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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

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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.

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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

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

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

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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

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

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

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

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

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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

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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%

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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

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14 2. Economic activity

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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

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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

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17 Non-primary sectors have led GDP growth

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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

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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.

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

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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

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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%

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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

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24 The economy will continue growing led by non primary sectors, which have a major effect on employment and households 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

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Private consumption indicators remain positive * Preliminary 25

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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

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

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Business expectations are recovering 28

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

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

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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

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

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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).

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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

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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

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

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

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

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

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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

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3. Monetary Policy and Financial Markets 41

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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

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

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

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

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

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

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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

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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

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Financial system development 50

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

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52 The Peruvian Nuevo Sol is the regions most stable currency Source: BCRP.

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

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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

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

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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%

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

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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

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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