A change in leadership brings calm
Amid an untenable political situation, President Pedro Pablo Kuczynski resigned on March 21st, thereby avoiding certain ouster via a painful and politically damaging impeachment process. It would have been impossible for him to stay on another 3 ½ years, given soured relations between the Executive branch and Congress. Vice President Martin Vizcarra stepped swiftly into the presidency, saving Peru from political chaos. Within a week, he’d named a new cabinet – and things returned to normal.
Almost all political forces supported Vizcarra, and markets reacted positively. The new government has at least gained enough space to govern, and to reach out to the majority Fuerza Popular.
The new government’s success will depend heavily upon its ability to quickly display managerial skills in dealing with pressing issues, such as post-El Niño reconstruction, and some problems in health and education. Fortunately, several new ministers have experience in public administration. But the lack of a clear congressional coalition won’t help Vizcarra, particularly in the face of unfolding corruption cases.
It is hoped that October regional and local elections won’t pose a new challenge. As general elections approach in 2021, the possibility of emerging frictions with Congress will increase.
Markets also reacted well to the nomination of David Tuesta as the new Minister of Finance. Tuesta worked for many years at BBVA in both Lima and Madrid, mostly in areas dealing with pensions. He is expected to emphasize the same areas as his predecessor Claudia Cooper, and has convinced Vice Minister of Economy Cesar Liendo to stay on. While they see the need to provide a strong fiscal impulse through public investment, also wants to cut spending by S/ 2 billion, and to introduce new measures to increase tax revenues.
We are maintaining our 3% y/y forecast for Q1, with domestic demand growing at about 4%. These rates are not particularly encouraging, as they rise from the very low output during the same period in 2017, after the economy was battered by El Niño.
The CPI for March, at 0.49% m/m, was lower than the average index for this period in the last seven years, and below the large March 2017 El Niño-driven spike. So the 12-month rate plunged to 0.4%, led by a decline in food prices. Certainly this low rate is transitory. Twelve-month core inflation remained at 2%.
As we envisaged, the Bank cut its policy rate at its March 8th meeting, and left it unchanged at its April 12th meeting, in line with consensus. Barring disappointing growth or investment results, we think the Bank will maintain this rate.
Now read on...
Register to sample a report