A president under pressure
The government has started to feel the brunt of increased demands for action in several public policy areas, intensified by an abnormal El Niño-driven rainy season that has demanded the special attention of most of the Cabinet. The idea that President Martin Vizcarra has made the fight against corruption the hallmark of his government, at the expense of urgently needed reforms, to keep his popularity high, has gained greater credence.
A cooperation deal signed to address the Odebrecht corruption case has heightened political tension, as company officials are to be granted immunity from prosecution in Peru in exchange for testifying about payoffs to local public officials and politicians during the construction of four projects. Odebrecht has agreed to pay fines of S/760 million ($230 million) in installments over 15 years, plus some $135 million in taxes owed, and additional moratorium interest. The deal has been widely criticized as too benign, and too limited, since, at least for now, it covers only four projects.
The administration’s lack of action in tackling urgent public issues has dented Vizcarra’s popularity. The 5pp decline in his approval rating, to 58%, has been accentuated by the opposition’s accusations of lack of transparency over the Odebrecht case. The opposition has pointed out that a company owned by Vizcarra and his brother had been awarded many public contracts while Vizcarra was Minister of Transport, and even after he was sworn in as president. A perceived lack of diligence in dealing with recent climatic events is another issue.
A major component of judiciary reform championed by Vizcarra was finally approved. It involves creating a body charged with appointing and removing judges and prosecutors.
December growth came in slightly lower than we expected (at 4.7% vs. 4.9%), but 2018 nonetheless ended with growth of 4%. This healthy growth was bolstered by the exceptionally high performance of fisheries, and solid growth in non-primary activity, linked to a 4.3% rise in domestic demand. This in turn was helped by higher private investment, particularly in mining. Government investments and private consumption also grew significantly. Domestic demand expansion is expected to be the main driver for growth again this year. We are maintaining our growth forecast for 2019, and think the economy could again grow by about 3.8%.
We continue to see the Central Bank maintaining its expansive monetary stance. Inflationary expectations are still anchored at 2.5%, and the monetary authorities think they could decline. Inflation had remained at 2% in February. Moreover, a more dovish Fed stance encourages Peru’s Central Bank to delay any rate hike, to stave off further appreciation. The Bank is unlikely to hike by more than 50bp, and only during H2.
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