Castillo against the wall; further downside economic risks; Central Bank to deliver two more 50-bp shots

PERU - Report 12 Apr 2022 by Alfredo Thorne

​Faced with widespread nationwide protests, and after his advisors warned of possible serious disturbances in Lima, President Pedro Castillo delivered an April 5th midnight speech, during which he imposed an immediate 22-hour curfew in Lima and Callao. The demonstrations had begun on March 28th, with transportation workers protesting fuel price hikes, and farmers the higher cost of fertilizers.

In our March report, we argued that two developments could push Castillo up against the wall, and eventually force him to resign. The first was massive street mobilizations fueled by popular discontent with poor economic performance and government mismanagement; the second was the president’s involvement in investigations by the Ministerio Público, Fiscalía de la Nación (MPFN, the Attorney General’s office) into the allocation of public works contracts to contractors with close personal links to the president, and investigations into the financing of Castillo’s 2021 presidential campaign.

Unfortunately for Castillo, the current political crisis has hit the economy hard, and the population will feel significant hardship in the months to come. Moreover, the high rate of informality in the Peruvian economy prevents the policy measures that Castillo has so far relied upon from benefiting the general public. Take the 10% minimum wage increase: according to our estimates, only 500,000 workers of a labor force of 17 million stand to benefit from it. Moreover, while the excise and VAT tax cuts introduced by the government in April should prevent further hikes in gasoline and other fuel prices, they may not translate into lower transport prices for the general population, being more to the benefit of producers than consumers. It is apparent that the only instrument that is effective in reaching out directly to the low-income population is targeted income transfers, an option that the government has so far been less keen to take.

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