Downbeat near term, but vaccine rollout offers upside
Less than two months before Election Day on April 11th, calling the results remains challenging. Although 16 political parties successfully registered their candidates on time for the presidential and congressional elections, the Jurado Nacional de Elecciones (JNE, the National Election Tribunal) was maintaining as we went to press that there were outstanding demands of certain candidates, either because they’d failed to provide requested information, had provided incorrect data about their personal finances, or both.
However, from careful analysis of the available published polls, we can derive a few conclusions. According to the February IPSOS poll, George Forsyth was still the frontrunner in February, with 11% of the vote. Though Forsyth has lost some votes, and his share is by no means stable, he has nevertheless held this position since late 2020. In the February IPSOS poll, Yonhy Lescano of Acción Popular jumped into second place, with 10% of the vote, and de facto becomes the joint leading presidential contender, with Forsyth. Should these two candidates successfully avoid any serious political mistakes over the next two months, it is reasonable to assume that they’ll both make it to a second-round election runoff in June. The polls indicate that a second round between these two candidates would be too close to call.
Close inspection of the polls indicates that three factors pose a risk to these forecasts. First, there’s the volatility of Forsyth’s support. Helping both Forsyth and Lescano into the second round, but hurting Keiko Fujimori, for instance, is their moderate rejection rate (the number of voters who say they would definitely not vote for a candidate). Another factor that could disrupt the final result is the source of votes. It is apparent that Forsyth receives his support principally from Lima, which accounts for about one third of total votes, and from younger people. In contrast, Lescano, Fujimori and Verónika Mendoza receive a greater share of their respective support from non-Lima and rural voters. To beat Forsyth, these other three candidates would have to gain more popularity in Lima and with the young—a tall order to achieve in a matter of months.
In our January report, we mentioned that epidemiological indicators were rising, and adding significant risk to the short-term outlook. In fact, the confirmed arrival of new, more contagious variants, such as the British and Brazilian variants, together with the higher mobility of the population during the year-end holiday period, has posed significant challenges in a country that previously seemed to have the COVID-19 outbreak under control. The rising health risks have prompted the government to promote stricter measures to try to contain the advance of the virus.
The government in late January introduced a new level of risk – “extreme” -- to the three existing levels (“moderate,” “high” and “very high”). In regions included in the extreme category, individual mobility was limited to the purchase of essential goods and services, as well as to an hour of daily exercise alone. Non-essential businesses, such as clothing retailers and restaurants (for dining in), were closed. A new lockdown has effectively been implemented, albeit one that is much more flexible than last year’s. This view is supported by the fact that, even in these regions, primary and secondary activities (such as mining, manufacturing, construction, etc.) are operating at full capacity.
Initially, nine out of 25 regions (accounting for 52% of the population) were classified as being at extreme risk between January 31st and February 14th. On February 8th, two additional regions were included in this tier, taking the percentage of the national population at this level of risk to 59%. Moreover, the government announced that the lockdown would be extended for two weeks, to February 28th. According to Google’s mobility index, lockdown has generally been respected, which illustrates a clear distinction between regions recently put into lockdown, and regions where mobility is less restricted. It should be noted that mobility levels began falling even before the government imposed the new restrictions, in line with our view that there has been a deterioration in short-term expectations, and demand for non-essential goods and services, amid a higher risk of contagion.
The December 2020 real GDP report released this week has, once again, exceeded analysts’ expectations, and confirmed that the economy continued in the expansion phase that started in October. Real GDP increased 0.5% oya in December, the first positive result since the pandemic hit the economy, and much better than the 1.2% oya contraction projected by our forecast. For the full year, real GDP fell 11.1% y/y in 2020, again, slightly better than our own forecast of -11.7% y/y.
The new lockdown should arrest the expansion, and push the economy into a new contraction phase. This justifies our decision to revise down our full-year 2021 real GDP growth forecast to only 6.5% y/y, from 9.7% y/y previously, and the 2022 full-year forecast up to 7.5% y/y, from 5.4% y/y previously. Most of this rebound was explained by a low-base effect: the fact that real GDP in 2021 is being compared with a GDP figure impacted by the 2020 lockdown. In our previous report, we argued that the 2021 economic rebound had already taken place through December 2020. In fact, according to our new estimates, using seasonally adjusted data, the December 2020 real GDP was 8.6 percentage points higher than the full-year 2020 figure.
Our new forecast introduces a deeper contraction in H1 2021 than we had previously anticipated. To the election risk already expected in our previous forecast, we have added the shock of the new lockdown, to control the second infection wave. Using the three-month on three-month seasonally adjusted comparison at the annual rate, our forecast projects real GDP to fall 9.4% in H1 2021, and to rebound by 16.2% in H2 2021 (previously, these forecasts were -2.8% and 4.7%, respectively). On the y/y comparison, our new forecasts anticipate a drop of 5.6% oya in Q1 2021, a 28.6% oya rebound in Q2 2021, and 4.3% oya in H2 2021, revised from 0.1% oya, 36% oya and 4.8% oya, respectively. Our expectation that the current lockdown will have less of an impact on the economy than the lockdown in March-April is supported by the fact that many businesses and commercial activities continue to operate and that the government has decreed only the full stoppage of service activities. In fact, according to our estimates, more than 80% of the economy continues to operate.
These new figures are subject to a high degree of uncertainty, and we regard them as a base case only. For one thing, the lockdown period could prove more protracted than expected. In fact, as explained above, the government has already extended the lockdown from February 15th to February 28th. In addition, there is still great political uncertainty. The forecast anticipates a volatile election contest lasting through June, but expects a neutral new government, rather than a reformist one that would add new growth drivers through much-needed far-reaching reforms, or a radical leftist populist government that engages in a counter-reform process similar to those seen in Venezuela, Argentina or Mexico.
More difficult to assess is the economic impact of vaccine rollout. The government has already committed, through various providers, sufficient vaccine supplies for the whole population. Like most countries leading in terms of vaccine distribution, the challenge may be logistical, in terms of distributing the vaccine, and our forecasts anticipate that the 90% herd-immunity threshold will be reached sometime in mid-2022. This justifies our forecast projecting real GDP advancing 7.5% y/y in that year, revised up from 5.4%. Moreover, the impact of the vaccine rollout should emerge earlier, and begin to affect consumer and investor expectations in H2 2021.
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