Macchu Picchu Peru

Peru Politics October 2019

Peru: President Vizcarra unexpectedly dissolves Congress; heightened political instability set to rock economy

On 30 September, President Martín Vizcarra announced his decision to dissolve Congress and called for snap parliamentary elections to be held on 26 January, escalating the level of political conflict amid gridlock between the president and Congress. After a short-lived challenge to his leadership faded, the president hastily replaced his cabinet on 3 October, although the new appointments should not affect the direction of policymaking. Meanwhile, the frenzied political juncture underscores the high level of political uncertainty, which has seen prolonged political spats delay the pace of reforms this year and further drag on below-potential economic growth. The volatile political environment will likely continue to hamper confidence and delay reforms until a working relationship is restored between the executive and legislative branches.

The clash between Vizcarra and the opposition Fujimori-controlled Congress has been dragging on for the past year, and revolves around reforms to the political and judicial systems strongly desired by Vizcarra. Among other measures, the president has tried to introduce term limits for Congress, cap campaign donations and modify parliamentary immunity, which he says are needed to fight corruption; however, Congress has so far managed to dodge these measures, arguing that they will weaken Peru’s democracy. The tensions preceding the president’s decision to dissolve Congress revolved around the composition of the Constitutional Court. Following the dismissal of Congress, some legislators called Vizcarra’s action illegal and vowed to ask the country’s top court to intervene.

Commenting on the likely effects of the latest political events on the performance of the economy, Diego W. Pereira and Lucila Barbeito, economists at JPMorgan, noted:

“Given the political developments, we now trim 2019 GDP lower to 2.5%y/y (from 2.8%, previously). We believe the private sector reaction to this scenario is straightforward: to postpone investment amid political uncertainty, with likely business confidence the timeliest gauge for the behavior. Relatedly, the political developments clearly add downside risks to public sector capex, which adds to the negative fiscal thrust this year […]. But we will also focus on consumers’ confidence. The perennial political gridlock so far has not reverted in financial markets, which from a macro perspective can be linked to consumers’ intertemporal savings allocation (the discount rate of the economy). But the accumulation of political distress in the system may start to affect consumers’ behavior, and thus financial markets. In all, the output gap is likely to widen further.”

Looking ahead, it is unclear how events will play out. Early legislative elections could strengthen Vizcarra’s political hand if a more aligned Congress is voted in, which would allow for easier passage of bills; however, much remains uncertain. In the meantime, while Congress is dismissed, politics will remain at the forefront and legislation stalled. Furthermore, the overall tense political environment will likely continue to impact confidence.

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