Reaching the inflexion point?
President Martín Vizcarra’s cabinet presented its plan to Congress, and won the body’s necessary vote of confidence, 94-19. The leftist parties dissented, but Keiko Fujimori’s Fuerza Popular party, which controls 50% of Congress, responded positively. Though some interpreted this as a tacit agreement between the new Executive branch and Congress, we advise caution. The Vizcarra administration will certainly have a wide margin for maneuver, for at least the next six to 12 months. That could be extended, if the economy rallies, and the government can extend its popularity (Vizcarra’s approval rating, though down from its peak, is still above 50%).
Taking advantage of this honeymoon, the president has requested legislative powers for two months on a wide array of issues, including measures to try to boost government revenues, and cut administrative red tape, especially for investment and PPPs. These powers will likely be granted, but in a more limited way.
GDP growth at 3.9% y/y for March was better than expected, and Q1 growth was 3.2%. The recovery of non-primary activities linked to domestic demand and non-commodity exports, up 3.6% y/y, were the main drivers. But primary activities rose only by 1.8% for Q1, with the fishing sector under a temporary restriction. Mining output also grew more slowly.
We would not be surprised to see April’s number at 6% or more, and a Q2 growth rate of about 4%. Still, these rates heavily reflect the low base of H1 2017, when the economy was badly hit by El Niño. Growth would need to climb in next months, to convince us that the economy has really gained traction. We still see 2018 growth at 3.5% to 3.7%, in line with the Ministry of Finance’s recent downward revision.
The Central Bank is likely to leave its policy interest rate unchanged in coming months, or even for the rest of the year.
This year’s main fiscal objective will be to increase public investment and revenue, while containing current spending. Minister of Finance David Tuesta says he intends to raise tax income by the equivalent of 2% of GDP in the medium term. This would be overly ambitious, barring a tax rate increase. Fortunately, tax revenues are increasing on the back of higher metal prices, and domestic demand rebound. We see the official 2018 fiscal deficit target of 3.5% of GDP as achievable.
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