Swimming Upstream
Education Minister Jaime Saavedra, considered by many the most valuable member of President Pedro Pablo Kuczynski’s (PPK) cabinet, was first impeached, then sacked, by the opposition-dominated Congress. While the supposed reason was corruption over computer purchases by lower-level officials, and delays in organizing the 2019 Pan-American Games, the opposition disliked him from the start, as he’d been an Ollanta Humala appointee. There was widespread suspicion that the true motive for his dismissal was a three-year old law he’d supported, requiring government certification of substandard (and very profitable) higher education institutions, many with close links to the opposition parties. The whole tense episode, which provoked demonstrations against Congress’ action, could be interpreted as a show of force by Keiko Fujimori’s Fuerza Popular (FP) party, or more gravely, as the end of a working relationship between the executive branch and Congress. We think PPK and FP will find ways to mend fences, though, and both did accept Cardinal Juan Luis Cipriani’s invitation to talk. The meeting took place on December 19th. In confronting the press after the hour-long encounter both leaders made efforts to transmit their intention to foster a climate of cooperation. Keiko Fujimori also emphasized her party’s commitment to respect the constitutional order in a clear reference to a lingering rumor that FP would be trying to, push to declare the presidency vacant.
PPK’s popularity has declined, though the same happened to his predecessors after their first semesters. The loss of Saavedra came after the resignation of Minister of Defense Mariano Gonzalez, reported to be having an affair with an advisor he’d promoted to a job in his office. Though PPK has presided over both positive and negative events, his honeymoon has abruptly ended.
New data reaffirms low GDP growth, and its dependence on primary activities, especially on mining. Q4 growth will be somewhat lower than 3% y/y, but with very weak growth of non-primary activities, and stagnant domestic demand. On the positive side, the current account deficit has fallen from a worrying 4.8% of GDP in 2015, to 2.3% in Q3, and we think it will be below 2% for Q4.
General government revenues fell strongly (by -7.6%) in November. PPK has promised to cut the VAT from its present 18% to 15% starting with a 1pp decrease starting in 2017, but this has yet to be executed. The new fiscal responsibility law is also still pending, but probably will be issued before the end of the granted legislative power granted by Congress.
Inflation for November was relatively high, for a 12-month headline rate of 3.4%. For December (a month of particularly high inflation) we expect it to be 0.3%-0.4%. We see the 12-month headline inflation rate remaining above the upper boundary of the Central Bank’s target range (1% to 3%) by yearend and in H1 2017. But the core inflation will hover around the 3% upper limit of the Central Bank’s target range. The Fed’s rate hike plans haven’t affected the currency so far, and the sol has devalued only by 1% since Donald Trump’s presidential victory.
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