A new battle cry
The short-lived calm after Martín Vizcarra’s assumption of the presidency was shattered by the president’s bold July 28th Independence Day speech, in which he proposed controversial reforms to address the major ongoing judicial scandal. The president’s proposals include change in the political regime – such as to ban congressional representatives from running for consecutive terms, and a requirement that parties submit gender-balanced slates – were widely regarded as a challenge to Congress, and a way for Vizcarra to position himself at the forefront of public anger. He has scheduled an October 7th public referendum on his proposals. Predictably, his popularity rating soared by more than 10 p.p., while Congress’ ratings continued to drop, as did those of opposition party leader Keiko Fujimori.
Despite ample popular support for the four proposed constitutional changes (outlined below), it’s unlikely that all will be submitted for referendum this year. Political reform, likely to require extensive debate in Congress, is unlikely to be decided before Q1 2019.
GDP grew 5.4% in Q2, driven by strong recovery in agriculture and fisheries. Domestic demand was also a factor, and the rise in investment is reflected in strong construction sector performance. Very high Q2 growth was helped by the results of April and May, but June’s figure came in at just 2%, with the plunge attributed to a decline in mining and fisheries.
We envision Q3 2018 growth of 2.7%. Q4 could be better, with a strong second fishing season and the start of production of the enlargements of Toquepala and Marcona mines. Public investment hopefully could also contribute to an almost 4% growth in Q4, which would put yearly GDP growth in line with our 3.8% forecast — and not very different than the 4% official estimate.
The government’s proposed budget now aims to lower deficit of 3% in 2019, from 3.5% target stated before, due to higher fiscal revenues. The intent is to knock it down to 1% by 2021, but we believe that would require both tax hikes and spending cuts. Budget financing for 2019 is to include a $1.5 billion bond issue likely to take place soon.
Recent emerging markets volatility and dollar appreciation have had only a moderate effect on Peruvian assets. The sol lost just 1% against the dollar in August, though it depreciated in early September. The small Lima Stock Exchange index did drop more significantly.
We expect modest inflation for September (of below 0.2%), and a substantial increase in the headline 12-month number, of 1.3% for September, and 2.3% by December.
As inflation is still close to the midpoint of the Central Bank’s target range, we think the Bank will likely wait until next year to consider a rate change.
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