Peru eyes silver lining to destructive rain clouds

Responding to the worst rainfalls in 20 years will be the first major test of Peru's president, Pedro Pablo Kuczynski, who won power eight months ago. The central bank has lowered forecasts for growth and the public finances but analysts believe that the government's stimulus package could reap rewards

  • By Lucien Chauvin
  • 01 Apr 2017
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Some rights reserved: Flickr - Guillen Perez
The destruction wreaked by the worst rainfall in Peru for two decades may offer a golden opportunity for the new administration headed by president Pedro Pablo Kuczynski, according to leading financial analysts.

The country lost 2,625 kilometers of roads and 242 bridges, while more than 40,000 hectares of crops were destroyed or damaged. Maximize, an economic consulting company, estimated losses of $5bn, more than 10% of the government’s original budget of $43.2bn for the year.

The state has already announced more than $1bn in emergency spending, with more to come. The reconstruction effort, together with an earlier stimulus package, could increase public investment by 15% this year.

The disaster response and reconstruction — the government expects rains to continue throughout April — will define President Kuczynski’s administration. The president has been in office eight months and finishes in July 2021. His approval rating stands close to 30%.

“This is going to test the president. This is the moment. The leash has never been shorter, but the path never clearer. If they don’t execute, they will be held accountable,” said Joseph Bormann, managing director for corporate finance in Latin America for Fitch Ratings.

Fitch has Peru at an investment grade BBB+. It also has investment grade ratings from the other major rating agencies. S&P Global, which has Peru at BBB, sees some pressures coming from the disasters and a corruption scandal involving bribes paid by Brazil’s Odebrecht, but is not overly worried.

“From a rating angle, Peru’s strengths are still there. Its finance profile is strong and the fiscal deficit is going to be pretty close to forecasts,” said Joydeep Mukherji, managing director at S&P Global.

Business climate

However, the disaster, which killed 98 people and left more than 133,000 people homeless, will deliver a short-term blow to the economy. The Central Reserve Bank lowered its forecast for growth this year on March 24 to 3.5%, from 4.3%. It has increased its forecast for the fiscal deficit to 2.8% of GDP, up from 2.5% in December.

Governor Julio Velarde said the business environment remained strong, despite the problems. “Confidence increased strongly when the government began. It has fallen somewhat, but optimism is still there. The expectation is that this administration is better suited to create a better business climate than the two previous administrations,” he told Global Markets.  

While the central bank has lowered its growth projection and increased forecast for the fiscal deficit, other indicators have improved. The country had a trade balance of $1.7bn last year, up from a deficit of $3.4bn the previous year. The bank forecast a surplus of $3.9bn this year, up from its initial projection in December of $2.4bn.

Export earnings in January were $3.1bn, up 25.9% from the same month last year, while imports were $2.96bn, a drop of 0.5%. The trade deficit in January 2016 was $507m.

The forecast for inflation this year is 2.4%, within the bank’s 1%-3% target band. Inflation was 3.2% last year, the third consecutive year it was slightly outside the band.

Velarde said the strong uptick in public investment would help to keep the economy among the strongest in the region this year. “We had two years of falling public investment and last year it was flat. We are now going to see a recovery, especially at the subnational level, which has a multiplying effect,” he said.

  • By Lucien Chauvin
  • 01 Apr 2017

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