UPDATE 1-INTERVIEW-Peru eyes foreign debt to curb currency gains

* Currency at 16-year high

* Sees 6 pct GDP growth next year

* Trying to ramp up investments in big projects

(Adds quotes, details)

LIMA, Nov 1 (Reuters) - Peru, South America's fastest-growing economy, might prepay billions of dollars in expensive foreign debt to stem the appreciation of the local currency caused by capital inflows, the country's finance minister said on Thursday.

Luis Miguel Castilla told Reuters the prepayment would be part of a ``liability management policy'' that seeks to improve and extend the Andean country's debt profile.

``We can introduce measures like prepaying certain public debts we have ... it's a way to help alleviate the impact of foreign capital inflows,'' he said.

Peru's currency, the sol is near a 16-year high of 2.59 against the dollar, as yield-hungry investors pour into emerging markets. The sol has gained nearly 4 percent this year and has strengthened more than 26 percent over the past decade, a period in which investors have poured money into an economy that has been growing on average by 6 percent a year.

Paying foreign bonds early would compliment other measures the government has applied before to curb the rally such as raising deposit requirements on bank accounts denominated in dollars or allowing local pension funds to invest more money abroad.

Castilla declined to say which bonds or debts would be targeted in a pre-payment program that is still being evaluated.

Peru has local and foreign debt in dollars and soles that are equivalent to about $36.6 billion, or nearly 20 percent of gross domestic product. About $20 billion is foreign debt, according to the central bank.

``We believe there may be opportunities to see that debt that is above our yield curve is prepaid,'' he said.

Castilla said prepayments would be part of broader goals of making sure the proportion of sol-denominated debt rises to 60 percent of the debt load from 50 percent now and lengthening the average life of the debt load beyond the current term of 13 years.

Castilla also said that, if Peru's constitutional court orders the executive branch to pay land bonds it issued in the 1970s, the finance ministry would comply with the ruling.

Bondholders have asked the court to ensure that the bonds, most of which went into default after the government carried out a controversial land redistribution program decades ago, are finally paid. The land bonds do not currently show up on government ledgers.


Castilla said the economy should grow 6 percent next year after an expected expansion of 6 percent this year. Surging domestic demand has kept the economy growing, although activity would pick up more if the global outlook improved.

``The important thing is to maintain the momentum next year and a lot will depend on the external environment,'' he said.

Peru relies heavily on the developed economies because it is the world's second-largest producer of copper and zinc and No. 6 producer of gold.

``We can't say for certain now, but it seems that (the world) is stabilizing; there are positive indicators in the United States, China appears to show a break in the contraction of industry that it had shown,'' he said. ``Europe itself is complicated, but it seems that the world is not going to enter a period of crisis or collapse. That will help us.''

To support local growth, Castilla said the government is promoting $10 billion in private infrastructure projects through 2013 and trying to cut red tape.

``We are looking for large, high-impact projects,'' he said.

Castilla also said investments in new mines are continuing to rise despite social conflicts over natural resources. Planned mining investments through 2014 total $25.3 billion.

He said the government is also trying to boost public investments to 6 percent of GDP from around 5 percent of GDP this year.

``The idea going forward is stabilize at a level of public investment at around 6 pct of the product, this is an optimal level,'' he added.

(Editing by Terry Wade and Andre Grenon)