Tumultuous Campaign
After the turbulent weeks surrounding the campaign for the April 10th presidential election, the electoral tribunal at last decided to disqualify candidates Cesar Acuña and Julio Guzman, citing irregularities in both candidacies.
It’s not yet clear which candidates will benefit most from their disqualifications, but Keiko Fujimori and Pedro Pablo Kuczynski are likely best positioned to gain. Only five of the still-numerous candidates have a real chance of reaching the second round. A GfK poll taken between February 27th and March 1st found that Fujimori, Kuczynski, Barnechea and Mendoza would now see their support increase to 37.7%, 10.1%, 6.7% and 5.6%, respectively. A Datum poll published on March 10th produced similar rankings, of 37%, 14%, 9% and 8%.
A Fujimori-Kuczynski runoff would be marked by widespread anti-Fujimori sentiment. Nobel Prize-winner Mario Vargas Llosa has already announced that he would campaign to prevent Fujimori from winning, as he did by supporting President Humala in 2011.
Growth came in at a surprising 6.4% y/y last December, raising growth to 3.3% for the year. Though much lower than envisaged at the end of 2014, growth was better than the recent consensus, which projected a 2.6%-2.9% rise. Preliminary data points to still-high growth for Q1, around 4% y/y, benefitting from the continuing rise in primary activity growth. We see January GDP growth at 3.5%, accelerating in February to more than 5%, and by about 3.5% in March. We are now assuming 2016 growth at least 3%, and it could near the 4% envisaged by the Central Bank.
We don’t expect a return to strong depreciation now, with March the start of the tax regularization process, forcing economic agents to get rid of foreign currency to fulfill their obligations. But electoral uncertainty and global volatility could rekindle depreciation.
The Central Bank has raised its policy rate by a cumulative 75 bp since last September, to the current 4.25%. Analysts’ inflationary expectations still stand at 3.5%, implying a real interest rate of just 0.75%. The Bank kept its policy rate unchanged at its March 10th meeting, but we think it will tighten at its April 14th meeting, just after the presidential election runoff.
The 2016 fiscal deficit is likely to exceed the 2015 2.1% figure, so the next administration will tackle the tough task of trying to return to lower deficit in the medium-term. To finance the future deficit, the Humala administration tapped international markets for one billion of euros last February, and concluded negotiations with the World Bank of two deferred drawdown options for $2.5 billion.
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