Last Tuesday, Peru's (A3 stable) Economy and Finance Ministry submitted a 2018 draft budget to Congress that makes reconstruction and recovery a priority, expanding investment by 19% over 2017 levels, Moody's Investors Service affirmed.
Following an average contraction in public investment of 10% year-on-year during the first two-quarters of 2017, the new investment will be credit positive for Peru,
supporting economic growth. The package will be financed using Peru's extensive
fiscal reserves to minimize its effect on debt metrics, it noted.
The budget attempts to counter the effects of two shocks Peru experienced this year. The first was Brazil's
Lava Jato corruption scandal, involving Brazilian construction company Odebrecht. Odebrecht's participation —in a consortium that managed a large infrastructure project in Peru— caused the consortium to be unable to raise financing, slowing work on public projects.
The second shock came in March, when Peru's economy took a hit following
Coastal El Niño phenomenon-related flooding that severely damaged coastal infrastructure and hurt the agriculture, transport, and tourism sectors, among others. The authorities estimate that around 30% of the country's coastal infrastructure was damaged.
Total damage equaled 3.2% of GDP and year-on-year growth fell to 2.2% in first-quarter 2017 from 4.0% in calendar 2016.
The government has budgeted to rebuild damaged areas and support growth while cutting current spending. The continued reduction in current expenditures in 2017-18 provides room for the boost in capital expenditures while also meeting the deficit limits outlined in the government's announced fiscal trajectory.
Government spending on capital investments is associated with positive fiscal multiplier effects, while government consumption has a lower fiscal multiplier, making this shift in expenditure composition positive for growth.
Total budgetary outlays are to increase 10% over 2017 levels and the budget targets a 19% increase in investment spending.
The increase in capital spending accounts for 44% of the total increase in 2018 outlays and the majority is concentrated at the central government level, which has improved execution of capital projects recently.
Overall, Moody's expects the higher public investment to provide a direct boost to the economy equal to 0.6% of GDP, and it expects growth in 2018 to be 3.9%, higher than our previous forecast of 2.6%.