Efforts and Frustrations
Toward the end of his first hundred days in office, President Pedro Pablo Kuczynski’s popularity has declined significantly. This is partly due to natural impatience over the government’s seeming slowness in addressing top public concerns, such as the economy and security. But two other reasons are clearly of PPK’s own making. First, health advisor Carlos Moreno was caught mounting a scheme whereby he and fellow physicians would route public health system patients to their private practice. While Moreno was quickly dismissed, and accused by a government prosecutor, the president was accused of bad judgment. A second damaging event took place at the Las Bambas mega-mine, where members of surrounding communities blocked the exit route.
Congress elected the remaining three members of the board of the Central Bank, while the president and the other three members were selected by the executive branch. The choices have provoked widespread opposition by the left and the media, due to the appointees’ strong links with the majority party in Congress. But Central Bank Governor Julio Velarde expressed firm acceptance of the new members, saying he was ultimately the guarantor of Central Bank independence.
Some 45 legislative decrees related to the economy, security and corruption are expected to be issued, as Congress has granted the executive branch legislative powers for 90 days. Not yet approved is the intended VAT rate cut to 17%, from 18%, desired by the Executive. This proposal has been criticized by most economic analysts, given declining tax revenues; if approved, tax revenues would fall further by about 0.4% of GDP.
After the strong 4.4 y/y growth in Q3, optimism for the months ahead is dwindling, particularly with domestic demand stagnating. We project just 2.8% y/y growth in Q4. Beyond growth (which we expect at 3.9% for the year), private investment is expected to shrink strongly this year, and it seems difficult to see a significant recovery at least before H2 2017. We see the 2016 fiscal deficit at 3% of GDP, or a bit higher.
Headline inflation for October, at 0.41% m/m, was a surprise on the upside. This raised 12-month inflation above the upper limit of the target band, though core inflation remained at the 3% limit. Expectations for 2017 point to 2.6% inflation, though the Bank aims to lower the headline number to the target band midpoint (2%). So we think the Bank will adopt a neutral or slightly more restrictive monetary stance.
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