Accusations Fly in as Elections Near

PERU - Report 11 Aug 2015 by Roberto Abusada

President Ollanta Humala’s confrontational attitude toward the opposition has compounded his party’s problems, after it lost its congressional majority. The uncovering of wrongdoing related to campaign financing and favoritism in the awarding of contracts to individuals and firms linked to the presidential couple is now being exposed by opposition leaders. The first lady is herself being investigated for charges of money laundering, and over her relationship with ex-Humala campaign advisor Martin Belaunde-Lossio, who is now in jail for money laundering and the illegal awarding of public works.

Though this looks like a wild year for Humala, certain events might help him in his last year. First, Luis Iberico, the new speaker of Congress, has signaled his willingness to forge a consensus to allow the adoption of several important reforms, especially to reinforce the party system, and to allow more transparent elections. Second, Prime Minister Pedro Cateriano has vowed to work with the opposition to avoid populist measures, and to resume efforts to allow Tia Maria to begin construction. And the government has been granted legislative powers to deal with the economic slowdown, and to cope with crime.

GDP growth was a disappointing 1.2% y/y in May, on the back of slow recovery in primary activities, and more importantly due to puny performance of non-primary sectors. But leading indicators point to stronger growth in June. We expect Q2 to be similar to our previous projections, of 2.9%.

Fiscal revenues have tumbled further than expected, and we don’t expect significant improvement in H2. First, the base comparison with 2014 revenues is high. Second, the depreciation of the sol is depressing the profits of dollar-indebted firms, and therefore lowering their tax obligations—while the plunge in the stock market shows that current and future earnings will also likely decrease. And if commodity prices continue falling, income revenue from minerals will be lower, both this year, and more concertedly in 2016. Total current revenues could fall by least 2 pp of GDP vs. 2014—that is, 0.5 pp of GDP lower than our forecast in our May Quarterly Outlook. We do not expect an improvement in the fiscal position of the government in the coming years.

Headline inflation for July was 0.45% m/m, brining the 12-month rate to 3.56%, slightly higher than in June. Surprisingly, most of the price increase in July was not attributed to food items but to the increase in water and electricity utilities. The high rate of core inflation, at 0.6% m/m and 3.36% y/y in July, was more worrisome. This is the first time core inflation has exceeded the Central Bank’s target band (1-3%) since mid-2009. While the Bank will probably still claim that the increase in inflation stems from supply shocks, we think it will adopt a less expansive monetary stance. We don’t expect it to increase in its policy rate, but it will expand less liquidity to commercial banks.

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