Peru: No smooth sailing ahead for the new government
April 13, 2018
On 23 March former Vice President Martín Vizcarra became the new president of Peru, following Pedro Kuczynski’s resignation two days earlier to avoid a second impeachment vote. Kuczynski had come under renewed pressure over alleged links with the Brazilian firm Odebrecht, in a far-reaching corruption scandal. The orderly transition of power should limit temporary economic disruptions related to the upheaval, and Vizcarra’s consensus-generating figure should help ease tensions and foster political stability, at least in the short term. Moreover, the pro-market, technocratic profile of his government could help the country address structural difficulties that are holding back growth. That said, the need for broad parliamentary agreement in congress suggests that the approval of much-needed fiscal and economic measures, which are key to improving the economy’s medium-term outlook, remains complicated.
Vizcarra inherits an economy that is gaining strength, supported by expanding credit and a scaling-up of public investment, which had slowed in March due to political instability. In the absence of further political turmoil, the economy should continue to expand at its current moderate, below-potential pace. The extent to which growth can gain further steam will depend on how fast infrastructure spending is undertaken and private investment is mobilized; political stability is essential to achieving this. During the difficult 18 months in which Kuczynski governed, he had trouble passing legislation. Congress was dominated by FP, a fujimorista opposition party led by Keiko Fujimori, which was determined to weaken Kuczynski politically.
The new cabinet has a strong technocratic profile. It will be led by Prime Minister César Villanueva, a member of the opposition who had led efforts to impeach Kuczynski. The new Minister of Economy and Finance, David Tuesta Cárdena is pro-market. Tuesta plans to lower current public spending to free up resources and expand productive investment, while keeping the fiscal deficit under control. Edmer Trujillo, an experienced civil servant, was appointed in the important role of Minister of Transport and Communications, suggesting he will continue post-Coastal El Niño reconstruction efforts. If Trujillo and Tuesta manage to implement their spending programs, public infrastructure should improve, boosting the economy.
Peru GDP Forecast
A stable political environment is crucial to promoting private investment and ensuring that public infrastructure is modernized, thus increasing growth potential. However, the lack of a parliamentary majority in the Vizcarra government could result in further political instability, which would weigh on growth. LatinFocus Consensus Forecast panelists expect GDP will expand 3.7% in 2018, which is unchanged from last month’s projection. For 2019, the panel expects the economy to grow 3.8%.