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Cablegate: Peru: 8.0 Quake Shakes Ica Economy

VZCZCXYZ0029
RR RUEHWEB

DE RUEHPE #2849/01 2322131
ZNR UUUUU ZZH
R 202131Z AUG 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 6577
INFO RUEHBO/AMEMBASSY BOGOTA 4979
RUEHBR/AMEMBASSY BRASILIA 7529
RUEHBU/AMEMBASSY BUENOS AIRES 3053
RUEHCV/AMEMBASSY CARACAS 0689
RUEHLP/AMEMBASSY LA PAZ AUG QUITO 1395
RUEHSG/AMEMBASSY SANTIAGO 1432
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC

UNCLAS LIMA 002849

SIPDIS

USTR FOR BHARMAN, MBURR AND MCARRILLO
USAID FOR LAC, EGAT, JKUNEN
TREASURY FOR MMALLOY
COMMERCE FOR 4331/MAC/WH/MCAMERON
DOE FOR GWARD/SBROWNE

SIPDIS

E.O. 12958: N/A
TAGS: EAID ECON ETRD SENV ENRG USTR PE

SUBJECT: PERU: 8.0 QUAKE SHAKES ICA ECONOMY


SUMMARY
-------

1. The GOP has not yet issued an official assessment of the
earthquake's economic effects and it is still early to gauge the
disaster's full repercussions. Respected private sector analysts
and Embassy officers and contacts have begun to evaluate the
economic impacts of the massive August 15 earthquake, above and
beyond its considerable human cost, and believe at this early stage
that its impact on Peru's economy should be minimal. The actual and
potential economic impacts include the following:

-- ICA TRADE DISRUPTION: Heavy traffic and damage to roads and
bridges in Ica, including the Pan-American Highway, will clearly
affect commerce in the very short term, but recovery should be quick
and most industries have already resumed operations;

-- DROP IN TOURISM: Some tourists will likely cancel or postpone
travel to Peru in the short-term, although most major sites are
hundreds of miles from the impacted area, completely intact and
accessible;

-- STOCK MARKET AND INVESTOR CONFIDENCE STABLE: Lima's stock
exchange recovered the losses it suffered on August 16 and investor
confidence in Peru's economy should hold;

-- CHANCE OF SMALL INFLATION SPIKE: The Central Bank and rating
agencies are keeping close tabs on inflation figures, which often
rise during recovery efforts;

-- TELEFONICA SUFFERS: Near-monopoly telecom provider Telefonica
has emerged with a black eye, as even President Garcia has
criticized its poor disaster preparedness for both cellular and land
networks;

-- WATER & POWER STILL DOWN: Many Peruvians in the hardest hit
areas are still without water, electricity or sanitation services;

-- HIGHWAY DAMAGE: Many coastal roads and highways were damaged,
and the Central Highway which connects Lima to the central highlands
is still blocked by rock slides which are stopping the delivery of
foodstuffs to the capital.

Some observers have suggested that reconstruction efforts could even
accelerate growth and improve pre-existing infrastructure, thus
strengthening the longer-term potential of the regional and national
economy -- but this will depend on the nature of the follow-up. End
Summary.

BACKGROUND
----------

2. The massive magnitude-8.0 earthquake that struck 25 miles off
the central coast of Peru the evening of August 15: killed more
than 500 people, injuring a couple thousand more; cut power, water
and telecom services; and destroyed homes, roads and bridges.
Strong shaking during the 2-minute quake plus numerous aftershocks
that still continued five days later were felt by over 10 million
people. Lima, 95 miles from the epicenter, survived largely
unscathed with few deaths reported, power loss in some
neighborhoods, widespread telecom interruption, some damage to
office buildings and many homes, and isolated fires. Hardest hit by
far was the agro-exporting Department of Ica, along the coast just
south of Lima. The department's capital (also called Ica) suffered
heavy damages in its historic downtown, as did the smaller coastal
cities of Pisco, Chincha and Canete, accounting for most of the
casualties.

AGROEXPORTING REGION SHOULD RECOVER QUICKLY
-------------------------------------------

3. The Department of Ica's economy represents 3.6% of Peru's GDP,
and is concentrated in services (58.6%), manufacturing (21.3%) and
agriculture (13.7%). Ica, a poster child for Peru's agro and
textile export boom, exported $1.3 billion in 2006 and outperformed
most of Peru's departments over the past five years. Respected
analyst Macroconsult notes that similar disasters have caused an
average 6% drop in a department's GDP with full recovery within a
year, and that Ica's recovery in this case should be even quicker
given the region's strong economy and the scale of the national and
international response.

4. Although perishable goods like asparagus and avocadoes could
spoil in the short term, and two large textile plants (Textil del
Valle and Textil San Cristobal) were temporarily closed, Ica's
overall exports aren't expected to drop dramatically. In fact, as
of August 17, asparagus harvesting had resumed and most of the
largest agroexporters had resumed operations. Textil del Valle
hopes to resume operations on August 21, and other plants are
already operating part time. The long-term economic damage to the
region could be reduced by rapid restoration of electricity, water,
communications, roads, and bridges. The vast majority of Peru's
exports exit the port of Callao, just north of Lima, so the
infrastructure between Ica and Callao is key to international
trade.

TOURISM TAKES A HIT
-------------------

5. There was significant damage within the coastal Paracas National
Reserve according to its manager, including the partial destruction
of popular ancient rock formations. The GOP's tourist office notes
that the hotel infrastructure in Pisco, Canete and Paracas has
suffered considerable damage, causing many hotels to close. For
example, the internationally-known Libertadores hotel on the coast
of Paracas suffered extensive damage, and its guests were evacuated
to Lima. Ica churches also were damaged, including the venerable
Senor de Luren church, built in 1558. According to the National
Culture Institute (INC), the world famous Nazca lines were
unscathed.

6. Peru's top tourism destinations -- Machu Picchu, the Amazon
jungle, the snow-capped Andes, Lake Titicaca, northern beaches --
are located far from the impact zone and suffered no damage.
According to the Director General of Civil Aviation, Peru's airports
never closed, with international and domestic arrivals and
departures continuing as normal. Nevertheless, the massive
earthquake will likely cause some tourists to avoid travel to Peru
for some time to come.

AFRO-PERUVIANS HIT HARD
-----------------------

7. Chincha, one of the worst-hit districts, has the country's
highest concentration of Afro-Peruvians. Hundreds of Afro-Peruvians
have lost loved ones, their homes and most of their belongings.
U.S. Members of Congress Gregory Meeks and Allyson Schwartz led a
visit to this very community on August 7, one week before the
earthquake. The Afro-Peruvian organizations have formed a joint
assistance committee to collect and deliver assistance to impacted
families.

CAMISEA AND LNG GAS PROJECTS UNSCATHED
--------------------------------------

8. The several-billion-dollar "Camisea" pipeline that brings
natural gas and liquids from the jungle to Paracas and Lima suffered
no significant damage. The gas fractionation plant on Paracas Bay
was stopped momentarily during the quake as part of normal internal
emergency procedures, but quickly resumed operations once checks
were completed. All pipelines are operating normally.

9. The Peru LNG consortium, led by U.S. firm Hunt Oil, is
constructing a branch pipeline that will terminate at a new plant on
the coast just between Chincha and Canete. Even though this
location is at the heart of the impacted area, Hunt Oil Peru GM
Carlos del Solar confirmed to us that there were neither human
casualties nor significant damage to the construction projects.

TELECOM COLLAPSE
----------------

10. Cellular and land line communications almost completely shut
down the evening of the earthquake, both in the heavy impact areas
and in Lima. Those in need of assistance could not contact
emergency services and those eager to confirm the well-being of
their loved ones were unable to do so. Telephone service was still
sporadic the day after the quake. During his radio address the
night of the earthquake, President Garcia singled out Telefonica (of
Spain), the owner of the majority of the land and cellular phone
infrastructure. Garcia complained that since the country is located
in an earthquake belt, Telefonica has no excuse for not keeping its
systems prepared for tremors. He ordered Transportation and
Communication Minister Veronica Zavala to hold emergency meetings
with the firms to resolve the problem quickly. The Communications
ministry is working hard to ascertain the reasons for the
communication failure, so that problems can be corrected. One
option under consideration is the installation of a back-up
network.

WATER & ROADS
-------------

11. The main bridge (San Clemente) that connects the region of Lima
to the region of Ica collapsed and several other portions of the
Pan-American Highway were initially impassable. However, detours
along smaller roads were quickly established as the Pan-American
Highway was restored. The Central Highway, which leads east into
the mountains from Lima, is still blocked by rock slides. One of
the main complaints in affected communities was the lack of potable
water. Assistance efforts have focused on delivering bottled water
to the affected areas as water and sanitation services are still
down in the area south of Lima.

CENTRAL BANK KEEPING TABS ON INFLATION
--------------------------------------

12. The Central Bank (BCR) is keeping a particularly close eye on
inflation figures, as government reconstruction efforts and the
rapid inflow of millions of dollars in international assistance can
combine with reduced local availability of certain products to raise
prices. BCR President Julio Velarde did note, however, that Peru's
2 percent inflation before the earthquake was quite low and that
Peru's strong macroeconomic indicators should help keep inflation in
check. He said that President Garcia would not tolerate a return to
an inflationary scenario.

STOCK MARKET DIPS, QUICKLY RECOVERS
-----------------------------------

13. The Lima stock Exchange (BVL) dropped 6.89%, its second biggest
drop in 2007, on August 16 (the day after the quake). On August 17,
the BVL closed with a gain of 5.58%, its highest increase since May,
largely due to improved international markets and metal prices.
Private bank analysts do not expect that the earthquake will rattle
investor confidence in Peru's buoyant economy. They note that
reconstruction efforts could further foster economic growth,
especially through infrastructure, construction and transportation
investments. It is possible that the long term economic effect of
the disaster will end up being positive rather than negative.

TSUNAMI SCARE BUT FISHING INDUSTRY INTACT

SIPDIS
-----------------------------------------

14. Immediately after the offshore earthquake, a tsunami warning
was issued for the Peruvian coast. The warning worked well, as
Peruvians throughout the country seemed to get the message quickly
(mostly through radio stations). Fishermen scrambled to pull their
boats ashore, and panicking residents of low-lying coastal areas
tried to get inland by any means possible. Fortunately, the tsunami
ended up being less than ten inches high. Peru's fishing industry
was unharmed, with even the hardest-hit areas faring surprisingly
well. The fish-processing plants, built of strong materials, also
survived the disaster well.
MCKINLEY

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