Scandals and Accusations Everywhere

PERU - Report 10 Mar 2017 by Roberto Abusada and joval

The Odebrecht affair continues to stir havoc in politics and the economy. Besides the imprisonment of a former Alan Garcia administration vice minister, and the arrest warrant for ex-President Alejandro Toledo, new accusations have surfaced suggesting that ex-President Ollanta Humala’s wife Nadine Heredia received at least $3 million from Odebrecht, prompted by ex-president Luiz Ignacio Lula da Silva, as a contribution to Humala’s 2011 presidential campaign.

In fact, all three of the most recent presidents are under suspicion of receiving funds from Odebrecht. The company was responsible for major infrastructure works in Peru from 2004-2016, and has admitted to delivering $29 million in bribes to high Peruvian officials. We expect further revelations. These events will undoubtedly undermine the government’s ability to increase investment. GDP growth will depend to a great extent on the rate of investment increase, which over the past three years has fallen to less than 22.8% of GDP, from its 2013 26.5% peak.

The Kuczynski administration has gone to great lengths to separate itself from the scandals. But public criticism over the handling of another big construction project, the building of a new airport in Cusco, has resulted in the interpellation of the transport minister Martin Vizcarra. These cases have hurt the popularity of the president, and politicians in general.

We expect January GDP growth to hover around 4.5% y/y, on the back of still two-digit growth (of about 13%) in primary activities. This high growth is mainly due to a sustained rebound in fisheries and hydrocarbons. Also, metals production continues strong, with new mines already reaching full capacity. But non-primary activities remain sluggish.

We expect much lower growth for February and March, and hence of about 3% for Q1, because of the waning effects of mining output, and the lack of signs of rebound in non-primary activities. More worrisome is the dearth of evidence supporting a rebound in private investment, which has continued to fall strongly in January and February.

Sol appreciation in January and February is attributable particularly to the increased demand for local currency-denominated assets by international institutional investors and, to a lesser extent, by lower hedging in the forward market. Despite some reversal on this trend so far in March, both local financial institutions and the monetary authorities are growing less convinced of strong trend reversal, given the rise in commodity prices. While Peru and other Latin American countries suffer from fallout surrounding the Odebrecht scandal, we suspect political uncertainties in Europe and the United States could delay a strong reversion of the revaluation.

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