Political instability is likely to continue after the formation of a new government.
The fiscal purse strings are expected to be eased before the 2024 elections.
Social disruption can lead to election submission.
What happened: On December 7, former President Pedro Castillo attempted to seize absolute power by dissolving parliament and declaring a state of emergency. Castillo aimed to prevent Congress from voting to impeach him. The impeachment initiative, the third in a year, was promoted by the center-right opposition on charges of “permanent moral incapacity” after several investigations opened by the judiciary against Castillo. The military, police, and his cabinet refused to support Castillo, who was removed from his post as president and arrested hours later. Subsequently, former Vice President Dina Boulwart was sworn in as president.
On December 10, Boulwart appointed a moderate government led by Prime Minister Pedro Miguel Angulo. However, violent protests by Castillo’s supporters led the new president to appoint Alberto Otarola as the new Prime Minister shortly thereafter. Economist and former Deputy Finance Minister Alex Contreras has been confirmed as Finance Minister. Under strong social pressure to call snap elections and in an effort to end the political crisis, in late December Congress gave tentative approval to a constitutional reform to hold elections in April 2024, two years ahead of schedule. While Peru’s Congress approved a vote of confidence in the government on January 10, violent demonstrations continue.
Economic Outcome: It appears that the impact of political and social unrest will be particularly noticeable in December and January, but will continue later in 2023. Transport disruptions are likely to hurt the mining sector and activity in general. Moreover, more than half of H1 travel bookings were canceled due to the unrest, dealing a major blow to the vital tourism industry. In addition, private investment will be held back by weak business sentiment, despite the moderate ministerial team. The offshore account balance and local currency can also suffer. In late January, the new government passed a Bn5.9 billion (US$1.5 billion) stimulus package, including infrastructure spending, subsidies and credit relief in order to support the economy. However, these measures are unlikely to fully offset the blow inflicted by social and political unrest. More spending to appease the protesters and boost activism is possible in the future.
The political outcome: The Cabinet remains shaky due to pro-Castillo protests, and additional riots could force Congress to move forward with elections. The resignation of members of the government – including the president herself – is also on the table if the protests continue. Therefore, major shifts in politics cannot be expected in such a turbulent environment, and the government is likely to be constrained to manage the daily complex political and economic situation before new elections.
Commenting on the country’s economic outlook, Diego W. Pereira, economic and political researcher at JPMorgan, stated:
On the macroeconomic front, private capital spending is likely to grow below its potential as we go through this new and drawn-out electoral process, which corresponds to below-par economic growth. On the fiscal side, we expect pressure to increase spending in the future, particularly emanating from Congress, particularly if lawmakers are able to move forward with their re-election or reforms to the bicameral Congress.”
Meanwhile, analysts at the Economist Intelligence Unit noted the risks of escalating the protests:
“Our basic view is that Congress will eventually agree to a constitutional reform to enable early elections, but there is a risk that it will backtrack and back down. In this adverse scenario, politically destabilizing protests will erupt again, possibly forcing Boulwart to resign. Under the constitution, he will become president.” Congress is acting president and will have to call snap elections, which could happen as early as the fourth quarter of 2023.”
Following the latest political and social developments, FocusEconomics analysts have decided to lower their GDP growth forecast for 2023. Growth is now expected at 2.2%, down 0.1 percentage point from last month’s forecast. In 2024, the economy is expected to regain strength and expand by 2.7%.