Castillo fights back; wider fiscal and current account deficits; and weaker currency expected in 2023
In this forecast report, we discuss President Pedro Castillo’s prospects for political survival. We then move on to our economic forecast, and review our predictions for growth, government finances and the balance of payments. We also discuss the recovery plan launched by Finance Minister Kurt Burneo on September 8th. Finally, we discuss our market forecasts, and the monetary policy outlook.
While Castillo has fought back, we argue that, in order to defend himself effectively, he has dug himself into a deeper hole, and may still have to resign in early 2023. Our political forecast is largely unchanged. Although Burneo’s program may boost growth this year and next, the economy has already entered a new deceleration phase. Moreover, the program may give rise to a wider fiscal deficit, and we have also revised up our current account deficit projection, on the basis of large corporates’ transferring higher dividends abroad.
On markets, we maintain most of the forecasts we made in our June forecast report, although we are allowing for increased weakness of the currency next year. We reaffirm our view that the Banco Central de Reserva del Perú’s Board will deliver one more 25 bp hike in October, and then pause at 7%. Next year, we expect it to cut rates, bringing the policy rate to 5.5%.
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