Election contest tightens; economy surprises on the upside
Less than three weeks before Election Day on June 6th, the second-round runoff between presidential candidates Keiko Fujimori and Pedro Castillo has turned tight. Most opinion polls published over the last four weeks confirm that Castillo has lost much of the strong lead he held at the start of the second round, with 20 percentage points’ difference in the Instituto de Estudios Peruanos (IEP) poll taken on April 17th‒April 21st. In the latest IPSOS poll, published on May 16th and offering a reading of the May 13th‒May 14th period, Castillo garnered 43.6% of the total vote, and Fujimori 41.7%, a 1.9-ppt difference.
It’s difficult to say who will win, although Fujimori has clearly gained momentum, and still has some potential upside. Three trends justify this view. First, there’s the proportion of undecided and void voters – and electoral history shows that this group tends to decrease some weeks before a second-round vote. Second, the number of void and undecided voters was high in Fujimori’s typical strongholds, and she may benefit from a reduction in these votes. Finally, the factor of absentee voters was high in provinces where Castillo had less than 20% of the votes, and a reduction in these votes may also help Fujimori. It is apparent that Fujimori has benefitted from Castillo’s mistakes, and from her campaign team’s positive moves.
Should these dynamics persist, Fujimori will soon become the frontrunner, and win the election. However, we cannot rule out a late aggressive strategy from the Castillo camp. As of this writing, the candidates had agreed to two more debates, and Castillo still has a chance to soften his radical stance, and to demonstrate that he can assemble a credible government. Presenting a respected candidate for the positions of health and finance ministers, who can lay out a program to tackle the pandemic and support an economic recovery, could help him regain momentum. At the equivalent stage of the 2016 runoff, ex-president Pedro Pablo Kuczynski was trailing 10 ppts behind Fujimori, yet still ultimately won the election. Another strategy Castillo may adopt is to hit Fujimori where she is most vulnerable: around the accusations of money laundering made against her, and the related investigations led by the Fiscalía de la Nación (Office of the Public Prosecutor). Fujimori has successfully reduced her rejection rate, but Castillo can still revert this trend. However, these strategies would take time to generate results, and our view is that Fujimori has gained sufficient momentum that, barring serious mistakes during the remainder of her campaign, make her the most likely winner.
March high-frequency economic reports confirmed that the economy outperformed expectations in Q1 2021. Although this was already indicated by February reports, the fact that the second wave of COVID-19 infections and the excess deaths curve were upward-sloping in February indicated that economic activity would lose momentum in March. But this did not happen: March real GDP posted gains of 18.2% y/y, following 4.2% oya in February and -1% oya in January, bringing the quarter as a whole to 3.7% oya — higher than the 0.7% y/y we’d forecast.
As the y/y measure is distorted by the effect on the economy of the lockdown that started on March 16th, 2020, it is advisable to use a seasonally adjusted time series. But so far the Instituto Nacional de Estadística e Informática (INEI, the national statistical institute) hasn’t released the seasonally adjusted estimates.
While political uncertainty is at its peak, in a neutral base-case political scenario, the forecast warrants an upward revision. So we’re revising up our real GDP growth forecast to 13% y/y in 2021, from 8.1% y/y previously, and to 7.4% y/y for 2022, from 5.9% y/y. Most of this revision is justified by the stronger-than-expected Q1 2021 figure. Our core message remains that the economy will decelerate in Q2 2021, on the back of political risk, and re-accelerate in H2 2021, once the vaccine rollout gains momentum.
Both candidates submitted their political platforms to the electoral tribunal at the start of the first round of the campaign, as required by Electoral Law, but their policies have remained vague. Nonetheless, based on these, we have constructed several scenarios of probable economic performance. On the campaign trail, the two candidates have offered additional proposals and, as of this writing, they’ve agreed that their technical teams will hold a debate on May 23rd that will offer each candidate’s more precise proposals for the first 100 days in government.
The two candidates’ economic programs differ radically. Castillo’s is a hardline Marxist-Leninist populist economic program that seeks to impose state control over the means of production. Fujimori’s is a free-market populist economic reform that, while defending the role of the private sector, calls for substantial fiscal expansion geared to specific economic groups. In assessing each program, we offer a “low” and “high” scenario for 2021 and 2022.
Starting with Castillo’s program, drafted by the secretary-general of the Perú Libre party, Vladimir Cerrón, we have two possible interpretations. One is provocative confrontation of democratic institutions and the forced takeover by the state (the low scenario). The high scenario is that, while in government, Castillo transforms himself into a more moderate leftist and breaks with the Cerrón-led radical wing of his party.
It is surprising that almost all the policies proposed by Castillo require the approval of Congress. Although Castillo has signed a democratic agreement and committed to observing the current Constitution, Cerrón has indicated that, should Congress fail to call for a referendum, Perú Libre would shut down Congress and, failing that, would organize street protests until a referendum is called, and a new Constitution drafted. While this sounds daunting, in practice it would look like a communist party trying to take over the state by force, which would be difficult to implement in a democratic nation. Moreover, it should be noted that Perú Libre obtained less than 11% of the total eligible vote, and that it would be difficult to lead an uprising against the institutional order on the basis of such limited support. The message we take from this is that, should Perú Libre insist on this strategy, the economy would grind to a sudden halt.
Fujimori and her Fuerza Popular party would face a different set of challenges. Fujimori’s main disadvantages are her lack of proven democratic credentials, and the public perception that her political party may fail to observe the independence of democratic institutions, such as the judicial system, or others that assure the checks and balances necessary in a democracy. It is apparent that her rivals, a large majority of the center-left population, would move to the opposition in the event of her election.
This opens up two possible scenarios. First, there’s a positive one (the high scenario), where Fujimori implements her campaign commitment to form a democratic government by inviting non-members of Fuerza Popular into her Cabinet and forms a wide coalition in Congress. Congress’ guaranteeing immunity to the president means that the Poder Judicial (the judiciary) would have to postpone her trial until after she leaves office; however, she may have to guarantee full independence of the judiciary and other independent offices. This could yield her immediate political benefits, and open the door to her enacting some structural economic and political reforms, guaranteeing fiscal sustainability and effectively cornering her opponents.
Now read on...
Register to sample a report