Political Quarrels, A Hurdle for Economic Recovery
The government has continued to enjoy heightened popularity over its handling of the El Niño emergency, though the president’s approval rating in the north, where most disasters occurred, has fallen. We think it could fall further if reconstruction action and aid doesn’t start fast.
Congress impeached Minister of Transport Martin Vizcarra. The main issue was Vizcarra’s approval of a controversial addendum to a PPP contract to build an international airport in Cuzco. The controversy heightened few days after, as the Controller presented a report containing a harsh criticism of the addendum on May 22th immediately provoking Mr Vizcarra resignation before the congressional debate on whether or not approve the censure Minister of Interior Carlos Basombrio is also scheduled to be impeached. Should he be censured the situation will derive into a critical political scenario.
The possibility of granting house arrest or pardon to ex-President Alberto Fujimori, who is serving a 25-year sentence for human rights violations, is another source of controversy.
Finally, the governor of the Callao region was jailed after a revelation that he received a bribe from Odebrecht over the awarding of an important public works contract. And an ex-governor of the Cuzco region was jailed on Odebrecht-related issues last week.
GDP growth in March was a positive surprise for practically all analysts, who were forecasting negative growth. This result completed a Q1 growth number of 2.1%. This suggests El Niño’s immediate effects were smaller than expected. But leading indicators suggest weak growth for April, of around 1% y/y.
We expect recovery to be very gradual, because private investment will likely fail to grow this year; it has continued declining, by -5.6% in Q1. Strong public investment growth linked to reconstruction will only start by yearend. The Minister of Finance recently lowered its GDP growth target for the year, to 3%, which we still see as optimistic. The medium-term return to fiscal deficit of 1% of GDPP seems unlikely, at least during this administration.
Analysts expect at least one more policy rate cut this year, generally in H2. But we expect a cut at the Bank board’s June 8th meeting.
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