A respite after the storm
Pressure on Education Minister Marilu Martens to resign, in the wake of a protracted teachers’ strike, ended up leading to the resignation of Prime Minister Fernando Zavala and his entire cabinet, after Zavala’s call for a vote of confidence over the issue backfired. Within 48 hours, President Pedro Pablo Kuczynski had named a new cabinet, elevating Mercedes Araoz, a member of Congress within his party, to prime minister, and changing five cabinet ministers (Martens among them).
The Araoz appointment has been well received, including by the opposition. An economist by training, she has ample political experience, and is likely to foster dialogue with Congress. Ex-Economy Vice Minister Claudia Cooper was named minister, which also reinforced business confidence. Most analysts hope that relations with Congress will now improve. These developments have also helped boost the president’s low approval rating, at least for now.
But the overwhelming majority held by the opposition in Congress, and a presidency with feeble representation there, leaves the scene ripe for future conflicts, especially with regional elections set for in 2018. Kuczynski is bent on granting a pardon for jailed ex-President Alberto Fujimori. Though that could in theory help soothe relationship, the pardon is a bone of contention within the majority Fuerza Popular party.
With the effects of El Niño over, the Peruvian economy has started to recover, helped by higher metal prices and an expansive macroeconomic policy. We see signs of improved business confidence. But the recovery won’t be reflected in Q3 GDP growth, because primary activity growth has leveled off, as large mining projects commissioned last year have reached maximum capacity, and the fisheries sector completed its recovery, and non-primary activities still show an uneven performance. We expect Q3 GDP to come in at 2.1%, similar to Q1 and Q2. We expect Q4 growth to be higher, and about 2.5% for the year.
After spiking in August, monthly inflation was nil in September (-0.02% m/m), pushing the 12-month headline inflation down to 2.9%, within the 1% to 3% Central Bank range. Inflation is likely to end the year at 2.5%.
The Central Bank cut its policy rate by 25 bp to 3.5% on September 14th, arguing that recovery is still incipient. We don’t foresee a further rate cut for the rest of the year, barring a lack of a rebound in demand. Cooper is determined to continue her predecessor’s policy of boosting public investment, and public investment will likely continue to rebound impressively in H2, despite fiscal revenues haven’t yet recovered as expected.
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