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Cablegate: Peru Announces $3.3 Billion Stimulus Package

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PP RUEHWEB

DE RUEHPE #1897 3451833
ZNR UUUUU ZZH
P 101833Z DEC 08
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 9723
INFO RUEHSG/AMEMBASSY SANTIAGO 2087
RUEHBO/AMEMBASSY BOGOTA 6187
RUEHQT/AMEMBASSY QUITO 2217
RUEHLP/AMEMBASSY LA PAZ DEC BRASILIA 8004
RUEHBU/AMEMBASSY BUENOS AIRES 3559
RUEHME/AMEMBASSY MEXICO 3779
RUEHZP/AMEMBASSY PANAMA 0947
RUEHCV/AMEMBASSY CARACAS 1293
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASH DC

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

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