A battle of wills
Since President Martín Vizcarra stunned Congress six weeks ago with his request for early general elections, Peru has been immersed in a political tug-of-war. While the president accuses Congress of dwarfing his plans and dragging its feet over political and judicial reforms, the congressional majority accuses Vizcarra and his cabinet of incompetence in dealing with Peru’s most pressing problems: of economic growth, unemployment, crime, post-2017 El Niño reconstruction and the handling of social conflicts surrounding Tia Maria and other mining projects. Vizcarra’s critics see his call for early elections as a “flight forward” that confirms his ineptitude at governing, and suspect strategic political reasons. Yet most of Vizcarra’s initiatives have passed largely unchanged, including his call for the December 9th 2018 referendum that resulted in overwhelming support for Vizcarra. That referendum also included a ban on members of Congress running for reelection.
Early elections would require a constitutional amendment that need the approval of Congress. But the president’s popularity, which jumped from around 44% to 60% after his call for new elections, has over the past month dropped to 50%, and support for early elections has declined from 78% to 64%. The odds against the approval of the constitutional amendment are high.
H1 growth, at 1.7% y/y, was particularly disappointing. June’s improved number (2.6%) represented just a moderate improvement over the two preceding months; in fact, slowdown was more pronounced in Q2. The decline in private consumption and exports grew noticeable in Q2, while private investment gathered strength, buttressed by mining project construction. Expected H2 rebound is based on the waning of supply shocks in H1 in primary sectors, resulting in higher export volumes. Public investment should also pick up, as new subnational authorities gather more project execution experience. Yet growth rebound is likely to be moderate, due to deteriorated business sentiment caused by the U.S.-China trade war, and by conflict over Vizcarra’s early election request. This is likely to delay investments and new employment. Too, increasing international tension and lower growth prospects for the region could cut demand for non-commodity exports. And the government’s poor handling of the social conflict surrounding Tia Maria has compounded the political conflict.
The sol lost 2.7% of its value against the dollar in August, more due to world events than to internal causes. But devaluation has been small compared to peer countries, thanks to Peru’s macroeconomic strength, especially high liquidity at the Central Bank and the Treasury. In September, the sol pared its losses. As we envisaged, the Central Bank cut its policy rate by 25 bp on August 8th; another similar cut is very likely this year.
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