PPK’s Mandate Starts Vigorously
President Pedro Pablo Kuczynski, widely known as PPK, was sworn in on July 28th, though with a Congress comfortably dominated by the party of his losing opponent, Keiko Fujimori. Kuczynski used his inaugural speech to present his vision of a modern Peru, vowing to rekindle growth, and produce a “social revolution” centered around universal provision of basic public services, especially drinking water, sanitation and better public safety – this latter certainly a top public concern. He also wants to shrink the large informal sector, cut the VAT, improve tax compliance and increase private and public investment. To begin his agenda, he intends to ask Congress for legislative powers to rule on economic, tax, investment and domestic security issues.
The new Cabinet is composed mainly of technocrats, many former ministers or top officials in past administrations. Prime Minister Fernando Zavala was PPK’s vice finance minister, then his finance minister, after PPK became prime minister in the Alejandro Toledo administration. The new finance minister is World Bank and J.P. Morgan veteran Alfredo Thorne. Central Bank Governor Julio Velarde, who has successfully managed the Bank for 10 years, has been invited to stay on.
GDP growth in May, at 4.9% y/y, surprised on the upside, on the back of a spectacular growth in mining, thanks to new production levels at the Las Bambas project. Other new mining projects also accelerated their rump-up. Public investment at the sub-national levels has started to pick up strongly. With preliminary indicators for June growth for H1 is expected to be 4.1% y/y, and we see H2 growth running at a similar pace.
PPK wants to be perceived as a doer who can deliver quick results. So he’s planning on a strong fiscal impulse. While that’s likely to produce short-term benefits, it remains to be seen if such a strategy will prove correct in the medium or long run. Our preliminary assessment of his program suggests that the deficit may not fall to 1% of GDP as quickly as the previous administration envisaged but the government is aware of the need to announce a credible plan for fiscal consolidation, as it understands that the credit rating agencies are likely to be concerned.
Headline inflation for July again was very low (0.1% m/m), due to a fall in prices of several food items. Likewise, core inflation, which excludes food and energy, was 0.2%, favored by currency appreciation during the first half of July. The 12-month headline and core inflation levels declined to 3% and 2.9%, and were within the Central Bank target, for the first time in more than a year.
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