Peru: Will the snap elections bring a new wind?

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Event

Snap elections were held on the 26 January. These snap elections came after years of political gridlock due to clashes between the executive and the legislature. Indeed, the pro-Fujimori Fuerza Popular party (FP), which won an absolute majority of seats in 2016, conflicted regularly with the president. In September last year, the clashes culminated in the dissolution of the legislature by President Vizcarra. The elections of last week produced a highly fragmented Congress. The vote was split amongst 10 parties with no party getting more than 11% of the vote. Furthermore, the FP lost its control over the legislature and won only 7% of the vote. 

Impact

The new balance of power could give Vizcarra a fresh chance to push his package of anti-corruption reforms. Nevertheless, with no party of his own, Vizcarra will need to forge alliances. Moreover, a fractured Congress can cause problems in passing legislation. On top of that, the newly elected legislators can only serve out the current legislative term (ending in July 2021), which can also sustain policy gridlock. That being said, in the past Vizcarra had no party representations either and was able to find support in Congress. 

The new balance of power can also give a boost to the Peruvian economy. The years of political gridlock led to low public investments and dragged down economic growth. That being said, it is especially the trade war between China and the USA that is leaving its marks on the Peruvian economy. Indeed, the Peruvian economy is heavily reliant on metal (copper) exports to both the USA and China (together accounting for more than half of Peruvian exports) and is therefore particularly vulnerable to a slowdown in either market. Hence, real GDP growth is historically quite low at 2.4% and 3.2% respectively in 2019 and 2020, compared to the average annual growth of 4.6% for the past decade.

In the coming year, copper prices, political uncertainty and the trade war will be key for the economic growth. A potential spillover of regional unrest from neighbouring countries (e.g. Chile, Bolivia, Colombia) cannot be excluded, though the country has been a heaven of calm in the past months despite the domestic political turmoil. Additionally, downside risks are mitigated by low public debt (27% of GDP end 2019), large stock of international reserves (covering about a year of import in September 2019), moderate external debt, small current account deficit and a solid financial sector. Hence, short-term political risk (1/7) and medium- to long-term political risk (3/7) have a stable outlook.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com                

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