The government of President Pedro Pablo Kuczynski, or PPK, is on damage control after revelations of the massive Odebrecht corruption scandal. As a result of the Odebrecht effect, experts lowered economic growth forecasts for Peru in 2017 from nearly 5 percent to under 4 percent.

PPK is optimistic that the economic fallout from the Odebrecht scandal will be a “blip” that Peru will overcome. While his optimism is reasonable, there are several reasons why he may be mistaken.

Odebrecht in Peru

All three former Presidents of Peru since the fall of the Fujimori regime in 2000 have been accused of corruption relating to the Odebrecht scandal.

Ollanta Humala, President from 2011 to 2016, is accused of receiving US$3 million in illegal donations tied to his 2011 presidential campaign. He has repeatedly denied the allegation.

In an article from March 8, 2017, La Republica reported that during his tenure as President from 2006 to 2011 Alan García Pérez issued three executive orders that favored Odebrecht or the consortia that the Brazilian company used in its corruption scheme. Furthermore, one of the executive decrees made it more difficult for the Comptroller General to investigate corruption.

Currently, the Public Prosecutor’s Office is investigating the public works projects which benefited from García’s executive orders.

Lastly, there is an arrest warrant for former president Alejandro Toledo, who is believed to be in hiding in the United States. Toledo is accused of accepting US$20 million from Odebrecht in connection to an interoceanic highway project.

On March 8, 2017, the Public Ministry announced that Toledo was also being investigated for collusion related to other Odebrecht public works projects.

#LoÚltimo: Fiscalía decidió ampliar formalización de investigación preparatoria contra Alejandro Toledo por delito de colusión (1/2) pic.twitter.com/i81njDLHtc — Ministerio Público (@FiscaliaPeru) March 9, 2017

The Odebrecht case has placed several projects on hold, including a US$7.2 billion gas pipeline. Peru has invested heavily in infrastructure improvements through various fiscal stimulus bills during the Great Recession.

There have also been calls to investigate Peruvian construction firms that had previously partnered with Odebrecht, including Peru’s largest construction firm, Grana y Montero.

The full extent of Odebrecht’s corruption scheme is not known yet. However, given the Brazilian conglomerate’s past record of collusion in Brazil, it is reasonable to assume that the allegations of corruption in other Peruvian corruption firms may be well founded.

Since much of the economic stimulus that Peru pursued since the economic downturn centered on infrastructure projects, allegations of corruption among foreign and domestic construction firms will have serious negative economic consequences.

That being said, it has not stopped the government from continuing its efforts to boost economic growth through a combination of fiscal and monetary stimulus.

Government Efforts to Boost the Economy

The Peruvian government recently announced a new round of fiscal stimulus to boost the economy in an effort to combat the Odebrecht effect. Reuters reported that the stimulus package will be 5.5 billion soles (US$1.67 billion) and will be directed to several economic sectors including transportation, communication, and to regional and local governments.

Economy and Finance Minister Alfredo Thorne also expects nearly US$20 billion in private investment in 12 projects in the mining sector.

As El Comercio reports, part of the fiscal stimulus will include increased subsidies that encourage companies to hire young people who have never worked in the formal sector.

Additionally, the Central Bank of Peru announced that it would maintain the base interest rate at 4.25 percent. As the global economy has improved, other Latin American central banks have followed the United States’ lead and raised interest rates.

The decision to lower, maintain, or raise the base interest rate is an indication of how concerned a central bank is growing the economy or managing inflation, as I explained in a previous article about Colombia.

Central Bankers in Peru are very much aware of the need to control inflation. Although inflation rates in Peru are near the Central Banks ideal rates, it is critically important that rates are not allowed to increase out of control.

The period of hyperinflation in Peru in the late 1980s and early 1990s and currently in Venezuela are potent reminders of the economic catastrophe that occurs when inflation is uncontrollable.

The annual inflation rate in Peru was 3.25 percent in February 2017 and is expected to be approximately 2.9 percent in 2017.

Peru Takes the Lead

South America is a continent divided. Even though the growth rate for Peru in 2017 was downgraded to just under 4 percent, it is still on of the fastest growing economies in the region.

The Odebrecht scandal and the larger Lavo Jato scandal have hit the Brazilian economy hard. The International Monetary Fund expects the Brazilian economy to remain essentially flat in 2017.

To a much greater extent, the Venezuelan economy continues to spiral downward as inflation rages out of control and the political situation continues to worsen.

The Odebrecht effect in Peru may indeed be a blip. Unlike other countries, Peruvian prosecutors appear to be investigating the case to the fullest extent. A consistent effort to combat corruption will have positive long-term impacts on growth and stability in Peru.

Another positive factor in Peru’s fight against corruption is that the current government appears to not be included in the Odebrecht scheme. If this continues to be the case as the various investigations progress, Peru will be seen as a better destination for foreign investment than other countries in the region whose governments are more directly connected to the corruption scandal.

In an address to the Universidad del Pacífico in Lima, Peru, IMF Director Christine Lagarde expressed optimism for the Peruvian economy, citing Peru’s embrace of global trade and global economic integration. She pointed out the incomes have risen considerably in Peru thanks in large part to global trade.

The Peruvian government must continue to promote economic growth while ensuring a fair distribution of economic gains. The recent stimulus package appears to do both and continues to push Peru forward down the right path.

Because of the government’s commitment to economic growth, market reforms, and its willingness to prosecute corruption, Peru will maintain a high economic growth rate in a region still struggling with the effects of the global economic downturn and the Odebrecht scandal.

PPK and the Peruvian Congress have turned their country into a model of economic and political stability to be envied and emulated throughout the region.

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