Public applauds crackdown on the political class

PERU - Report 17 May 2019 by Roberto Abusada and Jose Valderrama

All four Peruvian ex-presidents since 2001, a Lima ex-mayor and several regional governors are being investigated in relation to contributions from Brazilian construction firms. Prosecutors have secured information from such firms under arrangements providing immunity to their officials in return for collaboration. Many prominent figures, including President Martín Vizcarra, have voiced opinions against the indiscriminate use of preliminary arrests with its very long detention rulings. However, wide segments of the media and the public are so far applauding prosecutors’ approach.

The intervention of top political authorities finally solved the social conflict involving the large Las Bambas copper mine. The conflict caused a two-month road blockade that impeded exporting production, but created only a relatively small disruption of production. Unfortunately, in negotiating a solution, the government repeated its past behavior of giving in to demands, by conceding benefits to the local peasant communities while turning a blind eye to their illegal blockage of a national road. The terms of the conflict resolution are not clear, and the government’s handling of the situation makes it more likely that similar conflicts at Las Bambas or other mining districts will flare up in the future.

Relations between Congress and the executive branch have been tense recently. The government has voiced its disagreement with the slow pace at which Congress is discussing some 12 draft laws based on an experts’ commission to enact a widespread political reform. The legislative proposals deal with measures to reduce the number of political parties, institute a runoff for congressional elections, changes in the immunity rules affecting members of Congress, and changes in the conditions under which cabinet members could be impeached or censured. The government wants the political reform to be completed in time for the 2021 general election.

Growth during Q1 has been disappointing. Average growth in Q1 was only 2.3% y/y. Leading indicators for April point to a growth rate of at most 2.5%. Now we believe growth could reach our 3.8% forecast for the year only in a very optimistic scenario. A 3.5% is likely a more realistic estimate.

Plans for non-financial government expenditures in 2020 reflect the government’s expansionary stance. Outlays are to increase by 6% in real terms, including a 13% hike in public investment. We, along with other analysts, believe that spending could be even higher.

We are targeting inflation at 2.3% for end of the year, not far from the 2% midpoint of the Central Bank’s target range. Given currency appreciation in Q1, more foreign investors are moving to cover their sol positions in the forwards market.

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