Elections and second infection wave are key risks to outlook
The Jurado Nacional de Elecciones last week approved 18 out of 23 registered political parties that had submitted candidate slates for the April 11th presidential and congressional elections. The number of participants may change, either because some of the rejected parties successfully appeal the JNE’s decision, or because some of the approved parties fail to provide evidence of their wealth, income, or educational degrees. In any event, this may well prove to an election with one of the largest candidate rosters, close to the size of the candidate pool for the 1995 election, when 14 political parties participated -- or even the 2006 election, when there were 20.
Calling the election results from such a big pool is risky. Yet previous election contests indicate that the two front-runners that will make the runoff in early June are likely to be among the top six candidates in the most recent polls. The odds of a new candidate creating an upset and making it to the second round are limited; he or she would have to attract most of the undecided and void votes recorded in the most recent polls -- and that’s highly unlikely.
Yet narrowing the electoral contest to the top six candidates provides limited insight into the April 11th election result. Based on previous electoral outcomes, we believe that there are three possible scenarios: a strong mandate, fragmentation, and polarization. In light of the recent political brinkmanship, the most desirable outcome would be for one political party to win a strong mandate — a reasonably large advantage in the presidential runoff, and a substantive number of legislators in Congress. This had been the norm in Peru since 2001, the only exception being the 2016 election, when voters gave a narrow advantage in the presidential vote to Pedro Pablo Kuczynski, but a large majority in Congress (73 out of 130 seats) to Fuerza Popular, the opposition party led by Keiko Fujimori. Barring a recurrence of this situation, voters giving a strong mandate would strengthen governability and enable the president to pass critical reforms in Congress. The fact that former footballer and current mayor of La Victoria George Forsyth is well ahead of the other candidates in the polls offers some hope of this outcome.
Following the deep recession resulting from the strict lockdown that started in mid-March, in May the Peruvian economy began rebounding, prompted by commercial reopening. We have adjusted our forecasts to account for the surprisingly rapid economic rebound, which has outpaced most other countries in the region. We estimate that the economy fell by 11.7% y/y in 2020, revised up from the 12% y/y fall forecast in our previous report, and the 13.7% y/y fall forecast in our October report. We are also maintaining our forecast of a 9.7% y/y rebound for 2021, slightly lower than the 11.1% y/y forecast in October; and, for 2022, we are starting with a positive outlook, indicating the continuation of the economic recovery, with real GDP advancing by 5.4% y/y.
This notwithstanding, as we have argued in previous reports, the y/y real GDP comparisons may prove misleading, and fail to capture the gains within individual quarters. Using the seasonally adjusted real GDP series, it is apparent that most of the recovery we are forecasting for 2021 already took place in H2 2020. For instance, comparing the December seasonally adjusted real GDP growth figure with the full-year average for 2020, it is apparent that the former is 10.8 percentage points higher than the latter. This indicates that our 2021 real GDP growth forecast anticipates a relatively flat performance during the year, and that true recovery will not occur until 2022, when we forecast real GDP to add new growth gains and advance by 5.4% y/y. This is contingent on the government’s having achieved full control of the pandemic by then, through a mass vaccination campaign covering the general population.
To provide greater insight into our forecast, we will discuss the three areas that have experienced the most extensive revisions: aggregate demand components, the external sector and public finances. On aggregate demand components, most of the forecast revisions in 2020 have focused on total investment and on exports of goods and services. The new forecast anticipates a more moderate contraction, in both private and government investment.
The external sector is the other area that has experienced the most extensive revisions. The current account balance has been revised upward for 2020 and 2021, and is expected to begin a normalization trend in 2022. The 2020 balance has been revised up to a surplus of $1.35 billion, from -$154 million previously; to widen in 2021 to $207 million from a previous fall of -$3.5 billion; and, in 2022, to reach $37 million. As a share of GDP, the current account balance will reach 0.7% of GDP in 2020, 0.1% in 2021 and 0% in 2022 (from -1.5% in 2019). That the economy is operating well below its potential following the economic recession, and the highly accommodative global monetary stance explains the large swings in the current account balance.
Forecasts for public sector finances indicate a gradual retreat of the highly accommodative stance first adopted in 2020. We are revising slightly our overall fiscal deficit estimate for 2020 (in accord with the Banco Central de la Reserva del Perú, BCRP) to 8.6% of GDP, from 8.7% previously, but we now assume a much faster rate of fiscal consolidation, to 4.4% in 2021 from 9.2% previously, and a preliminary forecast of a 3% of GDP deficit for 2022. Using the BCRP’s estimate of a structural deficit, it is interesting to note that the overall 2020 figure is consistent with a 3.1% of GDP structural deficit and a highly stimulatory stance, which then narrows to 1% in 2021 and -0.2% in 2022, on the assumption that the government will remove the fiscal stimulus in 2022.
A notable feature of the recent period of political volatility has been the resilience of local and external market performance. Compared to those of its regional peers, Peru’s local and global debt indicators have performed well. The only exception to this is the PEN/US$ exchange rate, which has absorbed most of the volatility but, even here, the spot closed 2020 at PEN3.62:US$1. There are two drivers at play that may justify this performance. One is relative performance against other emerging markets credits. Although Peru has used a substantial amount of its fiscal space, relative to its benchmarks it remains a low-leveraged country. This notwithstanding, global excess liquidity has put pressure on investors, and most credits have outperformed: Peru isn’t the only one.
Now read on...
Register to sample a report