Navigating amid icebergs

PERU - Forecast 11 Apr 2019 by Roberto Abusada and Jose Valderrama

We expect more modest growth in Q1, after a robust Q4 2018. Nor does Q2 look very promising, especially should the blockade of the road impeding Las Bambas mega copper mine operations persist. Las Bambas represents 20% of Peruvian copper production, and its paralysis could affect 1% of monthly GDP. Yet we expect H2 will bring a growth rebound, driven by higher dynamism of primary activity, with the planned expansion of the Toquepala copper mine and the Marcona Iron ore operation, while non primary production remains strong. A relative rebound in subnational investment was seen in March, and expected to gain momentum in H2.​

So our 2019 growth forecast remains at 3.8%, assuming a prompt resolution of the Las Bambas conflict, and no eruption of other mine-obstructing activity​.

The Central Bank intervened moderately in the currency market so far this year. But the Bank continues to express its willingness to intervene much more strongly, if the currency grows volatile, or appreciates significantly​.

We don’t expect the Bank to raise its policy rate, long maintained at 2.75%, as the Bank sees inflationary expectations firmly anchored, coupled with the appreciation trend and the less contractive stance by the Fed and other central banks. We assume no more than a 25 bp rise towards yearend. Moderate hikes afterward could bring the rate to 3.75% by 2022, which the Bank considers neutral.

Despite the increase in Peru’s export prices from H2 2018, we still forecast a small decline in average prices for this year (-0.8%). Nevertheless, declines in the price of oil and other import prices lead us to expect almost flat terms of trade this year, and mild declines in ensuing years. The CAD is expected to rise to 1.7% this year, and to keep rising, but to stay below 2% of GDP. The fiscal deficit is to stay at about 2% of GDP.

After seeing his popularity soar after his confrontation with Congress, and his successful public appeal for a referendum to undertake sweeping political and judicial reforms, President Vizcarra is now confronting serious difficulties. These are linked to a widespread perception that his government is failing to address daily problems, such as violence, public health and frustrating delays in public investment, particularly in rebuilding after the 2017 El Niño-driven damage. His government’s inability to deal with the two-month-old Las Bambas conflict is also seen as a sign of weakness. His recent change of prime ministers, and reshuffle of more than half of his cabinet, unsurprisingly, didn’t help him.
The general public disaffection with politicians, and the fact that the two major political parties have fallen into severe crisis, poses several challenges in the runup to the 2021 general elections. No major political figure from PPK group or Fuerza Popular is likely to run, making the emergence of a right or left-leaning outsider a real possibility.

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