1. PERUVIAN ECONOMIC OUTLOOK Julio Velarde Governor Central Bank of Peru October 2011 Economic updates of Peru under the new government. “Investment perspectives” Peruvian - Canadian Chamber of Commerce

2. 2 1. International Economic Outlook Our base forecast scenario assumes that the United States will continue to show a low rate of growth, while Europe would exhibit growth rates close to zero. Our base forecast scenario assumes that the United States will continue to show a low rate of growth, while Europe would exhibit growth rates close to zero. In general, the world economy will have a moderate growth with high volatility in financial and commodities markets. In general, the world economy will have a moderate growth with high volatility in financial and commodities markets. In spite of the pace of global expansion has weakened, markets still assign a low probability to a global recession. In spite of the pace of global expansion has weakened, markets still assign a low probability to a global recession. Our base forecast scenario assumes that the United States will continue to show a low rate of growth, while Europe would exhibit growth rates close to zero. Our base forecast scenario assumes that the United States will continue to show a low rate of growth, while Europe would exhibit growth rates close to zero. In general, the world economy will have a moderate growth with high volatility in financial and commodities markets. In general, the world economy will have a moderate growth with high volatility in financial and commodities markets. In spite of the pace of global expansion has weakened, markets still assign a low probability to a global recession. In spite of the pace of global expansion has weakened, markets still assign a low probability to a global recession.

3. 3 IMF forecasts that global growth will moderate to about 4% through 2012, from over 5% in 2010. GDP Growth (Percentage annual changes) Source: World Economic Outlook, IMF, September 2011

4. Source: Consensus Forecasts (March, October) Consensus Forecasts also forsees lower growth in major economies 4 GDP Growth Forecasts (Percentage change)

5. Business confidence surveys confirm a less optimistic outlook on the world economy… 5 Optimistic area

6. June Forecast 2011 October Forecast June Forecast 2012 October Forecast 1.42.50.14.54.47.98.83.9 1.32.72.03.94.27.78.63.9 1.4 1.5 -0.6 3.74.37.98.83.7 0.71.52.0 3.64.07.58.5 3.5 Source: Bloomberg and BCRP. == 6 World USA USA E.U. E.U.JapanBrazilRussiaIndiaChina = = In consequence our forecasts also consider a lower growth for the major economies

7. 7 Global financial conditions remain under stress due to debt problems in European countries

8. High public deficits and debt problems are weighing on growth in European countries 8

9. Source: IMF Commodity markets are also facing a high volatility 9

10. The prices of metals have come down recently led by the uncertainty resulting from the crisis but remain high in historical perspective 10

11. Fiscal weakness and current low levels of policy rates reduce room to apply counter – cyclical policies in advanced economies Source: IMF Source: Bloomberg. BCE Japan FED 11 Monetary Policy Interest Rates

12. 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 BCEUnited StatesJapan Central banks in the United States and Japan have maintained a position of stimulus from over 2 years ago at historical lows. The central banks of Chile, Colombia and Peru have made a pause. Mexico maintains the stimulus since 2009 and Brazil reduced its rate 2 times (100 basic points). Monetary policy tightening in Latin American countries can do a temporary pause until uncertainty abates MONETARY POLICY INTERES RATES (Percentage) 0 2 4 6 8 10 12 14 16 ColombiaBrazilChileMexicoPeru Feb 3.25% -11 Jul 4.5% -11 Apr 9,5% -10 Oct 11.5% -11 Jun 1.0% - 10May 1.5% -10 Jun-11 May 4.25% - 11 Jul -11 1.5% Apr -11 1.25% Apr-10 3.0% Sep-09 8.75% Sep-09 0.5% Sep-09 4.5% Sep-09 1.25% Sep-09 1.0% Dec-08 0.25% Dec-08 0.1%

13. 13 In the financial channel, markets exhibit high volatility due to the global economy uncertainty Flows of portfolios to Latin America (Weekly flows, US$ Millions) Source: Barclays

14. 14 2. Economic activity

15. Avg. Growth 1950 – 1975: 2,7% Avg. Growth 1976 – 1992: -2,4% Avg. Growth 1993 – 2010: 3,8% The Peruvian economy continues showing high growth rates. Per capita GDP in 2010 was 29% above the previous maximum… 15 Per capita GDP did not recover its 1975 level until 2006

16. 16 Source: IMF. … being the economy with highest GDP growth in the region over the last decade GDP Average Growth (Real % Chg.) 2001-20052006-2010 Peru4,27,2 Argentina2,06,7 Uruguay0,56,2 Paraguay2,65,5 Bolivia3,14,6 Colombia3,64,6 Brazil2,84,4 Ecuador5,23,5 Venezuela2,63,4 Chile4,23,3 Mexico1,51,8

17. 17 Non-primary sectors have led GDP growth

18. 18 In the 2008-2009 financial crisis, imports and private investment had a strong fall. Inventories drop explained almost 4 points of the decline of GDP…

19. 19 …however, the Peruvian economy showed a fast recovery after the crisis 90 94 98 102 106 110 114 118 122 126 4Q071Q082Q083Q084Q081Q092Q093Q094Q091Q102Q103Q104Q101Q112Q11 Latin America: Seasonally Adjusted GDP 2007.Q4 = 100 Peru Brazil Colombia Chile Mexico Source: Central banks and statistical agencies.

20. 20 Inventory stocks recover, but they remain below the high levels observed in 2008…

21. 21 …and private investment back on its long trend growth Private investment reached its previous maximum in 08.Q3 Private investment is 13% above its previous maximum

22. 22 After some months of uncertainty due to general elections, economic performance is improving. In August GDP grew 7,5%. 3,8 5,7 8,9 9,3 8,9 12,0 9,3 9,2 10,3 8,5 10,2 8,9 10,0 8,3 7,9 7,5 7,3 5,3 6,5 7,5 J.10FMAMJJASONDJ.11FMAMJJA GROSS DOMESTIC PRODUCT (Annual % Chg.) Jan.-Aug. 2011: 7,5%

23. 23 Private expenditure continued leading growth during the first eight months of 2011, while public expenditure declined Annual % Chg.Contribution to Growth 2010 Jan.- Aug. 2011 2011*2012*2010 Jan.- Aug. 2011 2011*2012* 1. Domestic demand 12.88.87.55.612.89.07.85.8 a. Private consumption 6.06.36.05.64.14.34.03.7 b. Public consumption 10.65.15.74.41.00.5 0.4 c. Private investment 22.114.610.79.04.23.02.32.0 d. Public investment 27.3-22.0-2.911.41.5-0.20.6 e. Inventory change 2.12.31.1 2. Exports 2.58.06.07.50.51.41.11.3 3. Imports 23.814.411.76.74.52.92.51.5 GDP 8.87.5 6.3 5.78.87.56.35.7 Memo: Public expenditure 16.7-4.22.37.02.5-0.60.41.1 GDP and DOMESTIC DEMAND (Annual % Chg.) * Forecast

24. 24 The economy will continue growing led by non primary sectors, which have a major effect on employment and household’s expenditure 2010 Jan.-Aug. 2011 2011*2012* Agriculture and Livestock 4.33.7 3,25,2 Fishing -16.426.8 29,8-2,0 Mining and fuel -0.1-0.8 0,57,2 Metals -4.9-5.4 -2,86,9 Fuel 29.526.4 18,08,6 Manufacturing 13.67.6 7,65,2 Based on raw materials -2.312.5 15,42,9 Non-primary 16.96.8 6,25,6 Electricity and water 7.77.4 6,65,5 Construction 17.43.6 3,48,7 Commerce 9.79.2 7,45,4 Other services 8.08.9 7,05,4 GDP 8.87.5 6,35,7 Primary sectors 1.14.2 4,95,3 Non- primary sectors 10.38.2 6,65,7 GROSS DOMESTIC PRODUCT (Annual % Chg.) * Forecast

25. Private consumption indicators remain positive… * Preliminary 25

26. Sales of supermarkets (Annual % Chg.) Sales of supermarkets (Annual % Chg.) …with a high rate of growth of retail sales indicators… Sales of department stores (Annual % Chg.) 26

27. 27 …and employment growing above 2003 – 2010 average. * January - June Source: Ministerio de Trabajo y Promoción del Empleo. During 2003-2010 average GDP growth was 6.5% and average urban employment growth was 4.8%

28. Business expectations are recovering… 28

29. 29 …and announced investment projects amounts to US$ 48 billions for the next 3 years * M edia and information of companies Source: BCRP.

30. 30 Investment will be 26% of GDP in 2012 Public GFI

31. 31 High investment to GDP ratio helps to achieve high levels of growth Country Year in which investment reached 25% of GDP Average growth 5 years ahead Average global growth 5 years ahead Chile19898.22.5 China198012.23.1 India19905.72.7 Korea19809.43.1 Singapore19805.93.1 Thailand19805.33.1 Taiwan19806.43.1 Source: WEO-IMF

32. Forecasts of agencies show that Peru would grow between 6.2%and 6.4% in 2011… Source: Consensus Forecast (October) & WEO – IMF (September 2011).

33. 33 …and would have the greatest growth in the region in 2012 in spite of the high degree of uncertainty in the world economy Source: Consensus Forecast (October) & WEO – IMF (September 2011).

34. 34 The current account deficit would remain in sustainable levels… * Forecast US$ Millions20102011*2012* Current account balance-2,315-3,590-4,494 Private long term gross financing 12,0539,6439,861

35. 35 …supported by trade surplus Millions of US$200620072008200920102011*2012* Exports23,83028,09431,01826,96235,56543,96043,292 Imports14,84419,59128,44921,01128,81536,55339,033 *,Forecast

36. 36 Non-Traditional exports have the highest export volumes. During the IIQ 2011 represents almost 2.5 times those recorded in IQ 2003

37. 37 Source: BCRP. In the last years, there have had higher diversification in exports. China has tripled its share of total exports

38. 38 Source: BCRP 38 Latin America has become the main destination of non traditional exports

39. 39 Prices of traditional exports have increased more than 4 times those recorded during I quarter 2003

40. Higher number of products and exporting firms 40 Number of products* 20002010 Total Exports3,4554,229 Traditional Exports7690 Non-Traditional Exports3,3824,140 * Measured by number of exported items Number of exporting firms 20002010 Total Exports4,2247,464 Traditional Exports396505 Non-Traditional Exports3,9837,210

41. 3. Monetary Policy and Financial Markets 41

42. 42 Monetary policy is aimed at preserving price stability Target: Price Stability Target: Price Stability + Control of dollarization risks Inflation Targeting: 2 % Interbank interest rate as operational target Inflation Targeting: 2 % Interbank interest rate as operational target High reserve requirement in foreign currency liabilities to: -Reduce credit cycles associated with capital inflows. -Maintain adequate levels of foreign currency liquidity in the banking system. Intervention in foreign exchange market to: -Reduce exchange rate volatility. High reserve requirement in foreign currency liabilities to: -Reduce credit cycles associated with capital inflows. -Maintain adequate levels of foreign currency liquidity in the banking system. Intervention in foreign exchange market to: -Reduce exchange rate volatility. Conventional Monetary Policy Conventional Monetary Policy Non Conventional Instruments Non Conventional Instruments

43. The central bank chooses a policy rate level consistent with the inflation target Source: BCRP. 43

44. Reserve requirements on both domestic and foreign currency banking liabilities were modified to reduce the impact of capital inflows Source: BCRP. 44

45. Source: BCRP. Higher reserve requirements on external short-term liabilities change the composition of funding sources to long-term 45

46. Reduction in expected interest rate adjustment has resulted in a flattening of the yield curve of CDBCRP 46

47. Development of long-term sovereign bond market in domestic currency 47

48. 81,2 69,4 39,2 83,2 79,9 45,3 30,0 40,0 50,0 60,0 70,0 80,0 92939495969798990001020304050607080910 Dollarization ratios Money Credit De-dollarization: slowly but firmly 48

49. Credit growth remains strong 49 CREDIT TO THE PRIVATE SECTOR Annual % change Dec-10Jul-11Aug-11 Nuevos Soles 21.219.419.2 Dollars20.821.823.8 Total21.020.521.3

50. Financial system development 50

51. 51 Foreign exchange interventions are oriented to reduce volatility of exchange rate Source: BCRP.

52. 52 The Peruvian Nuevo Sol is the region’s most stable currency Source: BCRP.

53. 53 The Central Bank of Peru has accumulated international reserves as a precautionary measure Source: BCRP. As of October 14, 2011

54. 54 Real exchange rate shows low volatility and low deviation from its historical average Source: BCRP. Real Exchange Rate Index (Dec.2001=100) September 2011: 96.51 Month % change: -0.82 Annual % change: 0.96 Average of period 100.6

55. Source: WEO-IMF Inflation of Peru was the lowest in the region last decade 55

56. As of september, inflation is transitorily above the target range 56 INFLATION AND INFLATION TARGET (12-month % change) Maximum Minimum Inflation target range CPI w/o food and energy Core inflation Inflation 12-month %, Sep.11 Inflation: 3.73% Core inflation: 3.37% CPI w/o food and energy: 2.38%

57. Source: Survey on Macroeconomics Expectations, BCRP. Inflation Expectations of financial system and economic analysts converge to inflation target in 2012 57

58. 58 It is expected that the inflation rate converges gradually to the target range in 2012 Inflation Forecast (12-month % change) % Jan-02Jan-03 Jan-04 Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13

59. PERUVIAN ECONOMIC OUTLOOK Julio Velarde Governor Central Bank of Peru October 2011 Economic updates of Peru under the new government. “Investment perspectives” Peruvian - Canadian Chamber of Commerce