Keiko Leading, PPK Keeps Fighting
Two pro-market presidential candidates are competing in the June 5th runoff, after an April 10th first round that also gave Keiko Fujimori’s party a comfortable congressional majority, of 73 seats out of 130. Her opponent Pedro Pablo Kuczynski drew only 18 congressional seats, but narrowly trounced leftist candidate Veronika Mendoza, though Mendoza’s Frente Amplio won 20 seats in the new Congress. The results ended the fears of many citizens, especially in the business community, that Mendoza might beat Kuczynski to the runoff.
In the last weeks, Fujimori has been winning momentum, and all pollsters show her leading by about 5 pp. Although it’s not rare to witness important changes in the last week before elections. At this point we put the probability for the PPK victory at around 30%
The eventual victor will be forced to address the bitterness this campaign has surely engendered. If Fujimori wins, she’ll have to seek consensus (though she technically doesn’t need to) to avoid being cast as an authoritarian, and be forced to deal with hostility in the streets, a situation Mendoza and her backers would welcome. And Fujimori would need to adopt a consensual stance if she hopes to persuade Peruvians to embrace urgently needed structural reforms. If Kuczynski wins, he’ll need to seek an entente with Fujimori’s party, or risk a totally deadlocked government.
Both candidates agree on the need for a fiscal impulse, via public sector salary hikes, greater investment outlays and aid to small firms. Fujimori’s team intends to implement such measures through support to micro firms, and more public investment. Kuczynski is proposing to both increase spending, and to cut the VAT from the current 18% to 15% over three years.
Both candidates’ economic teams seem to worry that such spending policies could give the impression of fiscal irresponsibility—and so talk about eventual return to a deficit of no more than 1% of GDP in the medium-term. Yet it could be tough to reign in the deficit without drastic changes in fiscal policy, which would have serious political consequences.
GDP grew 3.7% y/y in March, accumulating a 4.4% growth in Q1—almost equal to our 4.5% May 6th Quarterly Report forecast. Strong primary activity performance, driven by mining exports, was aided by mild improvement in non-primary sectors. Government spending is growing, and private consumption is sound, but private investment remains anemic. Leading indicators support a Q2 growth forecast of only slightly higher than 3%.
Mild currency depreciation is bound to lower inflationary expectations. Barring resumption of strong depreciation pressure, the Central Bank should keep its policy rate unchanged at 4.25%, probably until at least July. But we can’t rule out a 25 bp increase, if the Fed raises its own rate.
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