Vizcarra triumphed despite legal transgressions
The legality of President Martín Vizcarra’s dissolution of Congress has been considered fraught, with legal experts citing elements of constitutional violation. But the idea of dismissing Congress is supported by some 85% of the public, and by the Armed Forces and police. International organizations, especially the Organization of American States, have not condemned Vizcarra’s action (the OAS stated that the issue had to be considered by the Constitutional Court, and “saluted” the immediate call for congressional elections).
We consider the dissolution of Congress a fait accompli. The electoral body is ready to conduct January 26th elections. The government has meanwhile named a new Cabinet, which looks much like the last Cabinet. Until the new Congress is sworn in, the government can rule via executive order.
The next Congress will be very fragmented (legally more than 20 parties may participate), but could introduce important legislation, including constitutional amendments. Leftist parties seem divided, but may manage to form voting blocs on specific issues. The main concern regarding the economy is the possibility of a new Congress modifying the current economic model which is enshrined in the Constitution.
Though we cannot rule out potential contagion from events in Ecuador and Chile, we doubt social unrest will break out in Peru. Current social conflicts surrounding mining could be influenced, though.
We expect growth in H2 to be much stronger than in H1. Growth at 3.4% in August was somewhat lower than expected; growth in Q3 will be just under 3.5%, and better than in Q4, due to the base comparison with Q4 2018, when the economy grew by 4.7%. We’ve cut our growth forecast for 2019, to around 2.5% (in our August 7th Forecast). The worsening global growth scenario and the political noise in the wake of the dissolution of Congress will bring heightened uncertainty likely to be detrimental to growth, particularly in 2020 and 2021.
Continuing world trade tensions and domestic political uncertainties lead us to judge next year’s official estimates as overoptimistic. The Central Bank expects 3.8% growth 2020; we think it is unlikely to top 3%. We also see the Bank lowering its policy rate by 25 bp in Q4 – and another 25 bp probably in 2010.
The 2020 budget will go forward. But the government is allowed to introduce revisions before the end of November. New Finance Minister Maria Antonieta Alva did approve a reallocation of some funds related to projects unlikely to be disbursed this year toward other projects with a higher likelihood of execution– particularly items linked to infrastructure maintenance. The reallocated funds came to under 0.2% of GDP (S/ 1.1 billion). This measure is likely to have some impact, however small, and we’ve incorporated it into our Q4 growth and fiscal deficit forecasts, the latter still targeted at 2% of GDP.
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