Institutional crisis should end positively; the economy set to rebound in H2 2024; asset prices likely to remain well supported
This forecast discusses three topics. First, it examines the likely outcome of the institutional crisis confronting the Judiciary, Executive, and Legislative branches. Second, we discuss our economic forecasts. We take stock of recent performance, then present our forecasts for three possible scenarios: low, base and high. We also discuss our government finances forecast. Lastly, we introduce our market asset-prices forecast, and argue that, in the base case, asset prices would remain well-bid.
The political crisis took another turn for the worse on November 27th, and affected all three independent constitutional institutions: the Judiciary, Congress, and the Executive branch. In the past, we’ve seen confrontation between Congress and the Executive branch, but not among all three simultaneously. In early December, when the issue erupted, we expected a full-fledged political crisis but, having had time to reflect, we believe there could be a beneficial outcome, if this upheaval results in greater transparency. We retain our forecast that President Dina Boluarte will stay in office until July 2026, but she may be forced to reshuffle her Cabinet in early 2024. We also foresee a possible restructuring of the Ministerio Publico Fiscalia de la Nación (MPFN, the Attorney General’s Office), following the appointment of a new Attorney General.
Against a backdrop of such great uncertainty, we have adjusted our growth and inflation forecasts. Our current forecasts project real GDP falling 0.6% in 2023; advancing 1.7% in 2024; and then rising 2.8% in 2025; and 3% in 2026. This is slightly different from the forecasts offered in our previous forecast report in September, when we projected a GDP increase of 0.8%, followed by 2.4% and 3% in the subsequent years.
Government finances are another area that deserves attention. We now forecast a wider overall fiscal deficit. While we retain our 2023 fiscal deficit estimate at 3% of GDP, we have widened our 2024 forecast to 2.8%, from 2.5%; and for 2025 to 2.5%, from 2%; then for 2026 by 2%, from 1.5%. All of these forecasts are wider than the fiscal rule to which the government committed, of 2.4%, 2%, 1.5% and 1%, respectively. On November 30th Congress approved the government’s 2024 budget, justifying an update to the government finances forecast.
Despite the high current political risk, and global central banks’ hiking interest rates, we believe that market asset prices will remain strong overall through 2026, in our base case scenario. We expect the BCRP Board to hike once more this week, and then to enter a brief policy pause, until the El Niño effect on inflation in Q1 2024 becomes clearer.
Now read on...
Register to sample a report