Peru is moving to fend off economic catastrophe with a record fiscal stimulus and plans for a contingency line of up to $18 billion from the International Monetary Fund (IMF) to contain the fallout from the coronavirus pandemic.
The government is putting together a package of economic measures totaling 90 billion soles ($26 billion), including health-care spending, tax breaks and loan guarantees to revive an economy that’s ground to a virtual halt after the government implemented some of Latin America’s toughest lockdown rules.
The economic package equals to 12% of gross domestic product, more than any other country in the region has announced to date, and could be increased further, said Finance Minister Maria Antonieta Alva. It includes short-term measures such as cash handouts, and longer term measures to “rebuild” some industries such as tourism that face devastation as a result of the pandemic, she told America Television’s Cuarto Poder program.
The arsenal also will include up to 30 billion soles in government-backed loans to small and medium-sized businesses.
“The impact of what’s happening is unprecedented, so we need to implement an unprecedented economic plan,” the finance minister said. “We have the fiscal backing to take audacious but necessary measures.”
The country has also begun talks with the International Monetary Fund for a contingency line that could reach $18 billion, central bank President Julio Velarde said. The sol is unlikely to see a “significant”
depreciation, he told Lima-based Canal N network’s Agenda Politica program.
The Finance Ministry plans to draw down an existing $2.1 billion contingency line from the World Bank, he added.
Peru’s massive stimulus illustrates the magnitude of the economic damage being wrought by the deadly virus, with a growing number of analysts warning Latin America is headed for its worst recession in decades. The package dwarfs neighbouring Chile’s plan to deploy 4.7% of GDP while the $2 trillion package signed by US President Donald Trump amounts to about 10% of GDP.
Years of prudent fiscal management have put Peru in an enviable position to finance increased spending. The country is the highest-rated sovereign credit in the region after Chile, and the government has tens of billions of dollars in savings.
“They are ahead of the curve, and they can afford it,” said Alvaro Vivanco, head of Latin America strategy at Natwest Markets in Stamford, Connecticut.
Still, with international markets in turmoil, the country’s bonds have taken a battering, and its currency fell to its weakest in 18 years this month.
Peru’s economy began shutting down March 16 after President Martin Vizcarra decreed a nationwide lock-down to stem the spread of the coronavirus. Shops, offices and factories closed, while mines scaled back operations to a minimum. Last week Vizcarra extended the measure to April 12 as coronavirus infections gathered pace, and said the government will increase emergency cash handouts to the poor. Almost 70% of the economy is currently off-line, according to the central bank.
Goldman Sachs Group Inc. said it expects Peru’s economy to contract 2.5% this year, compared with the 3.3% expansion it had forecast before the coronavirus pandemic.
Policy makers’ top concern is ensuring that companies whose revenue has dried up continue making payments to each other and lenders, Velarde said.
Under the central bank’s stimulus, it will provide credit to banks at an annual interest rate of 1.25% or less so they can lend to companies lacking working capital. The program will be implemented before the containment measure is lifted, he said.
“It’s going to be very powerful,” Velarde said, adding he expects economic growth to recover quickly once businesses reopen.
The central bank cut its benchmark rate by 1 percentage point to 1.25% earlier this month, and the rate may be lowered to 1% in coming weeks, Velarde said. He added the bank is concerned annual inflation could fall below 1%, compared with close to 2% last month.