Peru’s capex push tests fiscal credibility

Peru’s latest infrastructure update signals a shift from announcement risk to execution credibility at a time when macro anchors are intact but growth drivers are uneven. On a calendar-year basis, the 2024 fiscal deficit printed around 3.5–3.6% of GDP after counter-cyclical outlays, while general government debt stood near 32.8% of GDP in December 2024.

Headline CPI moved back inside the 1–3% target band through August–September 2025, and the policy rate was held at 4.25% in October 2025. The sol traded broadly in a S/3.40–3.48 per US$ range in October, indicating contained pass-through. With external financing conditions steady—Peru’s 10-year USD sovereign yield has hovered around 5.9–6.2% in October—the determinant of market pricing is delivery on the infrastructure pipeline rather than funding access.

The mechanism is threefold. First, front-loading logistics, ports and water projects reduces structural bottlenecks that have depressed total factor productivity since the mid-2010s. Second, scaling concessions in transmission and renewables crowds in private capital via availability-payment PPPs, limiting gross financing pressure on the budget while imposing procurement and performance discipline. Third, predictable project disbursement stabilises unit costs for tradables, allowing the central bank to preserve the current policy stance without leaning on the exchange rate. This alignment—supply-side relief with monetary credibility—tightens the link between execution metrics and the sovereign risk premium.

Macro and sector impacts are quantifiable. If public-investment execution rises to at least 80% of the approved budget in 2026 from sub-70% outcomes in 2024, gross fixed capital formation could expand by 3–5% y/y, adding 0.4–0.7 percentage points to real GDP over 12–24 months. Corridor upgrades that cut average freight times by 10–15% on principal routes improve inventory turns and export pass-through, cushioning margins as copper (HG=F) trades below mid-2024 peaks. Transmission concessions reduce technical losses and integrate new renewable capacity, dampening tariff volatility and improving industrial cost curves. Employment effects arrive first in construction and engineering services, but the durable gain is productivity in manufacturing and logistics as travel times compress and water resilience rises.

Markets will discount pace, not plans. A credible delivery sequence—dated tendering, financial close, and measured work progress—compresses spreads as investors price lower execution risk. The fiscal profile should tighten toward a 2.0–2.5%-of-GDP deficit in 2025–2026 if procurement moves on schedule, royalties stabilise, and current spending growth is contained. That mix supports PEN=X by anchoring portfolio flows into sol paper and reduces the need for pro-cyclical restraint that would otherwise stall private capex. Conversely, slippage—delays in rights-of-way, judicial challenges, or cost overruns—would widen the funding requirement, push term premia higher, and test the fiscal rule at a time when congressional initiatives already tilt expansionary. The policy feedback loop is direct: weak execution heightens import content, strengthens the dollar bid, and forces tighter liquidity to keep inflation anchored.

Regional benchmarks sharpen the test. Chile’s port-corridor expansions and Colombia’s 4G/5G roads demonstrate that multi-year logistics programs compress freight spreads and improve export resilience even when global rates are restrictive. Peru retains structural advantages—investment-grade metrics, low gross debt, deep local markets—but political fragmentation has raised governance risk around procurement and concessions. The economic signal behind this week’s update is therefore institutional: the government is attempting to re-establish a dated, transparent schedule that investors can underwrite.

Forward indicators are measurable and time-anchored. By Q4 2026, public-investment execution should register ≥80% of budget on a rolling 12-month basis; the overall deficit should track toward 2.0–2.5% of GDP; and the 10-year USD sovereign yield should hold within a 5.75–6.25% range with reduced volatility. By end-2027, logistics upgrades should cut average corridor freight times by 10–15% and lift non-mining export volumes by 5–7% versus 2024. If these thresholds are met while inflation stays in target and debt remains around 31–33% of GDP, spreads are likely to compress and PEN=X should remain stable within its recent trading band; if missed, the growth dividend from infrastructure will remain latent and markets will re-price execution risk.