Vizcarra governing unhindered
Elections for a new Congress are set for January 26th, after President Martín Vizcarra’s dissolution of Congress in September. Though the government is in the interim empowered to issue executive orders that have the same validity as law, we doubt it will enact any significant reforms this way, beyond ruling on certain popular measures, such as raising the minimum wage.
The next Congress is likely to be quite fragmented – and, alarmingly, could be of even lower quality than the last. A recent publication found that over 200 of current congressional candidates had received criminal sentences. Though some 22 political parties have presented candidates, we project that only seven parties will obtain the more than 5% tally required to win representation. Keiko Fujimori’s Fuerza Popular will probably be represented, though in a much smaller way (Fujimori was released from jail last week, after the Constitutional Tribunal ruled her preventive incarceration unconstitutional). Parties likely to strengthen their representation include Accion Popular, ex-president Fernando Belaunde’s old party; the new Morado (purple) party, headed by Julio Guzman; and two other parties from the left. It’s unclear whether Apra will win enough votes to gain representation.
Vizcarra should be able to continue his purported “campaign against corruption,” which many political analysts think smacks of an effort to neutralize old political parties, and to weaken congressional power. He may, for example, enact populist measures to stave off contagion by street protests flaring up in neighboring countries. The president still enjoys strong popularity, with approval ratings of nearly 60% – an unusually high number after two years in office. But this figure is likely to fall if, as is likely, the government continues to be perceived as lacking in managerial skills to deal with urgent needs in health, education, crime and public investment. Slowdown in economic and employment growth will also tend to drive Vizcarra’s popularity lower.
GDP growth in September, at 2.2% y/y, was much lower than expected, on the heels of poor performance in primary activities, especially in mining. We project 2019 growth at 2.4%, and 2020 growth at 3%.
The Central Bank, as expected, cut the interest rate by 25 bp, to 2.25%. The possibility and timing of further cuts is uncertain.
We see inflation at the end of 2019 in the 1.9%-2% range, while the core figure will be three tenths of one percent higher. Hence, inflation will practically hit the midpoint of the Central Bank’s target range. Inflationary expectations for the coming 12 months remain anchored at 2.2%.
The sol has been volatile, yet far more stable than other Latin American currencies, with a 0.6% ytd depreciation against the dollar.
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