A major victory for the President

PERU - Report 10 Dec 2018 by Roberto Abusada and Jose Valderrama

Yesterday´s referendum President Martín Vizcarra promoted over four constitutional reforms has produced a resounding boost to his power. Voters did just what he asked, by a 4-to-1 margin: they supported the first three proposals and voted down the fourth. Together with the question dealing with judicial reform, the fourth question (introduction of a Senate) was the most important, and ironically one Vizcarra had originally backed. But after Congress changed the terms under which a president could dismiss Congress, and call for new congressional elections, Vizcarra urged Peruvians to vote the proposal down. The outcome kills Peru’s chance for a two-chamber Congress.

Of the other three proposals (on judicial reform, campaign financing rules and the banning of reelection for members of Congress) most political analysts consider the latter institutionally detrimental. Typically, only about a fifth of members of Congress manage to get reelected. But Vizcarra, taking advantage of the unpopularity of the current Congress, proposed the ban as a way to win extra public support.

We’re likely to see increased prosecutorial activity in coming months, after the new agreement between the government and Odebrecht. The firm and its managers to be granted immunity, and be allowed to sell assets in Peru, in return for payments reparation, and full disclosure of illegal activities.

How will Vizcarra use his greater popularity? He could choose to lead his team through structural economic reforms, or rather to remain in his comfort zone, and to try to run again in 2021 (which he denies planning to do).

Weaker-than-expected September GDP growth, at 2.1%, contributed to a 2.3% growth rate for Q3. Influencing this result was the contraction in mining output, which lowered Q3 exports. And also public investment plunged, while private investment (non-mining in particular) lost traction. The initiation of the second fishing season with a bumper catch, coupled with a strong public investment, leads us to expect Q4 growth at above 4%. We maintain our 3.8% growth forecast for the year.

Depreciation pressure waned in early December, and the exchange rate is still hoovering around 3.38 soles per dollar. The currency has in fact appreciated marginally nominally ytd against a basket of currencies, and depreciated against that basket just 0.2% in real terms. As expected, November’s inflation was low, at 0.12% m/m. The 12-month number was 2.2%. We don’t expect the year’s number to surpass 2.3%, just above the midpoint of the Central Bank target range. The policy interest rate is likely to remain unchanged at the next policy interest rate meeting on December 13th.

The government tapped international debt markets at the end of November, issuing local currency bonds with a 10-year tenor for S/10.35 billion ($2.7 billion, or 1.3% of GDP) with a yield of 5.95%.

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