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Macroeconomic Environment Essay

In contrast, the external scenario was characterized by increased uncertainty in international financial markets as a result of the mortgage crisis in the United States and the price rises in foodstuffs and petroleum which, together with a greater weakening of the dollar, generated strong inflationary pressures worldwide. These external factors had a strong impact on domestic inflation -measured by the Consumer Price Index (ICP) of Lima Metropolitan- which reached 3. 9 percent in 2007, the highest inflation rate observed in the country since 1998.

It is worth pointing out that Peru recorded the third lowest inflation rate in Latin America after Ecuador (2. 7 percent) and Mexico (3. 8 percent), and that Chile, China, Taiwan, United States, Singapore and Japan showed in 2007 the highest inflation rates of the last ten years, while inflation in the Rezone (3. 1 percent) reached the highest level since this region was created. Macroeconomic Environment By Philomena dyestuffs and imported inputs (wheat, maize, soybean oil, and petroleum), as reflected in the rate of imported inflation which reached 10. 5 percent in 2007.

In Peru, this affected both the prices of some final goods included in the consumer basket (bread, food outside the household, evaporated milk) and

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firms’ production costs (fuels and related inputs, such as plastics and fertilizers, and inputs for the production of foodstuffs). As mentioned above, the dynamism shown by domestic demand (1 1. 6 percent), – particularly as a result of the evolution of private expenditure- reflected the growth f non-primary sectors, especially construction and non-primary manufacturing, which led the Peruvian economy to grow 9. 0 percent in 2007 (the highest growth rate seen over the past 13 years).

The Central Government accounted mainly for this surplus (1. 8 percentage points), while entities in the rest of the General Government -particularly local governments- and state enterprises accounted for 1. 2 percentage points and 0. 1 percent of GAP respectively. This high growth of domestic demand is explained by consumers and business optimistic expectations given the country’s macroeconomic robustness, favorable reedit conditions, and the growth of formal employment seen in all the economic sectors and in most regions, as well as by increased announcements of investments in all production sectors.

The changes in the shorter rates resulted from preventive adjustments implemented by the Central Bank in the reference rate in July and September 2007 (25 basis points in each case). On the other hand, long-term interest rates increased as a result of greater uncertainty in international markets and of investors’ demand for higher yields – spreads- in emerging economies. In 2007, in line with the robustness of the economy, financial entities showed a good performance, as reflected in their indicators of solvency, quality of portfolio, operational efficiency, and profitability.

The capital market showed a positive evolution both in terms of fixed and variable income instruments, as reflected in increased public and private long-term bond issues in uneven soles and in the participation of new issuers. The indices of the Lima Stock Exchange (ELSE) showed an important growth in 2007 (36. 0 percent), as a result of which the ELSE was one of the most profitable bourse in Latin America, surpassed only by the SAA Paulo Stock Exchange. The growing resources of institutional investors, particularly mutual funds, private administrators of pension funds (Fps), and insurance companies, account for this evolution.

The growth of the monetary base in 2007 (SSL. 3,916 million) was mainly associated with the BPCS exchange operations (amounting to SSL. 21,914 million or IIS$ 7,070 million), which included purchases of foreign currency (SSL. 32,057 million or IIS$ 10,306 million) that were partially compensated by net sales of dollars to the public sector (S’. 10,263 million and IIS$ 3,275 million). Conversely, the monetary base shrank due to net placements of BPCS Certificates of Deposit (S’. 13,393 million) and higher deposits from the public sector at the central bank (SSL. 6,751 million).

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