ANDEAN ECONOMIES: POLITICAL DEVELOPMENTS LIE AT THE HEART OF MACRO PROJECTIONS

Daniel Velandia / Chief Economist of Credicorp Capital

Daniel Velandia
Daniel Velandia

The region continues to adjust to a new scenario marked by lower commodity prices and slower global growth. That said, we expect Andean economies (i.e. Chile, Colombia and Peru) to post a faster pace of expansion next yearled by a recovery in private investment amid the expectation of higher confidence levels and a more supportive external environment. We project that the Peruvian economy will exhibit the highest GDP growth rate in the region in 2017 at 4.2% (2016F: 3.7%) driven by higher infrastructure investment as unlocking key large-scale projects that have been delayed for different reasons(e.g. the 2ndLine of the Lima Metro, the Southern gas pipeline and Lima airport) is one of the main goals of the new government. The approval of special legislative powers to the government for 90 days by the Congress and a recovery in sentiment by local agents in the last months, support this view. Likewise, factors as the proposed cut in VAT from 18% to 17% in 2017 and the fall in inflation will provide support to private consumption. All in all, non-primary sectors are expected to gain traction next year after the significant contribution of mining to growth in 2016.

On its part, the Colombian economy would post an expansion close to 2.7% in 2017 (2016F: 2.3%) mainly as a result of the positive impact of both the 4G infrastructure program and higher public investment. As to the former, 30 road projects have been awarded so far, with 17 of them having already reached the financial close; thus, we estimate that the effective execution of some of these projects may contribute up to 0.7pp to GDP growth next year. On the other hand, it is worth to mention that 2016 is the first year of the local and regional governments’ terms, leading to slow dynamism in public spending due to the usual operational learning process, a situation that typically changes in their second year of mandate (i.e. 2017).

Finally, we project that the Chilean economy will accelerate from ~1.5% in 2016 to 2.2% next year amidst the expectation of a gradual recovery in sentiment, the positive effect of low-for-long interest rates, and a stabilization of the labor market, factors that should create the scenario for a rebound in investment in a context of stabilization of the mining sector, which has continued to be a drag on growth. In general, the absence of significant fiscal and external unbalances implies that favorable conditions are present for the Chilean economy to gradually achieve growth rates closer to its potential in the upcoming years.Beyond all these country-specific factors, a gradual recovery in global economy and particularly, in main trading partners, should contribute to better prospects for the Andean economies ahead.

Having said all this, the relevance of politics for the future performance of economic activity in the three countries cannot be overstated. In Peru, while recent political developments have been positive (i.e. the granting of special legislative powers to the new government), it must be recalled that PPK’s party holds a minority of only 18 out of 130 seats in Congress. Our base case assumes that the Fuerza Popular party, which is led by Keiko Fujimori and holds a majority in Congress, will adopt a collaborative stance with the government in economic-related issues once Fujimori’s proposals on campaign in this regard were similar to those of PPK’s, while her participation in the 2021 elections cannot be ruled out. However, it does not necessarily mean that all economic proposals would be approved easily. In addition, to get the approval of other matters in Congress may prove harder, requiring political negotiation, so that the relationship between the two parties will be a factor to keep an eye on.

In the case of Colombia, the attention is focused on the approval of the long-awaited tax reform amid a tougher political environment caused by the NO victory in the peace deal’s plebiscite on October 2nd. We think that political incentives are aligned for the approval of the tax bill as: i) the approved 2017 budget, which excludes fresh revenues from a tax reform, entails no growth in real terms with investment falling 2.2%; thus, a tax reform would allow to introduce budget additions, which should be in the interest of Congressman as 2017 is a pre-electoral year, typically characterized by strong public spending; and ii) both presidential and congressional elections will be held in 2018, which should encourage political parties to take right now the proper measures that allow this huge fiscal issue to be solved by then. Regarding the peace deal, the current stage can be tough and even slow as it evolves negotiations among the government, the NO supporters, and the FARC,with time being a key factor as the bilateral ceasefire could not be maintained indefinitely amid no clear legal conditions for FARC militants. That said, we highlight that the government has recently mentioned that a new agreement could be reached before year-end.

Finally, current administration in Chile struggles with low popularity levels and lack of control over the political agenda; accordingly, attention is shifting to presidential elections (Nov-17) with the right-wing opposition looking competitive after October county elections, in which the right-leaning “Chile Vamos” emerged as the big winner with 38.5% of total votes against 37% for the ruling coalition, implying a heavy defeat for the left-wing “New Majority”. This leads us to believe that no additional initiatives will gain traction in Congress during this mandate, though the attention will be focused on the pension reform discussion in the upcoming months as it has gathered a lot of interest from the public. In general, proposals by candidates during next year’s presidential race should be a key factor for business sentiment.Former presidents Piñera and Lagos appear as front runners, but it is too early to tell. Coming from different political backgrounds, both names are moderate figures that would be very well received, in our view.

All in all, we think that conditions exist for a higher dynamism in activity in Andean economies in the upcoming years. In any case, politics will play a key role for this view to effectively materialize. Currently, political changes are happening in the three countries that may lift animal spirits next year, in our opinion; that said, we must acknowledge that recent developments globally have recalled us that, in politics, anything can happen.

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