Peru Politics March 2016

Peru

Peru: Uncertainty clouds political outlook, but economic risks are limited

March 11, 2016

The political landscape in Peru has changed just weeks prior to the vote 10 April elections. While the economy ended 2015 on a strong note with GDP growth picking up to an over one-year high, recent developments in the Presidential race have clouded the political outlook and sparked doubts over the fairness of the upcoming elections. On 9 March, Peru’s electoral board barred Julio Guzmán, the main opposition to front-runner Keiko Fujimori, over his party’s lack of compliance with electoral procedures. While the result is unlikely to have any impact on the country’s economic prospects—all of the main candidates plan to keep economic policies broadly consistent with the current administration’s policies—uncertainty has increased over the outcome of the vote and has sparked criticism regarding the state of Peru’s democratic institutions. Guzmán had surged in the polls in recent weeks and his exclusion leaves a number of votes up for grabs. While Guzmán has stated that he will fight the ruling, analysts deem it unlikely to be successful. Current President Ollanta Humala is ineligible to run in this election due to term limits.

Despite the recent turmoil, polls continue to point to a victory for Fujimori, although it appears that she will fall short of securing the 50% of the vote needed to avoid a runoff election. Fujimori is the daughter of former President Alberto Fujimori, a controversial figure in the nation who is currently jailed in Peru. While Alberto Fujimori is revered by many for defeating a violent guerrilla insurgency and restoring macroeconomic stability, he is also held in contempt by others for human rights violations and corruption scandals. Keiko Fujimori’s platform is generally fiscally conservative and business friendly. Specifics include a focus on fighting crime, spurring infrastructure development and offering tax breaks to companies to promote hiring young workers.

Regarding economic policies, there are no glaring differences between the leading candidates’ platforms as citizens favor market-oriented policies; this means that risk from the political uncertainty is limited. Commenting on the economic implications, Hugo Perea, Chief Economist for Peru at BBVA Banco Continental, adds:

“We consider that this uncertainty will be more limited than in previous electoral processes, because in general most of the proposals put forward by the candidates leading the polls at least for now are in line with the range of economic policies that the country has already been implementing for several years. Moreover there is almost universal acknowledgement of the need to improve certain aspects that will favour the productivity and competitiveness of the Peruvian economy, such as making it easier for the private sector to do business (by reducing the number of bureaucratic processes and the time and money spent on them, eliminating those that are unnecessary) and continuously pushing education and infrastructure, all of which sounds positive. Our projected baseline scenario assumes that electoral uncertainty, which naturally postpones certain spending decisions and leads to an element of flight-to-safety in less risk assets, will dissipate once the elections are over, allowing business and consumer confidence to increase from then on.”

The incoming president will inherit a healthy economy, especially given the economic turbulence plaguing many of its neighbors in Latin America. However, going forward, a few challenges need to be tackled. Chiefly, managing growth given the low-commodity-price environment and the size of the natural resource sector as well as mitigating conflicts between local communities and mining companies, which have restricted activity in the sector.

Panelists surveyed for this month’s LatinFocus report expect GDP to expand 3.3% in 2016, which is unchanged from last month’s projection. For 2017, the panel expects the economy to increase 4.0%.


Author: Angela Bouzanis, Senior Economist

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