Congress vs. Castillo—who sacks whom?
In this report, we try to answer three key questions: What will happen to the presidency of Pedro Castillo? Is the economy transitioning to a new normal growth rate? And when will the Central Bank end its tightening cycle?
We argue that the confrontation between President Pedro Castillo and the opposition in Congress reached a stalemate last week, following the constitutional complaint submitted to Congress by the Ministerio Público Fiscalia de la Nación (MPFN, the Attorney General’s Office) on October 11th. While there is substantive evidence to suggest that Castillo had led a criminal organization with the purpose of embezzling funds intended for public works projects, as discussed in our October report, the legal process is less than straightforward.
On November 11th, following a month of discussions, Congress’s Sub-Comisión de Acusaciones Constitucionales (SAC, the Constitutional Accusation Sub-Commission) narrowly approved a constitutional accusation against Castillo, by an 11-10 vote. This followed a May 2022 denunciation against Castillo for treason by Acción Popular (AP) party congressman Wilson Soto, after the president said in a January CNN interview that Peru would grant Bolivia territory providing it with access to Pacific Ocean seaports. Simultaneously, and in a surprise move, the SAC on November 16th approved the MPFN’s constitutional complaint, in a 13-8 vote.
In response, Castillo’s lawyers launched a well-structured legal defense. First, they lodged two protection-right appeals in the Supreme Court and invoked the writ of habeas corpus in the Tribunal Constitucional (TC, the Constitutional Tribunal, Peru’s highest court). Then on November 9th, Prime Minister Aníbal Torres sent a letter to President of Congress José Williams to schedule a session of Congress, during which he planned to propose no confidence vote, which he then did propose on November 17th.
Against this backdrop, one may wonder what comes next. Should the TC rule against Congress in relation to the treason accusation and the no-confidence vote fail to pass, it is apparent that Castillo would again survive. However, this would likely be only temporary, as Congress is expected to order the Attorney General to continue with the preparatory investigation. While this investigation could prove lengthy, it could also see further evidence uncovered against Castillo, with more witnesses coming forward as his popularity continues to slide. If this scenario plays out in 2023, it may offer Congress another opportunity to gather the 87 votes needed to press for impeachment.
The economy decelerated in the previous quarter, as confirmed by the Instituto Nacional de Estadística e Informatica (INEI) in its Q3 2022 real GDP report. Real GDP advanced 1.7% oya in Q3 2022 following growth of 3.3% in Q2 2022 and 3.8% in Q1 2022. This was even more apparent in the q/q seasonally adjusted real GDP estimates, which fell by 0.4% in Q3 2022, after advancing by 2.2% and 4.2%, respectively, in Q2.
While the forecast projects real GDP rebounding to 1.9% oya in Q4 2022 (or 1.8% on the q/q seasonally adjusted comparison), growth should gradually converge with the potential growth rate of 2%. This justifies our forecast that real GDP will advance by 2.2% in 2023, when the global economy is likely to edge towards recession, before accelerating mildly to 2.6% in 2024 as global headwinds ease.
The Central Bank planned to continue policy tightening in November, and its hike 25bp was in line with both market consensus and our own expectations. It is more difficult to project when the BCRP will end its tightening cycle. Our forecast expects one more 25bp hike at its December 7th meeting, bringing the terminal policy rate to 7.5% per annum. With headline inflation easing, the one-year-forward implied real rate reaching 2.5% in November, and the output gap widening, conditions favor the BCRP’s pausing at its December meeting. While there are other factors that support the BCRP’s continuing its program of hiking, we believe that the balance is in favor of a pause at the December meeting. The BCRP’s decision to intervene in the Government Soberanos market for the first time may hint that some markets are suffering dislocations, which would be a further factor in favor of a pause.
One risk worth monitoring is the liquidity level in the Soberanos market. This is not directly related to the BCRP’s tightening cycle, but may have an indirect link. Long-term holders of these bonds have been selling their positions, inducing a selloff in the Soberanos market, drying up liquidity. However, the BCRP started buying these bonds as an effort to stabilize the Soberanos market. Another justification for intervening in this market is that the 10-year Soberanos yield is used as the benchmark for mortgage lending and, should “animal spirits” take hold of this market, it could result in a credit crunch in the mortgage market.
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