The high cost of political survival
This administration has been thrust into permanent conflict, as its lack of a significant presence in Congress is forcing it to wrestle with a huge opposition. Though a motion to impeach President Pedro Pablo Kuczynski on the grounds of “permanent moral incapacity” failed, due to a fracture within the majority party Fuerza Popular engineered by ex-President Alberto Fujimori’s youngest son, Kuczynski’s survival came at a high cost. When Kuczynski pardoned the jailed ex-president a few days later, many considered it a tit-for-tat arrangement, though Kuczynski had in fact been contemplating freeing Fujimori for months.
These events had two important political consequences. First, Fuerza Popular has lost its absolute majority, and therefore its ability to unilaterally determine legislative outcomes. Second, the pardon triggered widespread public rejection of Kuczynski, mirroring the anti-Fujimori sentiment that helped thrust him into office.
A subsequent cabinet reshuffle Kuczynski cast as a “reconciliation” gesture also backfired, as opposition parties and important independent leaders refused to join the cabinet. Three ministers (Interior, Defense and Culture) and other three congressmen in Kuczynski’s camp resigned in protest against the pardon. The president’s popularity rating has fallen to around 20%.
In this context, the executive branch will try less to struggle to pass important reforms and will be likely to oppose successfully populist proposals. This situation could dampen the growth outlook, as Peru is in dire need of major reforms.
Before this latest political crisis, the economy was recuperating, albeit more slowly than expected during the last months of 2017. We expect Q4 growth of just 2.4%, and the same rate for the year. Business expectations remain positive but were affected by the political crisis. Q1 2018 growth could still be about 4%, given the very low growth performance of Q1 2017. But a recent inquiry into presumed collusion practices by major construction firms could hamper growth in the dynamic construction sector.
Even at the height of the political crisis, Peruvian assets showed very little volatility. Inflationary expectations for the next 12 months declined to 2.3% at the end of November, down from 2.9%, and are likely to decline again. Against this backdrop, the Central Bank cut its policy rate by 25bp to 3% during its January 11th meeting, after a full 1% cut in during 2017. We think the Bank will cut once or even twice more. Preliminary official information puts the 2017 non-financial public sector deficit at 3.2% of GDP, 0.2pp above the official target.
Now read on...
Register to sample a report