PERU ANNOUNCES $3.3 BILLION STIMULUS PACKAGE

UNCLAS LIMA 001897 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN PE SUBJECT: PERU ANNOUNCES $3.3 BILLION STIMULUS PACKAGE SENSITIVE BUT UNCLASSIFIED, HANDLE ACCORDINGLY ¶1. (U) On December 7, Peruvian President Alan Garcia announced a stimulus package amounting to 10 billion soles (approximately $3.3 billion),or 2.47% of Peru's GDP. The intention is to provide a counter-cyclical fiscal boost to the economy. Thus far, the most significant negative effects in Peru of the global financial crisis have been decreased export earnings, holds on planned mining investments due to plummeting commodities prices (particularly copper and other metals),and a sharp drop in Lima's stock market. Although the announced plan is mostly a repackaging of existing moneys, observers reacted positively and the stock exchange climbed over 5% on December 9. ¶2. (U) The GOP's stimulus package targets the construction sector, with a planned 3.1 billion soles ($1 billion) investment. Garcia explained that the construction sector has led the impressive growth of the Peruvian economy over the last few years. Construction has a ripple effect throughout the economy, he noted, making it particularly appropriate to channel a large slice of new funding to it. ¶3. (U) Other sectors with earmarks for new funding are small and medium enterprises (SME) and the export sector, which together will receive 1.36 billion soles (about $400 million). Social programs and aid to workers will receive 550 million soles (approximately $160 million). Garcia said that his intention in putting money into these areas is to ensure an immediate benefit to lower-income Peruvians. The largest single line-item in the package, according to the GOP's breakdown, is an investment of 5 billion soles ($1.6 billion) in "investments additional to the 2009 budget." This includes infrastructure projects, among other things. ¶4. (U) According to a World Bank study, these new investments would not require incurring a fiscal deficit in a medium case ("base") scenario. In a worst-case scenario, however, it may. Therefore, the GOP has secured contingent lines of credit amounting to 9.25 billion soles, or $3.1 billion, from international financial institutions. ¶5. (U) President Garcia also called on Peruvian businesses to up their investments. "These have been bonanza times," he said. "As good Peruvians, we would do well to invest what we have gained, in difficult times." ¶6. (SBU) Comment: The global economic downturn has provided the necessary cover for answering social and business calls for increased government spending. Although much of the stimulus plan is merely a repackaging of initiatives that were already in the works, the announcement boosted confidence that the GOP is staying ahead of the financial crisis. Naturally, the success of this package depends on the length and depth of the world financial turmoil. However, international financial institutions believe that Peru has demonstrated a track record of sound fiscal policy. This makes even the fulfillment of a worst-case fiscal scenario cause only for concern, not for desperation. NEALON