Gripped by political uncertainty
We project 2019 growth at just 2.6%, but deterioration of the political situation, and the perception that an anti-system candidate could become the next president, could further damage growth prospects. In addition, international turbulence could affect emerging countries, including Peru. On the positive side, mining investment continues to be brisk, up more than 20% this year, and new mining projects will soon enter full swing. We are also more optimistic than most analysts about a public investment rebound in H2, to temper the H1 plunge; public investment could end the year up 1%.
President Martín Vizcarra’s gambit, in demanding Congress approve his proposal to advance elections by one year to April 2020, has been supported by parties on the left, which could attain a greater presence in the next Congress. So H1 2020 will likely bring a decline in private investment, though primary sectors may keep rebounding. We foresee a growth rate slightly below potential growth (3.4% vs. 3.5%), but with a clear downside risk. Our forecast is far below the 3% official target.
For subsequent years, we see the economy growing at or slightly above potential growth. In 2022, it will benefit from the commissioning of the large projects now under construction, but the effect of the surge on mining investment will cease. The probability of new large mining projects being developed has plummeted, after the government’s failure to resolve social conflicts, impeding the construction of the Tia Maria mine. Vizcarra’s announcement of a new general mining law adds another element of uncertainty.
This year we’ll see a further decline in the total-investment-to-GDP ratio, with the slight recovery expected in subsequent years unlikely to reach the 23% average of the past 10 years.
We expect the Central Bank to cut its policy rate by 50 bp this year: by 25 bp in August, and by another 25 bp no later than October. Barring a worsening in the political climate, or a strong sol depreciation, we don’t foresee any rate hike until 2021.
The trade surplus shrank substantially in H1 (almost 40% from H1 2018), caused by a decline in both volume and prices of exports. In 2019 and subsequent years we see the CAD hovering around the equivalent of 2% GDP.
If the referendum approves early elections (as will almost surely happen), Vizcarra will be better positioned to govern. But already-dwindling business confidence will only worsen. Many believe a far right candidate, or worse, an anti-system individual, could win the presidency, or acquire a significant share in a new Congress. Too, the notion that the Constitution could be changed so easily could encourage those who want to change the basic tenets of the market-friendly economic model, or weaken constitutional checks and balances.
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