PERUVIAN CAPITAL SPENDING RECOVERS IN 2003.

Peruvian industrial production should rise by more than 4 percent during 2003 and that will contribute to healthy gains in capital spending as the year progresses. The main beneficiaries of increased industrial expenditure will be construction companies, importers of production equipment, and producers of intermediate goods.

Strongest growth will be noted in the textile and apparel sectors, where the value of sales should rise about 20 percent per annum in 2003 and 2004. That growth will be partially attributable to increased internal sales, but the primary force behind growth will be a sharp increase in sales to the United States under the Andes Trade Promotion and Drug Eradication Act. The act eliminates the 20 percent tariff that previously applied to Peruvian-made apparel.

Orders for apparel production equipment grew in excess of 10 percent in 2002 and should again in 2003. In addition, construction of new production plants and expansion of existing ones will help to nudge Peru's construction industry out of the doldrums.

Construction sector activity should experience growth of 3 to 5 percent year-on-year starting in the second quarter. By the end of the year, growth in construction orders should rise slightly above that range. That, in turn, will contribute to an increase of over 4 percent year-on-year in sales of construction materials as of the second quarter, approaching 6 percent late in the year.

Modest growth in purchasing power of 1 to 3 percent will put upward pressure on sales of household consumer goods as the year progresses. That will drive a 4 to 5 percent increase in production of consumer goods for the year. Capital expenditure on the part of consumer goods manufacturers (excepting apparel) should grow in the range of 4 to 5 percent in 2003.

The recent multi-year economic crisis battered purchasing power and depressed consumer confidence. Consumer confidence should improve a bit during 2003, but will not experience strong and sustainable strengthening until unemployment drops well below the current level of about 9 percent. An even bigger enemy of consumer confidence is large-scale informal employment that tends to deprive households of an adequate and stable source of income.

On the positive side, during 2003 Peruvians should enjoy a brighter macroeconomic panorama than in recent years. GDP expansion of 3 to 4 percent coupled with low inflation (less than 2.5 percent) will lead to a modest but significant rise in discretionary spending among households in the middle- to upper middle-income brackets.

Private sector consumption will be well below potential for years to come due to inadequate wealth distribution. Roughly half of Peruvian households live in poverty. The top 10 percent of wage earners account for more than 36 percent of all earnings, while the bottom 10 percent account for less than 2 percent.

Several factors should contribute to a slow but steady improvement in living standards among lower income households over the next few years. Urban dwellers will benefit from the increase in formal consumption arising from industrial expansion. Rural dwellers will not fare as well, yet agricultural production increased more than 5 percent in 2002 and gradual harmonization of agricultural supply and demand should improve the livelihood of farmers.

Retail sales should show mixed performance through 2003, with gains outnumbering losses. Durable goods sales should experience year-on-year growth of 2 to 4 percent through the first half of this year. Sectors that will show relatively weak performance include cosmetics and soft drinks. Cosmetics sales will be hit by a 20 percent Andes Community tariff on extra-regional imports.