Photographer: Miguel Arreategui/AFP via Getty Images

Peru to See `Very Sharp' GDP Rebound After Floods, Thorne Says

  • Peru suffered worst flooding in almost two decades last month
  • Govt to create $3 billion fund for rebuilding infrastructure

Peru’s economy will bounce back from the worst flooding in two decades as the government creates a $3 billion fund to finance rebuilding, Finance Minister Alfredo Thorne said.

A fiscal stimulus to lift public investment this year will be followed by a three-year rebuilding program financed using credit lines and ample savings the government accumulated over the last decade or so, Thorne said in an interview in Washington. The finance minister is in the U.S. capital for the annual meetings of the International Monetary Fund and World Bank Group.

South America’s sixth-largest economy is reeling after the worst flooding in almost two decades destroyed thousands of kilometers of highway, thousands of homes and farmland, leading the government to cut its growth forecast to 3 percent from 3.8 percent previously.
The catastrophe came as the country was dealing with the fallout from a corruption investigation into construction industry bribes that has set back a pipeline of $70 billion in infrastructure projects. The construction of 150,000 new homes mainly in areas worst affected by flooding will help offset those delays, Thorne said.

“We expect a very sharp rebound,” Thorne said. After a weak first quarter, the minister expects the economy will bounce back to grow close to 4 percent in the second half of 2017 and 4.5 percent in 2018.

Some forecasters are less optimistic. Banco Bilbao Vizcaya Argentaria on Thursday cut its 2017 growth forecast to 2.5 percent from 3.5 percent previously, and projects a 3.9 percent increase for next year.

While previous catastrophes caused by El Nino plunged Peru’s economy into recession, the government has unprecedented financial resources after almost two decades of fiscal prudence and the fastest growth in Latin America.

Thorne said the government will use as little debt as possible to finance reconstruction, even as foreign investors increase their holdings of sol-denominated bonds, pushing down yields. The government has financial assets equal to 15 percent to 16 percent of gross domestic product earning “very low interest rates,” and it makes more sense to use some of those savings than increase debt, he said.

“We have a very strong balance sheet and we have to be careful to use that balance sheet to our advantage,” Thorne said. “When we come back after the reconstruction, we want to make sure we re-establish that balance sheet strength.”