Will Zavala change course on the economy?

1 July 2017

One of the consequences of a minister departing is that disagreements, previously held in reserve, come to the fore. So it seems that the new minister of economy and finance, Fernando Zavala, had clashed with his predecessor, Alfredo Thorne, over macroeconomic policy. Zavala, it now appears, had had deep reservations about Thorne’s fiscal policies, in particular his attempts to rein in public spending at the end of last year when, in Zavela's view, what Peru needed was an injection of fiscal resources into the economy.

The snail-like speed of growth over the first four months of the year would seem to favour the Zavela line. Taking the period between January and the end of April, GDP expanded by 1.58% in relation to the same period in 2016, according to the latest figures from the central bank (BCRP). Looking at the figure just for April, compared with April 2016, growth was 0.17%.

Among the reasons for the slowdown are the effects of flooding earlier this year, the impact of corruption scandals and the result of the unwillingness of investors to invest. In these circumstances, Thorne’s fiscal squeeze seems (in retrospect) ill-advised.

The official growth target for 2017 has been progressively lowered as the year has gone on. The MEF currently predicts 3% (as opposed to a 4.5% prediction at the beginning of the year). But even this looks unlikely. The IMF thinks it will be no more than 2.7%, even assuming a major increase in public investment over the second half of the year. Other forecasters are far less sanguine than this. Many think it will be a minor miracle if GDP expands more than 2% this year (compared with 3.9% in 2016). Some even say it will struggle even to reach 1%.

A slowing economy will mean less job creation and, consequently, reduced consumer demand. It has been the latter that has been the main dynamic in recent years. What is needed is a counter-cyclical increase in public investment. Some of this will come from the money being spent on repairing the damage done by the floods, but, as Humberto Campodonico argues in a lucid piece in La República, there needs to be a thorough revision of the policies of fiscal retrenchment pursued both by Thorne and (before him) Alonso Seguro. Will Zavala respond?

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