Power Game Affecting Recovery
One might have thought that two parties with similar market-friendly views could work harmoniously, and create a fertile environment for reforms to facilitate an eventual government for Keiko Fujimori in the 2021 elections. Instead, this has been a year of acrimonious actions and accusations, and President Pedro Pablo Kuczynski has lost three valuable cabinet members in the process and popularity. Tensions seem to have abated after a meeting between Kuczynski and Fujimori, presumably geared toward a dialogue to improve governance, and to lift sluggish growth. Many analysts think this dialogue will continue, and produce positive results.
On July 27th, Kuczynski made three more cabinet changes. Then in a July 28th speech, a year after his inauguration, he announced the submission of five proposed laws to Congress. These would facilitate expropriations of land and real estate for the completion of major infrastructure works; create an urban transport authority for Metropolitan Lima, to tackle transit chaos; reform the way members of the National Judiciary Council are elected; promote sewage treatment projects; and strengthen SUNAFIL, which enforces corporate labor rules. Kuczynski’s speech was relatively well received, albeit with far less enthusiasm than his inaugural address, and attracted tepid and even critical comments by members of the opposition, as expected.
After the jump in March headline inflation, caused by the El Niño-driven closure of roads, there was a strong downward correction, to below pre-El Niño levels in 12-month terms. Thus, by July, 12-month headline inflation declined to 2.85% y/y, within the inflation target range of the Central Bank, after having been above it for nine months before June.
The sol has continued to appreciate against the dollar, and by 3.5% ytd. We believe this relates not only to the new local currency-denominated bond issue, but to still-high global liquidity, and the market’s appetite for local currency-denominated debt issued by emerging countries. With lower inflation we expect expectations for the next 12 months to decrease further, to show up in the next Bank survey.
The public sector fiscal deficit for the past 12 months was 2.9% of GDP, on the back of a decline in fiscal revenues, and non-financial expenditures. New Finance Minister Fernando Zavala has reiterated the need to continue a strong fiscal impulse for H2, and plans on a 19% H2 public investment increase. That would make the 3% fiscal deficit target for the year difficult to meet. However, we see very difficult that increase in public expenditures, and a deficit near its target of 3% likely.
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