A breathless run-off presidential election
Without a doubt, the results of the April 11th first-round presidential and congressional elections were surprising. Few had expected an outsider to emerge two weeks ahead of Election Day, and to win by a landslide. The official count by the Oficina Nacional de Procesos Electorales (ONPE, responsible for organizing the elections) and with 100% of ballots counted, Pedro Castillo of the Perú Libre party, a primary school teacher of Marxist-Leninist leanings, gathered 19% of the vote. Keiko Fujimori of the right-wing Fuerza Popular won only 13%. Next were Rafael López Aliaga of Renovación Popular, with 11.7%, and Hernando de Soto of Avanza País, with 11.6%.
Also surprising was the low proportion of votes needed to qualify for the second round, with the top two candidates gathering only 26.7% of the total vote, and Castillo winning the first round with only 15.7%. This is unique in Peru’s electoral history: in the previous four presidential elections, the top two candidates have, on average, obtained 49.4% of the vote. This indicates the level of polarization in this political campaign. True, the large number of political parties in the presidential competition, reaching 18 (and 20 in the congressional election), was a factor. However, 20 political parties likewise competed in the 2006 presidential and congressional elections – and at that time, the top two gathered 46.1% of the total vote.
The flip side of presidential election polarization has been a fractured Congress. Of the 18 political parties competing in the congressional election, 10 lost their registrations by failing to amass either 5% of the valid vote, or by gaining members of Congress in at least two circumscriptions. However, the representation of the 10 political parties that made it to Congress has been diluted. Castillo’s Perú Libre obtained 14.1% of the valid vote, translating into 37 of 130 congressional seats. Next is Fujimori’s Fuerza Popular, with 24 representatives. Behind them are Acción Popular, with 17; Alianza para el Progreso, with 15; and Renovación Popular, with 13. The remainder have fewer than 10 representatives each. The result is a Congress as fractured as the previous one, introducing the risk of failure to reach consensus and instilling greater tensions that could lead to further political confrontation. Without a majority for their party in Congress, whoever wins the presidency would be unable to implement any planned radical reforms and be forced to compromise.
The focus of the next few weeks will, of course, be the June 6th run-off between Castillo and Fujimori. Last Sunday, IPSOS published its first second-round election poll, with Castillo taking the lead with 42% of the total votes, Fujimori 31%, void 16% and undecided 11%. However, this is only a first poll, and calling this election is challenging, for three reasons. First, the candidates are ideologically opposed, representing different parts of the political spectrum -- Castillo to the far left, and Fujimori to the center-right. However, they share a conservatism in terms of individual rights: both candidates are pro-family and reject LGTBQ rights and same-sex marriage. Second, between them, they captured only 26.7% of the vote; in the second round, they will need to appeal to the average voter, who sits at the center of the ideological spectrum. Finally, little is known of either candidate’s political strategy for the run-off election. At this writing, each political party was approaching minority parties to form a coalition; however, with political parties often considered “empty shells,” endorsing a different candidate isn’t really an option.
In our view, two characteristics could help define different potential scenarios for the run-off. First, there’s Castillo’s extreme leftist position. Without a majority in Congress, most of his proposals are non-viable, and likely to divide the electorate further. Moreover, to pass a referendum calling for constitutional change, as he has proposed, requires a two-thirds majority in Congress, which Castillo has failed to obtain. In relation to this, he has stated that, should Congress fail to cooperate with him, he will shut it down, along with the Constitutional Tribunal (the highest court in Peru’s judicial system). But his radicalism goes further: in recent interviews, he has threatened street mobilizations and alliances with extremist leaders, such as Antauro Humala, who in 2005 organized a coup in an attempt to take power by force and was tried and sentenced to prison for killing four policemen. Refusing to dilute his radical views in the run-off may instill fear among the electorate and diminish his popularity. In the 2006 presidential run-off election, Alan García beat Antauro’s brother, the future president Ollanta Humala, by accusing him of trying to implement a chavista government (in reference to the leftist dictatorship established by former president Hugo Chávez, who led Venezuela from 1999‒2013); in panic, voters turned out in favor of García.
The most recent high-frequency economic reports have given a slightly more favorable-than-expected reading, and have justified our decision to revise up our full-year 2021 real GDP growth forecast to 8.1% y/y, from 6.5% y/y, and the 2022 figure downward, to 5.9% y/y from 7.5% y/y. Even with these new forecasts, we remain below the market-consensus forecast calculated by the Banco Central de Reserva del Perú (BCRP) on March 31st, to be 9% y/y for 2021 and 4.6% y/y for 2022.
The fundamentals that justify this more downbeat overall forecast remain unchanged. When we introduced this forecast in our February report, we argued that the second wave of COVID-19 infections and political uncertainty justified a downbeat forecast for H1 2021 but that, once these headwinds normalized in H2 2021, the economy should rebound. In fact, the new forecast anticipates real GDP averaging -3.3% q/q, saar, in H1 2021 and 4.4% q/q, saar, in H2 2021. Although the economic deceleration in H1 2021 was less severe than anticipated, the January and February real GDP estimates confirmed this contraction, averaging 0.9% m/m, sa, below the 1.5% m/m, sa, expansion in Q4 2020. However, with heightened election risks, we are also less confident of the economic rebound in H2 2021; nevertheless, this aligns with our election scenario, which gives a slight advantage to Fujimori in the second-round election on June 6th.
On the back of recent high-frequency reports, two components of aggregate demand justify further revision: total exports of goods and services and government consumption. We are revising up our 2021 forecast for total exports of goods and services, to 23.5% y/y from 18.4% y/y previously, and down to 6.7% y/y in 2022, from 11.1% y/y previously (owing to a low-base effect; exports would nonetheless remain strong). Similarly, we are revising up our government consumption forecast to 3.4% y/y in 2021 from 0.1% y/y and down, to -1% y/y in 2022, from 0% y/y. We are also raising our government investment forecast.
On the back of the government’s recent $5 billion bond issuance on March 23rd, we have also adjusted the sources of finance figures. For one thing, with the upward revision to the overall fiscal deficit, the funding requirement has increased to PEN45.8 billion ($12.7 billion) in 2021 from a previous forecast of PEN38.8 billion and to PEN40 billion in 2022 from PEN29.5 billion. Our new forecast anticipates this requirement being financed in 2021 by PEN36 billion of debt disbursements; PEN10.8 billion from multilateral or bilateral debt and PEN25.2 billion from bond issuance, mainly Global bonds. Finally, the government will use PEN9.8 billion of its own Treasury savings, deposited in the domestic financial system. This assumes that the government may need to go back to the market and issue a further 1.2 billion in H2 2021. For 2022, the forecast assumes total financing needs to be covered by PEN25.8 billion in debt disbursements; PEN2.5 billion from multilateral or bilateral sources; and PEN23.3 billion from bond issuance. Finally, the government would draw down PEN14.8 billion from Treasury savings.
The net effect of this financing would be an upward revision in the gross and net public-sector debt and a downward one to Treasury savings. We now forecast total gross debt to reach 36% of GDP in 2021, from 34.4% previously and to 37.5% in 2022, also from 34.4%. Moreover, we now expect Treasury savings to reach 11.4% of GDP in 2021, slightly higher than the 10.3% previously forecast, and 9.6% in 2022, also higher than the previous forecast of 8.7%.
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