Boluarte holds on; economy to recover gradually; BCRP’s first rate cut delayed to June
In this report, we offer an update on politics, the economy and the markets. We argue that the government of President Dina Boluarte has gained stability, and that Boluarte has improved her chances of staying in office until the scheduled July 2026 end of her term. On the economy, we argue that exogenous shocks, first from the protests in the south in January, and then from the floods in the north starting in March, have affected growth. It is unclear how quickly the economy will rebound from this mini recession. We suggest that the rebound will be gradual, led by increased government expenditure and rising external demand, while private expenditure will remain subdued. Finally, we have decided to push back our forecast of the start of cuts by the Banco Central de la República del Perú to June, when we expect it to make a 25 bp cut.
Notwithstanding her high disapproval ratings, Boluarte is consolidating governability, and strengthening political stability. Although this stability may prove short-lived, it has already had two beneficial effects. First, it has strengthened Boluarte’s position, making it less likely that she will continue the recent record of presidencies that last for a year or less. This new-found sense of calm could allow Boluarte to remain in office until July 2026, extending her government for another 2½ years. Second, it has allowed her to appoint technocrats to key government positions, meaning that the government can reach out more effectively to the general population. It has also allowed her to dismiss those public servants appointed by her predecessor Pedro Castillo who have become tainted by investigations into alleged Castillo administration corruption and embezzlement. Risks to Boluarte’s government come from the left-wing political parties, who have become her opposition, and the fragility of the support the administration receives from the general public.
It is unclear how the economy will perform in the wake of the protests and floods: will the economy rebound strongly or only moderately? Here, our forecast diverges from that of the BCRP, accounting for the difference in our respective full-year forecasts. While we see the rebound taking effect in earnest from Q3 2023, the BCRP anticipates a quicker rebound, starting in Q2 2023, Another significant question is: What are the drivers of the recovery? Our forecast projects government expenditure and external demand adding to growth, with private expenditure subtracting from it.
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