Another game of chicken
Facing dwindling approval ratings, the Vizcarra government resorted to its usual ploy: it confronted the unpopular Congress, though now with a credible excuse: Congress had been dragging its feet over approving the government’s proposed political reform. The Executive branch sent Congress 12 draft laws, some involving constitutional amendments that would overhaul Peru’s political system.
The conflict came to a head in mid-May, when Congress’ constitutional committee decided to shelve the immunity initiative. This act was aggravated when the committee failed to approve a constitutional indictment against ex-Attorney General Pedro Chavarry, a sworn enemy of President Martín Vizcarra. Chavarry had been accused of constitutional violations, and of belonging to a criminal organization. These two events prompted Vizcarra to announce a question of confidence to be submitted to Congress, challenging the body to consider his proposed political reform before the end of the legislative session on July 25th.
In the end, Congress approved the confidence motion by a large majority (77 to 44, with three abstentions) and the constitutional committee accelerated the discussion of the government’s draft proposals. So the gambit paid off, crisis was averted and Vizcarra’s approval ratings jumped by eight or 13 points (according to different polling companies). As in his last ratings-boosting episode, Vizcarra is likely to see his popularity erode, due to the general perception that he is failing to address pressing economic and security issues. His government’s popularity is much lower. This affair has also further weakened the majority Fuerza Popular party, where membership has fallen to 54, against the 73 representatives elected in 2016.
Modest Q1 growth, at 2.3% y/y, is likely to be followed by lackluster growth in Q2. Worse, public sector investment dipped again in May, and private investors are continuing in wait-and-see mode. Yet we see the economy improving somewhat in June. Growth in 2019 is likely to end at 3%, much lower than the 4.2% originally targeted by the Ministry of Finance. Preliminary information also suggests that the current account deficit will increase to 2% or more, due to lower metal export volumes and prices.
The sol lost 2% of its value against the dollar in May, due to external tensions and domestic political conflicts. Against a trade-weighted basket of currencies, the sol remained unchanged. So far in June, and in line with other regional currencies, the sol has appreciated by about 0.7%.
Given a possible Fed rate cut, and lower risk aversion, the Ministry of Finance issued bonds equivalent to $2.5 billion, mostly in local currency, to exchange previous issues, and to pre-finance 2020 financial needs.
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