Fighting for an Ambitious Agenda
President Pedro Pablo Kuczynski is enjoying a warm honeymoon, with popularity ratings of around 61%, and approving commentaries in both domestic and international media. But he’ll have to negotiate hard with Congress to advance his ambitious five-year agenda. Key aims include raising potential GDP growth to 5% per year, by boosting investment and cutting the high rates of informal labor, from the present 70% to 40%, while also reducing poverty from 22% to 15%, and eliminating extreme poverty altogether. He also intends to broaden the tax base; to increase the tax burden by about 2 pp to 17%; and to overhaul the pension systems, to include everyone over age 65. And he wants to increase access to drinking water and sanitation, to improve public safety and to reduce corruption.
The government has asked Congress for special legislative authority for 120 days, so it may issue rules in five key areas: citizen safety and corruption; water and sanitation; general government administrative procedures; and reorganization of the state oil company Petroperu. It also intends to undertake measures linked to fiscal management, tax policy measures, and measures to speed development of capital markets.
Clearly, all of these requests transcend technical and policy design matters, and have wide political implications. Though passing such a big raft of initiatives will require skillful negotiating, especially with opposition party Fuerza Popular’s 73-strong majority, we think the administration will win approval to act in most of these areas in the end.
We project 2016 GDP growth at 4%: though June growth at 3.6 % y/y disappointed a bit, H1 growth still came in at 4.1%, and leading indicators for July and August point to improved performance over July and August. Continued growth in primary activities, especially in mining and fisheries in July, and a strong rebound in public capital expenditure of more than 20% in August, should help. But we see the administration’s forecast of 4.8% growth in 2017 as overly optimistic, as does the Fiscal Council (an independent committee), citing a still-weak world economy. We continue to forecast growth at 4.3%.
The executive branch has requested and obtained congressional approval of new ceilings on public deficit and a more gradual fiscal consolidation path. For 2017, the Executive in addition to new bond issues in mostly local currency, and external credits for $4.4 billion to cover the deficit, it has asked to issue up to $6 billion in exchange bonds, and other liability management instruments. We expect this government to tap the markets more frequently, and it may launch a very large bond issue.
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