IMF Working Papers

Peru is highly exposed to periodic El Niño Costero events, which impair production in the country’s fishing, agriculture, and construction sectors, as well as inflict sizeable damages to physical assets. Moreover, rising average temperatures are expected to diminish productivity in agriculture, fisheries, and energy. Without efforts to strengthen its adaptive capacity, the country remains highly vulnerable to such acute and chronic physical risks in the long term. This paper combines a Markov-switching DSGE model with empirical estimates of losses from such risks to conduct a scenario analysis of their macro-fiscal implications. We find that cumulative income losses could reach up to 18.6 percent by 2050 and 50.6 percent by 2100. The analysis further shows that scaling up investments in structural resilience and adaptation can partially mitigate these losses—raising output by up to 12.3 percent by 2050 and 31 percent by 2100—while also generating long-term fiscal savings.