Peru Readies $27 Billion Infrastructure Plan to Shore Up Economy

(Bloomberg) -- Peru is seeking investors to improve some of the worst infrastructure in South America and at the same time provide a boost to its weakening economy.

The country will present next month a five-year plan to develop 60 projects requiring investment of 90 billion soles ($27 billion), according to Finance Minister Carlos Oliva. The works will spur construction activity in the short term and boost Peru’s annual growth by 1 percentage point in the medium term, he said.

“We had many years of economic crisis where we didn’t invest anything. We have a big gap to narrow,” Oliva said during an interview at the finance ministry in Lima. The plan has “an effect in the short term because it boosts construction activity but the main objective is to increase GDP potential.”

The South American country is seeking to revive infrastructure investment that was derailed in 2017 by the continent-wide bribery scandal involving Brazilian builder Odebrecht SA. Despite making some headway before the scandal, it still needs to make up for years of under-investment in order to unlock the economy’s full potential, the minister said.

Peru has the worst roads in South America after Paraguay and Bolivia and ranks among the poorest for overall infrastructure on the continent, according to the World Economic Forum’s 2018 competitiveness index. It needs $160 billion to close its infrastructure deficit, according to estimates from the National Association for Infrastructure Promotion.

Experts from the U.K. government advised Peru on the infrastructure plan, according to the minister. The U.K. government helped it build facilities for the Pan-American Games which Lima will host next month.

‘First Step’

Oliva declined to list the projects as the plan isn’t public yet. Some projects will be built using public money, others will be public-private partnerships or financed entirely by the companies building the infrastructure. Many of them will be built under supervision of companies specializing in project management to avoid delays.

“This is a first step. We have to strengthen institutionality and send a signal to the market,’’ the minister said, adding that the next step will be a longer-term plan.

Peru’s infrastructure drive may help lift business sentiment that’s been hurt by global trade tensions and a slump in the price of copper, the country’s biggest export product. Economic growth slowed in the first quarter and stalled in April, mainly because of declines in mining and fishing output and drops in public spending by local authorities. Oliva said the slowdown should be temporary though the government is evaluating measures to stimulate growth if May and June data don’t show an improvement.

“We’re convinced the second half will be much better than the first half. That doesn’t rule out the possibility of a transitory policy response,” he said. Economic growth of about 4% year-on-year in the second half will bring full year growth to 3.7%, down from a previous forecast of 4.2%, he said.

Bond Sales

Peru returned to global bond markets last week with the sale of $2.5 billion in dollar- and sol-denominated debt, paying its lowest yields on record for international issues. Oliva said that while the deal saw unprecedented demand for local-currency bonds, the government isn’t in a hurry to issue more as it has covered this year’s spending and part of next year’s.

State-owned oil company Petroperu SA may no longer sell up to $600 million in overseas bonds this year to complete financing for construction of a new refinery, Oliva said. Instead, the firm’s new management has proposed privatizing the refinery’s auxiliary facilities to reduce debt. The company sold $2 billion of debt in 2017 in its global market debut.

Petroperu is also looking into making an initial public offering of shares, though Oliva said any sale should wait until after the refinery project is complete.

Tax Break

The minister said the government is considering adjusting a tax break for stock market gains when an existing exemption expires at the end of this year. Peru suspended capital gains taxes on equities in 2015 to boost trading and help keep the country from being reclassified as a frontier market by MSCI Inc.

“The idea is to maintain some type of incentive. We’re just not sure the existing one is the most appropriate,” he said.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter Brandimarte

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