Stalking Elusive Recovery
In our scenario, business confidence will strengthen only a bit in coming months, then rally after the April 2016 general elections. We believe the next government will pursue market-friendly policies, and build alliances in Congress geared to passing urgent structural reforms. That would also pave the way for better social conflict management.
Growth improved in Q2, but ended H1 at a disappointing 2.4% y/y. Stronger Q2 performance was mainly due to recovery in primary activities, despite falling public and private investment. We expect mild growth improvement in H2, due to more infrastructure works, and an uptick in subnational governments’ investment. We project 2015 GDP growth at 2.6%, though a particularly strong El Niño (but mainly affecting 2016) and electoral uncertainty are downside risks.
Growth should improve to 3.5% for 2016, as the Las Bambas mining project comes online, and the Constancia and Toromocho mines have their first year of full capacity. Growth could be even higher in later years, with big expansions of the Cerro Verde and Toquepala mines due. And we expect better performance of non-primary activities.
Headline 12-month inflation has been near the upper boundary of Central Bank’s target range of 3% since 2014, but inflation has recently risen to 4%. We expect 2015 depreciation of the sol to be at least 13%.
Even assuming mild recovery in commodity prices from very low levels in mid-August, we expect terms of trade to decline by 5.3% this year, and 2016 export prices to remain flat, for a 1.2% terms of trade decline.
Fiscal revenues are on track to plunge almost 10% in real terms this year, due to tax cuts, lower mineral prices and weaker GDP growth. For 2016 and beyond, government tax revenues probably won’t rise significantly; they could even decline further.
Prime Minister Pedro Cateriano’s good performance has curbed President Ollanta Humala’s inclination toward adopting populist measures in the hope of gaining a few seats in the next Congress. Yet Cateriano has been unable to impede congressional proposals to involve Petroperu in upstream operations, though barred by law last year.
The probability of an outsider presidential candidate coming to the fore can never be ruled out, though Keiko Fujimori continues to lead in the polls, with 30% of voter intentions, followed by Pedro Pablo Kuczynski with 17%, and Alan Garcia with just 6%.
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