Good growth momentum despite political chaos

PERU - Report 22 Jan 2019 by Roberto Abusada and Jose Valderrama

Since winning ample public support in a fall showdown over judicial and political reform, President Martín Vizcarra has successfully positioned himself as Peru’s anti-corruption leader. The leaders of both major opposition parties, Fuerza Popular (FP) and APRA, are now under high-profile investigations that have resulted in a ruling of a preliminary 36-month jail term for FP leader Keiko Fujimori, and in having ex-president Alan Garcia of APRA banned from leaving the country for 18 months. Attorney General Pedro Chavarry, who publicly disagreed with the two prosecutors in charge of these cases, has been forced to resign, after a pro-prosecutor media campaign Vizcarra openly supported. With its leader in jail, FP is now in severe crisis and, with 18 fewer members in Congress, has now lost its absolute majority.

Vizcarra’s popularity could in theory support many urgent structural reforms, but the general feeling is that he’s reluctant to risk his popularity. Such measures would include tackling problems involving labor or conflicts impeding mining mega projects, or creating PPPs for improving infrastructure – and especially addressing the fraught areas of pension or tax reform.

And though very high now, at 63%, the president’s approval ratings may have reached their ceiling.

Staying in his present comfort zone could also prove a flawed strategy over time, if the government is seen as avoiding pro-growth and employment policies. The general feeling is that while the economy is growing adequately, it is immersed in a chaotic political environment filled with permanent accusations, acrimony and the deterioration of FP and APRA. Several splinter groups are being created within Congress, of FP dissidents. With members of Congress now banned from running again in 2021, all sorts of inadequate measures could start to emerge. Additional political noise could also surface if Peruanos por el Kambio (PPK) party pushes for Vizcarra to run again in 2021.

Economic performance during Q4 2018 was even stronger than expected, driven by a strong fishing season and a powerful rebound in public investment. This suggests 4.8% growth for Q4, and 3.9% or even possibly 4%, for 2018.

As expected, December inflation was quite low (0.18%), due to almost flat food prices. So both headline and core 12-month numbers ended the year at 2.2%, just above the midpoint of the Central Bank’s target range. The sol has appreciated by about 1.4% against the dollar so far in 2019, in response to external events (local political conflicts have not had any material effect). As expected, the Bank left its policy rate unchanged at 2.75%, maintaining an expansionary monetary stance. Central Bank authorities do not seem poised to raise rates for now.

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