In August, the business environment deteriorated on three fronts: the public health, political, and economic fronts.
First, the public health crisis worsened this past month, leading the government to reestablish restrictions to human mobility. President Vizcarra adopted two main measures to stop the increase of COVID-19 cases this month: a mandatory nation-wide lockdown on Sundays and the extension of focalized quarantines towards new geographic areas. The impact of quarantines on economic activity will be limited, but the lockdown on Sundays will affect the recovery of lower- income households and of some economic sectors, such as the commerce and restaurants sectors.
Second, the confrontation between Congress and the Executive branch further escalated in August. At the beginning of the month, Congress rejected the vote of confidence requested by Pedro Cateriano’s cabinet. Although it then granted the vote of confidence to the cabinet that followed, tension between both State powers remains high. In fact, since then, Congress has approved the questioning of two ministers in key sectors: education and economy. The confrontation between Congress and the government increases regulatory risk, as it hinders consensus in the creation of laws. As a result, some regulatory proposals from Congress concerning the economy could end up being enacted by Congress without considering, for example, the opinion of the Ministry of Economy and Finance, such as the law which authorizes the reimbursement of public pension system (ONP) contributions of up to 1 tax unit.
Third, the pace of economic recovery weakened in August, following the quick recovery observed in the previous months. This is due mainly to two factors. In first place, economic reopening ceased to move forward, and it is unlikely that it will accelerate in the upcoming months. In second place, the impulse generated in some markets when the quarantine ended, stemming from demand that was unmet during the quarantine, has began to dissipate. As a result of the slowdown in economic recovery, it is unlikely that we will observe significant improvement in the labor market and in the economic situation of families in the remainder of the year.
Looking ahead, it is most likely that the restrictions to individual mobilization and economic activities will remain. It will thus be important for the government to accelerate the execution of public spending to foster economic recovery again.
Last month, we identified four pieces of good news for the business environment: (i) lower prices of certain imported goods, (ii) lower political risk, (iii) improved business confidence, and (iv) some stabilization in local financial variables.
Six months into the administration, signs of an impending deterioration in the relationship between the Executive and Congress are starting to surface.
After a challenging start of the year, characterized by social conflicts and heavy rains, the Peruvian economy has begun to show signs of recovery, albeit at a slow pace.
