUSdollars(FLA) X

Life Annuity in soles and dollars Inflation-indexednuevossoles,andUSdollars X

Life Annuity in soles and dollars Inflation-indexedorfixed-rateindexednuevossoles,andfixed-rateindexedUSdollars X

Notes:- TI:Temporaryincome;DLA:Deferredlifeannuity;PW:Programmedwithdrawal,andFLA:Familylifeannuity.- IntheProgrammedwithdrawaloption,thepensionisgrantedbytheAFP.ThepensionvariesaccordingtotheFund’sprofitability.- TheTemporaryIncomewithDeferredLifeAnnuityoptionconsistsofaTemporaryIncomeinnuevossolesandaDeferredLifeAnnuityin

inflation-indexedorfixed-rateindexednuevossoles,oradeferredlifeannuityinfixed-rateindexedUSdollars.- IntheMixedIncomeoption,thepensionerreceivesamonthlypaymentthatcombinestwoformsofbenefitpayment:Programmedwithdrawal

(innuevossoles)andLifeAnnuity infixed-rate indexedUSdollars.TheoptionofProgrammedwithdrawalandLifeAnnuity infixed-rateindexed nuevos soles is not available.

- IntheoptionofLifeAnnuityinsolesanddollars,thepensionerchoosesacombinationoftwosimultaneousformsofbenefitpayment:LifeAnnuityininflation-indexedorfixed-rateindexednuevossoles,andLifeAnnuityinfixed-rateindexedUSdollars.

Source: SBS. Elaboration: BCRP.

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VI. Inflation83. Inthefirstmonthsoftheyear,last12-monthinflationhasbeendecliningasaresult

of thebeginningof thereversalofsupplyshocks. Inflation inFebruary recordeda rate of 4.17 percent, a level above the upper band of the target range. Thegradualdeclineofinflationarypressureswhichiscurrentlybeingobservedisalsoconsistentwithaneutraleconomiccycleduring2012,whichwillfavorinflation’sconvergencetowardsthetarget.

Graph 94INFLATION AND INFLATION TARGET

(Last12month%change)

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Maximum

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Inflationtargetrange

12 month % change February 2012Inflation: 4.17%Core inflation: 3.79%CPI without food and energy: 2.23%

ICPIinflationCPIwithoutfoodandenergyCore

Graph 95INFLATION EXPECTATIONS FOR THE NEXT YEAR*

(%points)

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*Correspondstotheaverageoftheexpectationsofthefinancialsystemandeconomicanalysts.

Mar.08 Dec.08 Sep.09 Jun.10 Mar.11 Jan.12Mar.05Jun.04Sep.03Dec.02 Dec.05 Sep.06 Jun.07

Maximum

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Inflationtargetrange

84. Inflation expectations for 2013 –a relevant time horizon for monetary policyactions–continuetobewithinthetargetrangeandhavebeendeclininginthelastmonths,inlinewiththelowerrateofinflationobserved.

85. Inflationinthefirstquartersoftheyearisusuallyhigherthanintherestoftheyeargiventhatitisnotuncommonthatsometransitorysupplyfactorsmayariseinthefirstmonthsoftheyearandgenerateupwardpressuresonsomeprices,especially

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onfoodprices.Inthelastdecade,forexample,whiletheannualaverageinflationrateinthefirstquarterswas4.6percent,thisratedeclinedto1.8percentasanannual average in the next months –April to December–, reflecting mainly thehigherseasonalinflationofperishablefarmingfoodproductsinthefirstmonthsoftheyear.

Table 34

CPI AND PERISHABLE AGRICULTURAL FOODAnnualizedaveragechangeofperiod2001-2011

January-March April-December Year

CPI 4.6 1.8 2.5Perishable agricultural food 23.6 -1.6 4.2 86.Thenon-core component ofinflation,whichgrew6.8percentinannualtermsat

December2011,declinedto4.9percentinFebruaryfollowingtheevolutionofthepricesoffoodproductsandfuelswhichgrew7.8and3.9percent,respectively.Ontheotherhand,core inflation roseslightlyfrom3.65percentinDecemberto3.79percentinFebruary,reflectingthepricerisesinfoodsoutsidethehome–becauseofthehigherpricesoffood–andineducation(tuitionandfees).

87. Inflationwithoutfoodandenergy,indicatorexcludingtheshocksinthepricesoffoodandfuels,droppedfrom2.42percentinDecember2011to2.23percentinFebruary2012.

Table 35 INFLATION(%change)

Weight 2006 2007 2008 2009 2010 2011 2012 2009=100 Jan.-Feb. 12 month

I. INFLATION 100.0 1.14 3.93 6.65 0.25 2.08 4.74 0.22 4.17 II. CPI WITHOUT FOOD AND ENERGY 56.4 1.28 1.49 4.25 1.71 1.38 2.42 -0.06 2.23 III. CORE INFLATION 65.2 1.37 3.11 5.56 2.35 2.12 3.65 0.54 3.79 Goods 32.9 0.97 3.30 5.32 2.17 1.53 3.17 0.46 3.36 Services 32.2 1.85 2.88 5.86 2.56 2.72 4.13 0.62 4.23 Iv. NON CORE INFLATION 34.8 0.83 5.07 8.11 -2.54 2.00 6.79 -0.35 4.86 Food 14.8 2.06 7.25 10.97 -1.41 1.18 11.50 -0.65 7.82 Fuels 2.8 -1.50 6.45 -0.04 -12.66 12.21 7.54 -0.69 3.91 Transportation 8.9 1.12 0.82 5.86 0.19 1.94 3.61 -0.95 3.44 Utilities 8.4 -3.22 0.24 7.48 -4.56 0.01 1.50 1.05 1.31

88. Imported inflationalso fell from4.9percent inDecember2011to3.23percentin February2012, the rise in thepricesof coregoodsandservicesbeingoffsetwiththeevolutionofthenon-corecomponentsofinflationinacontextofnominalappreciationofthenuevosol.

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89. Inannualterms,quarterlyinflationdeclinedinFebruaryfrom3.7to2.8percent.Quarterlycoreinflationfell from3.0to2.8percent,while inflationwithoutfoodandenergyfellfrom2.1to1.9percent.

Graph 96DOMESTIC AND IMPORTED INFLATION


11

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-9Jan.02 Jan.10 Jan.11 Feb.12Jan.06Jan.05Jan.04Jan.03 Jan.07 Jan.08 Jan.09

ImportedCPIDomesticCPI

Graph 97CPI

(Annualizedpercentchangeofmobilequarter)

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CPI Dec.10 Jan.11 Feb.11 Mar.11 Apr.11 May.11 Jun.11 Jul.11 Aug.11 Sep.11 Oct.11 Nov.11 Dec.11 Jan.12 Feb.12

Indices 102.2 102.6 103.0 103.7 104.4 104.4 104.5 105.3 105.6 105.9 106.3 106.7 107.0 106.9 107.312month%change 2.1 2.2 2.2 2.7 3.3 3.1 2.9 3.4 3.3 3.7 4.2 4.6 4.7 4.2 4.2Annualizedquarterly%change 0.0 0.6 2.1 4.1 5.7 6.3 5.3 4.0 3.8 4.7 4.7 4.6 4.1 3.7 2.8

Graph 98CORE INFLATION


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Core inflation Dec.10 Jan.11 Feb.11 Mar.11 Apr.11 May.11 Jun.11 Jul.11 Aug.11 Sep.11 Oct.11 Nov.11 Dec.11 Jan.12 Feb.12


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Graph 99CPI WITHOUT FOOD AND ENERGY


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CPI without food and energy Dec.10 Jan.11 Feb.11 Mar.11 Apr.11 May.11 Jun.11 Jul.11 Aug.11 Sep.11 Oct.11 Nov.11 Dec.11 Jan.12 Feb.12


90. TheitemsthatmostcontributedtoincreaseinflationbetweenJanuaryandFebruaryweremealsoutsidethehome,electricity,andagriculturalproducts,suchaspapayaandonion.Inadditiontomealsoutsidethehomeandelectricity,anotheritemworthpointingoutforitscontributiontoincreaseinflationinthelast12monthswaseducation(tuitionandfees).

Table 37 ITEM WITH THE HIGHEST WEIGHTED CONTRIBUTION TO INFLATION:

March 2011 - February 2012 Positive Weight % Chg. Contribution Negative Weight % Chg. Contribution Meals outside the home 11.7 7.1 0.86 Telephone rates 2.9 -5.3 -0.14Education(feesandtuition) 8.8 4.3 0.39 Citrics 0.5 -5.0 -0.04Urban fares 8.5 3.3 0.28 Cleaning items 0.9 -2.5 -0.02Electricity 2.9 7.5 0.21 Olluco and alike 0.1 -19.1 -0.02Poultry 3.0 7.2 0.20 Garlic 0.1 -23.4 -0.02Toiletries 4.9 3.6 0.18 Sugar 0.5 -1.9 -0.02Rice 1.9 7.5 0.13 Freshandfrozenfish 0.7 -1.3 -0.01Papaya 0.2 65.8 0.13 ApparatusofrecreationGasoline and oil 1.3 8.2 0.13 and culture 0.9 -0.9 -0.01Garment for men and kids Internet service and others 0.8 -0.8 -0.01aged 12 or older 1.5 7.9 0.12 Gas 1.4 -0.4 -0.01

Total 2.63 Total -0.30

Table 36 ITEM WITH THE HIGHEST WEIGHTED CONTRIBUTION TO INFLATION:

January - February 2012 Positive Weight % Chg. Contribution Negative Weight % Chg. Contribution Mealsoutsidethehome 11.7 1.4 0.17 Freshandfrozenfish 0.7 -11.7 -0.09Electricity 2.9 4.8 0.13 Poultry 3.0 -2.5 -0.07Papaya 0.2 20.8 0.05 Telephone rates 2.9 -2.1 -0.05Other vegetables 0.4 9.1 0.04 National transportation 0.3 -10.6 -0.04Onion 0.4 11.3 0.03 Urban fares 8.5 -0.5 -0.04Sodas 1.3 1.6 0.02 Grape 0.1 -22.8 -0.03Carrots 0.1 7.8 0.01 Corn 0.1 -16.8 -0.03Education(feesandtuition) 8.8 0.1 0.01 Avocado 0.1 -11.7 -0.02Evaporated milk 1.6 0.8 0.01 Rice 1.9 -0.8 -0.01Textbooks and school supplies 0.7 1.6 0.01 Peach 0.1 -13.0 -0.01

Total 0.48 Total -0.39

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Inflation components

91.When we analyze the main components that have affected the evolution ofinflation at February, we see that meals outside the home registered a growthof 7.1 percent in the last 12 months associated with the higher prices of foodproducts.Educationcostsalsorose4.3percentduetotherisesregisteredinthetuitionandfeesofuniversitiesandhighereducationinstitutes.Electricityrecordedariseof7.5percentasaresultofthequarterlyadjustmentinelectricitygenerationratesandtheincreaseinthepricesofcrude,naturalgas,andthewholesalepriceindex.

Thepricesofotherfoodproducts,suchaspapaya,rose65.8percentinthelast12monthsafterhavingrisen90.2percentin2011whenthesupplyofthisproducttoLimafell33percentbecauseofthestrongrainsandtheriveroutflowsandfloodsthataffectedtheharvestandtransportationofthisproductsinthemainproducingareasofUcayaliandSanMartíninthefirstquarter.Thepresenceofcropspestsandincreasedseasonaldemandinthesummermonthsalsocontributedtothisrise.

Continuingwiththeupdateinthebandpriceoffuels,thegovernmentadjustedthepricesoffuelsatendFebruary2012,whilethepriceofcrudereachedUS$102.3intheinternationalmarket.

Otherproducts,suchaschickenmeat,showedlowerratesofgrowthcomparedto2011.Thepriceofchickendidnotincreaseasmuchduetotheappropriatelevelofthesupplyoffish,themainsubstituteforpoultry.

Graph 100PRICE OF CHICkEN(Nuevossolesperkg)

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Jan.10:7.3

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Aug.11:7.4

Dec.10:6.1

Feb.12:7.0

Sep.09:5.8

Oct.08:6.3Jan.08:

5.6

Nov.05:4.6

AvianfluconcernsinceOctober

Feb.10 Feb.11 Feb.12Feb.06Feb.05 Feb.07 Feb.08 Feb.09

Inflation forecast

92. InFebruaryinflationinthelast12monthsshowedalevelabovetheupperbandof the target range recording a rate of 4.17 percent. As in the Inflation Report

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ofDecember, the central forecast scenario considers that inflationwillgraduallyconverge towards the target range since Q3-2012, provided that all the costpressuresgeneratedby the significant rises in commoditypricesdisappear andthat inflationexpectations remainwithin the target range. The inflation forecasttakesintoaccounttheupwardrevisionintheforecastonthepricesoffuelsandalsoconsiderstherisksofamorepersistentincreaseinthepriceofcrude.

Non core inflation is forecast to showa rate close to2.0percent in2012afterhavingreachedalevelof6.8percentinDecember2011.Theconductofnoncoreinflationin2011reflectedcostpressuresassociatedwithshocksintheinternationalpricesoffoodandfuels.In2012,theconditionsconstrainingtheglobalsupplyoffoodareexpected todisappear,whichwouldoffset theupward revision in theforecastonthepriceofcrude.Moreover,itisalsoexpectedthatthenegativetrendobservedininflation’simportedcomponentwillcontinueover2012,whichwouldreducetheupwardpressuresofexternalpricesonthedynamicsofinflationintheforecasthorizon.This isconsistentwiththelowergrowthforeseenintheglobaleconomy.

93.Theforecastsoneconomicgrowthareconsistentwithaneutraleconomiccycleintheforecasthorizon–outputgapclosetozero(seegraph101)–andthereforenomajordemandpressuresoninflationareanticipatedinthisperiod.

Thisscenarioconsidersthatboththepositivefiscalimpulseforeseenfor2012–which

isconsistentwith the forecastofhigherpublic spending–and theexpansionarymonetaryandcreditconditionsindollarsthatwouldbeobservedininternationalmarketswillhaveapositivecontributionontheoutputgap.Thiswouldbeoffsetbythelowergrowthexpectedinourmaintradingpartners.

94. Inflationexpectationsarealsoexpectedtoconvergefromtheircurrent levelsof2.5–3.0percenttoa levelof2.0percent, thusremaininganchoredwithintheinflationtargetrange.Thehigherlevelsofinflationexpectedduring2011reflectedthehighratesof inflationobservedinthatperiod–abovethetargetrange–asaresultofpersistentsupplyshocksonthepricesoffoodandfuels.Thistemporaryriseinthelevelofexpectedinflationshouldsubsideastheimpactoftheseshockson inflation reverses, inflation returning thereafter to its path of convergencetowardstheinflationtargetof2percent.

95.LikeintheInflationReportofDecember,thebaselineforecastscenariointhisreport

considers that themonetarypolicypositionwillnotbesubstantiallydifferent intheshorttermfromtoday’smonetaryposition.Anappropriatemonetarystancecontributestomaintaininflationexpectationsanchoredtothetarget,particularlyin a context of persistent significant shocks that affect sensitive CPI products.Therefore,theCentralBankwillcontinuetooverseetheevolutionoftheglobaland

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thedomesticeconomyandstandsreadytoadjust itsmonetaryposition,shouldthisberequired,toensureinflation’sconvergencetothetargetrange.

Graph 101OUTPUT GAP: 2006 - 2013

(%ofpotentialGDP)

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Memo: Theoutputgapisnotanobservablevariableandhastobeestimated.Becauseofthis,thegraphshowsuncertaintyaboutitsvalue,eveninperiodsforwhichthereisinformationonGDP(e.g.until4Q-2011).AsinGraph102,eachbandcon-centratesaprobabilityofoccurrenceof10%andtotalbandsrepresentaprobabilityofoccurrenceof90%.

Theoutputgap is estimatedusing statisticalmethodsof signals extraction.A set of equations that relate unobservablevariableswithobserveddataarespecified.Twoequationsshouldbepointedout:thefirstoneistheidentitythatequates(thelogarithmof)GDPwiththesumof(thelogarithmofthe)potentialGDPplustheoutputgap;thesecondisanequationofaggregatesupply(knownasthePhillipscurve)thatdescribesinflationasafunctionofseveraldeterminants,theoutputgapamongthem.Therefore,theoutputgapisinterpretedasthetransitorycomponentofGDPthatismorecloselyrelatedtoinflationovertheeconomiccycle.

ThechapteronthebalanceofrisksdiscussestheriskscenariosusedtoforecasttheoutputgaponwhichtheinflationforecastillustratedinGraph102isbased.

Graph 102INFLATION FORECAST: 2012 - 2013


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Memo: Thegraphshowstheprobabilityofoccurrenceofinflationvaluesinthefuture:ThesevalueswereestablishedcombiningstatisticalanalysisandthesubjectiveperceptionoftheBCRP.

Thegraphconsistsof18bands,eachbandwithaprobabilityof5%thattheprojectedvaluemayfallwithinit.Thus,ineachperiodoftheforecasthorizon,eachpairofbandswiththesameshadeconcentratesaprobabilityof10%.Thiscanbeinterpretedasthat10ofevery100possiblefuturevaluesofinflationareexpectedtofallwithinthedarkestbands(locatedinthecenter),10areexpectedtofallwithintheclearerbandsadjacenttothedarkestones,other10areexpectedtofallwithintheevenclearerbandslocatedaboveandbelowthesecondgroupofbands,andsoonuntil90ofthe100valuesaredistributedinthegraph.Theremaining10valueswouldfalloutsidethebands.

Thebaselinescenariopathiscontainedinthedarkerbands,describedinthetext.Thechapteronthebalanceofrisksdiscussestheriskscenariosunderlyingtheinflationforecastinthisgraph.Thebalanceofrisksforinflationbytheendof2012isneutral:itiscontemplatedthattheprobabilityofittobebelowtheForecastofbaselinescenarioisequaltotheprobabilitytobeabove.

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SUMMARY OF INFLATION REPORT FORECASTS 2012,1/ 2013,1/

2010 2011

IR Dec.11 IR Mar.12 IR Dec.11 IR Mar.12 Real % change 1. GDP 8.8 6.9 5.5 5.7 6.3 6.3 2. Domestic demand 13.1 7.2 5.6 5.9 6.1 6.5 a. Private consumption 6.0 6.4 5.6 5.8 5.8 5.8 b. Public consumption 10.0 4.8 5.3 5.3 4.9 5.1 c. Fixed private investment 22.1 11.7 7.0 8.2 8.3 8.7 d. Public investment 27.3 -17.8 33.1 34.3 7.3 7.33. Exports(goodsandservices) 1.3 8.8 6.0 7.5 7.7 7.74. Imports(goodsandservices) 24.0 9.8 6.5 8.3 6.6 8.3 5. Economic growth in main trading partners 4.5 3.5 2.7 2.9 3.1 3.2Memo: Outputgap2/(%) 0.1 0.8 -1.0;0.0 -0.5;+0.5 -0.5;+0.5 -0.5;+0.5

% change 6. Forecastinflation 2.1 4.7 1.5-2.5 2.0-3.0 1.5-2.5 1.5-2.57. Averagepriceofcrude 28.7 19.8 5.2 10.2 0.0 1.1 8. Nominal exchange rate 3/ -2.1 -4.3 0.0 -1.5 0.4 0.0 9. Nominal exchange rate 3/ -3.0 -5.8 1.0 0.1 0.4 1.010. Terms of trade 17.9 5.4 -5.8 -1.4 0.6 0.4 a. Export price index 29.9 20.0 -6.1 -1.9 1.2 0.9 b. Import price index 10.1 13.8 -0.3 -0.5 0.6 0.5

Nominal % change 11. Currency in circulation 25.4 12.9 14.5 17.5 11.5 13.012. Credit to the private sector 4/ 21.0 18.9 13.5 14.5 11.5 12.5

% GDP 13. Grossfixedinvestmentrate 25.1 24.1 25.6 25.7 26.1 26.214. Current account of the balance of payments -1.7 -1.3 -2.2 -1.5 -2.1 -1.815. Trade balance 4.4 5.3 3.6 4.5 3.9 4.616. Grossexternalfinancingtotheprivatesector5/ 7.9 6.4 4.6 4.9 5.3 5.117. Current revenue of the general government 20.0 21.0 21.0 21.2 21.0 21.218. Non-financialexpenditureofthegeneralgovernment 19.2 18.1 18.9 18.9 18.4 18.719. Overallbalanceofthenon-financialpublicsector -0.3 1.9 1.0 1.1 1.5 1.420. Total public debt 23.4 21.7 20.1 19.9 18.6 18.3 IR:InflationReport.1/ Forecast.2/DifferentialbetweenGDPandpotentialGDP(%).3/ Survey on exchange rate expectations.4/ Includes loans made by banks’ branches abroad.5/ Includes foreign direct investment and private sector’s long term disbursement.

Table 38

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VII. Balance of risks

96.Thebaselinescenariofortheinflationforecasttakesintoaccountrelevantdataonmacroeconomicandfinancialvariablesaswellasinformationonthedomesticandinternationalenvironmentthatiscomplementedwithqualitativeinformationnotconsideredinstatisticaldata.

Given that the forecast process is not free from uncertainty about futuredevelopmentsinthedomesticandintheglobaleconomies,alternativescenariosincludingshocksthatdivertinflationfromthebaselinescenarioarealsoevaluatedinthebalanceofrisks.

Thebalanceof risks results fromassessing the relative significance thateachoftheriskfactorshasontheinflationforecast.Theexpectedimpactofariskfactoroninflationdependsontwocomponents:first,themagnitudeofdeviationoftheinflationforecastintheriskscenariocomparedtothebaselinescenariobase,andsecond,theprobabilityofoccurrenceassignedtotheriskscenario.Together,thesetwofactorsdeterminethebiasoftheinflationforecastinthebalanceofrisks.

97.Themainrisksthatcoulddiverttherateofinflationfromthebaselinescenariointhe forecast horizon are associated with uncertainty about the evolution of theglobaleconomy,theevolutionofdomesticdemand,andtheimpactofthepricesofcommodities.Graph103showstheexpectedimpactofeachoftheseriskfactorsontheinflationforecast.

The downward risks in the inflation forecast are both external and domestic.Theexternalrisksareassociatedwiththepossibilitythataninternationalfinancialcrisismayunfold,whilethedomesticrisksareassociatedwithacontextofslowerdemandgrowthduetothepostponementofsomeinvestmentprojects.

a. Uncertainty about the evolution of the world economy

Thebaselinescenarioconsidersalowergrowthrateintheworldeconomythisyear(3.3percentvs.3.7percentin2011)andarateof3.8percentin2013afterarecoveryintheeconomy.Theriskofaglobalrecessionhasdecreasedinrecentmonthsduetothe lesspessimisticviewthat internationalmarketshaveadoptedingeneralvis-à-vistheEurozonefinancialandfiscalproblems.However, should such an adverse scenario develop, this situation wouldcontribute to weaken external demand and affect the domestic economythroughthefinancialandtradechannels.

Thisscenariodescribesadropinglobaleconomicactivitycoupledbyadeclinein the termsof trade.Additionally, a rise inglobal uncertainty could create

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panicamonginvestorsinternationallyandunfoldasuddenreversalofexternalcapitalswitharealdepreciationandanincreaseinthecountryriskindicator.

Iftheserisksmaterialized,theCentralBankwoulduseitsavailableinternationalreservesandthevariousmechanismsithastoinjectliquidityinbothdomesticandforeigncurrencytooffsettheimpactofsuchshocksondomesticfinancialconditions. The monetary policy stance in the forecast horizon would beexpansionarytopreventdeflationaryrisks.

b. Evolution of domestic demand

In a scenario of higher uncertainty, there is the risk that domestic agents’expectationsmaydeteriorate,especiallyinthecaseofinvestment,whichcouldgeneratea lowerdynamisminaggregatedemandandleadtheeconomytogrowbelowitspotentialgrowthrategeneratingdownwardpressuresoncoreinflation.Inthisscenario,theCentralBankwouldeaseitsmonetarypositioninorderthatinflationfallswithintheinflationtargetrange.

On the other hand, there are two risks on the upside for inflation associatedmainlywithhigherforeigncapitalinflowsandhighercommodityprices

c. Increased capital inflows

The high availability of liquidity in international markets due to the aggressiveexpansion of central banks’ balances in developed countries, together with thescarce attractive investment options observed in today’s context of high globaluncertainty, could lead to a flow of foreign capitals to emerging countries suchasPeru,generatingasimilarsituationtotheoneobservedpriortothecrisisthatstarted towards the endof 2008.On theonehand, an increased capital inflowwouldacceleratetheexpansionofcredit,thusstimulatingaggregatedemandandinflation.Ontheotherhand,thiswouldcauseappreciatorypressuresontheforeignexchangeratethatwouldtranslateintolowerdomesticinflation.Itisestimatedthattheneteffectofanincreasedcapitalinflowoninflationwouldbeslightlypositive.

In this scenario, the Central Bank would adjust its monetary policy includingmacroprudentialpolicy instruments,suchastheratesofreserverequirements, ifapaceofcreditexpansionthatcouldaffectmonetaryandfinancialstabilityisperceived.

d. Imported inflation or adverse climate conditions

Thereistheriskthatglobalinflationarypressureswillbemorepersistentthancurrently estimated in the baseline scenario. Uncertainty about how policymakerswillcopewithfinancialproblems,especiallyintheEurozone,ishavingastrongimpactonthelevelofglobaleconomicactivity.Amoredetermined

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andcredibleeconomicpolicyinmostdevelopedcountriescouldgenerateaconfidenceshock,whichcouldleadtohigherglobaldemand.Iftheshocksarepersistent,theymayaffecttheevolutionofdomesticinflationthroughhigherimportedcosts,whichcouldgenerateinflationarypressures.

TheriskthatoilandoilderivativeswillshowhigherinternationalpriceshasalsoincreasedduetothepoliticaltensionsobservedintheMiddleEastrecently.Inthedomesticarea,thereisstilltheriskthatadverseclimateconditionsmayaffectthenormalsupplyofagriculturalproducts.

In this scenario, theCentralBankwouldadjust itsmonetarypositiononly ifimportedinflationaffectedeconomicagents’expectationsofinflation.

98.Our Inflation Report of December included in its balance of risks the possibilitythattheexpectationsofinflationofhouseholdsandbusinesseswouldpersistentlyremainabovetheinflationtargetgiventhattheinformationgatheredthroughtheBCRPsurveysshowedaslightincreaseinthelevelofinflationexpectedtowardstheendof2011.However,accordingtothelatestsurveycarriedout,thisincreasehas reversed,whichwouldbe indicating that the riskof higher inflationdue toexpectationsofhigherinflationwillnotmaterialize.

99.Theeffectsoftheriskfactorspushinginflationupwardswouldbecounterbalancedby theeffectsof the risk factorspushing inflationdownwards. In summary, thebalance of these risks is neutral for the inflation forecast for end 2012; that is,there is the sameprobability that inflation will fall above or below the forecastconsideredinthebaselinescenario.

Graph 103bALANCE OF RISkS AGAINST THE bASE SCENARIO

0.100.080.060.040.020.00

-0.02-0.04-0.06-0.08-0.10

Expe

cted

impa

ct =

pro

babi

lity x

impa

ct (p

oint

s of i

nflat

ion)

0.100.080.060.040.020.00

-0.02-0.04-0.06-0.08-0.10

Risksontheupside

Risksonthe

downside

Deterioration of theinternational environment

Lower demandgrowth

Higher inflationexpectations

Greater inflows of capital

Memo: TheriskassessmentdescribeshowexogenousfactorswouldaffecttherateofinflationforecastforDecember2012ifsuchrisksmaterialized.Eachbarinthegraphillustratesthemagnitudeanddirectionoftheeffectofthesefactors,i.e.,theexpectedimpactinalternativeforecastscenarios.Thisimpactiscalculatedasthedifferencebetweenthe inflation forecast in the baseline scenario and inflation projections in several scenarios considering differentassumptions,multiplyingthisdifferencebytheprobabilityofoccurrenceassignedtosuchalternativeassumptions.Thesumofthebars–theriskbalance–indicateshowtheseriskfactorsasawholewoulddivertinflationfromthebaselinescenarioinDecember2012.

InthisReportthebalanceofinflationrisksisneutral:theprobabilityofthatinflationwillbebelowtheForecastofbaselinescenarioisequaltotheprobabilitytobelocatedabove.Thuswhythegraphbarssumzero.

IRDec.11 IRMar.12

-0.09

-0.06-0.04

-0.02

0.03

0.00 0.000.01

0.060.07

Food prices and othercommodities

119


CONCLUSION

100.Therecentevolutionoftheoutputgapandinflationexpectationsindicatesthattherisksofdemandpressuresaresubsiding.Moreover,thecostpressuresgeneratedbytherisesinthepricesofsomecommoditiesareexpectedtooffsetintheshortterm.Therefore,inflationisexpectedtoreversefromitscurrentlevel(abovethetargetrange)andtoconvergetowardsthetargetrangeinthesecondhalfof2012.

TheCentralBankwillcontinuetooverseetheevolutionoftheglobaleconomyandthedomesticeconomy,andstandsreadytoadjustitsmonetaryposition,shouldthisberequired,toensureinflation’sconvergencetothetargetrange.

InflatIon RepoRt: Recent trends and macroeconomic forecasts … · 2020-01-26 · Recent trends and...

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