Noisy politics and new lockdown jeopardize the economic recovery
Congress delivered a shock on Tuesday, August 4, when it passed a vote of no confidence in the then-prime minister, Pedro Cateriano, and his Cabinet. Although the new prime minister, Walter Martos, and his Cabinet were approved by Congress last Tuesday, August 11, with a large majority (115 out of 124 congressmen), and a major political crisis avoided, the question remains as to how significant this event was for Peruvian politics.
Our interpretation is that the 1993 Constitution has failed to strike an equal balance of power between the Executive and the Legislature, or to insulate the president from political confrontations as it is intended to. The message may be that, when a political party controls Congress, or the president is insufficiently represented in Congress, the president risks being over-ruled. In retrospect, it is apparent that the president has been unable to control the large volume of populist legislation coming through from interest groups in Congress, which is undermining economic performance; moreover, this is unlikely to change before Mr. Vizcarra’s term ends in July 2021.
Mr. Martos, a military man, together with his Cabinet, gained Congress’s vote of approval on Tuesday, August 11, exactly one week after Mr. Cateriano suffered the no-confidence vote. The speed with which Mr. Vizcarra recovered from the defeat of his prime minister in Congress was remarkable, and indicates that neither the president nor Congress wanted to escalate the confrontation into a full-fledged political crisis.
In his Confidence speech to Congress, Mr. Martos focused on the government’s fight against the Covid-19 pandemic. Since June, both the infection and death rates had increased as a result of the reopening of the economy, and the opposition had demanded the government lay out its strategy for controlling the spread of the virus. Last Wednesday night, the Cabinet approved a new Executive Order introducing a strict nationwide lockdown on Sundays; limiting the mobility of children under 14 years of age to only 30 minutes per day outside of their homes; prohibiting social meetings, including among family members from different households; and placing five more states and 34 more provinces under focalized lockdown (about 30% of the population). The surprise was that no Lima districts were included, despite the fact that the capital shows the highest infection and death rates nationwide and accounts for one-third of the national population.
Most economic reports received since our last essay was published confirm that the worst of the economic recession is over. Nevertheless, putting the economy on partial lockdown, failing to lay out a realistic stimulus program, and the unabated political noise, make it difficult to predict a sustainable recovery. Although we are maintaining unchanged our forecast for the beginning of recovery in 3Q20, we cannot rule out a backlash later in the year. Our forecasts anticipate a 17% y/y contraction of real GDP in 2020 and a moderate rebound, of 6.8% y/y, in 2021. On a quarter-on-quarter comparison, we believe Q2 2020 will mark the low point, with real GDP falling 71.1% q/q, saar, and anticipate the economy posting a strong recovery from 3Q20, when it should advance by 90.3% q/q, saar.
Local markets remained well anchored, despite the early-August political noise. This performance is unsurprising and confirms the strength of Peru’s balance sheet. Although the government has announced an 18.1%-of-GDP fiscal stimulus program, to date, it has used mainly its own Treasury savings, performing only a US$3bn Soberano international bond issue in mid-April.
Moreover, according to our estimates, at end-2019 the Treasury had around 14% of GDP in savings to finance the fiscal stimulus program. However, it is apparent that, sometime in 2H20, the Treasury will have to raise financing, and this could come from multilaterals such as the International Bank for Reconstruction and Development (IBRD or World Bank) and Inter-American Development Bank (IADB), or from local-currency and US-dollar international-bond issuance. According to our forecast, the Treasury would need net external financing of 6.5% of GDP in 2020 and 1.5% in 2021. More details should be offered in the 2021 budget, due to be sent to Congress by August 30.
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