Coronavirus threatens to depress growth
Nine parties will be represented in Congress for the next 16 months, led by a new informal alliance of Acción Popular, Alianza para el Progreso, Somos Perú and Podemos Perú, which together hold 69 of the 130 seats. This majority will allow them to name the president and vice presidents of Congress, and to wield some agenda-setting power. Three of the four have centrist tendencies, while Podemos Perú casts a more populist image.
The parties of the alliance have agreed to give priority to education, health and public security issues. Following the Executive branch line, another key issue will be political and judicial reform. But some of the most controversial presidential decrees, such as the one regulating civil service unions, could be struck down or modified. We believe some agreements will be reached.
Appetite for confrontation is reduced for now, especially given President Martín Vizcarra’s relatively high approval rating. But political opportunity to oppose government policies will be more tempting as the 2021 national elections near. Political support for Vizcarra is also likely to wane this year, making him an attractive target.
The political environment was also shaken by an Odebrecht arbitration suit against the Peruvian state over the Southern Gas Pipeline Project. Poor handling of the negotiations on the government side led to the dismissal of the ministers of Justice, and Energy and Mines, and of a leading prosecutor for the Lava Jato affair. Odebrecht has demanded $1.2 billion in compensation.
As everywhere in the world, the Covid19 outbreak is a concern for the Peruvian economy. Commodity prices and financial markets have reacted first, but further impact on supply chains and domestic demand is expected. A 10% drop in commodity prices would cost the Peruvian economy about 1.3% of its GDP, according to Goldman Sachs estimates. Copper prices, which accounted for 29% of exports in 2019, have fallen about 12.5% since mid-January. Other basic mineral exports, such as zinc and lead, have seen similar drops. But an 5% rise in gold prices over the past six weeks has partly compensated, and lower oil prices will help the balance of payments.
Financial market assets have lost value, with high volatility. The sol has depreciated by about 6% against the dollar since the start of 2020, with a high pressure in the last days.
GDP expanded 1.8% in Q4 but, due to upward revisions, was set at 2.2% for the year 2019. Current expectations put 2020 growth at 2.5% to 3.2%. But Covid19 effects have already moved the MEF to announce a possible cut in GDP growth at the end of March. It now looks challenging for GDP growth to top 3% this year.
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