Boluarte attempts to boost approval ratings; post-election risk falls, but near-term election risk will impact economy; local market rally weakens
We cover three topics in this September forecast report. First, in politics, having adjusted our forecast in August, we now believe with 80% probability that President Dina Boluarte will complete her current term, scheduled to end in July 2026. We examine how Boluarte has attempted to boost her popularity by appointing Juan José Santiváñez as minister of justice and human rights, and by supporting moves to allow further withdrawals from public pension funds. (We believe that this latter move may have backfired on her.)
Next we discuss economic performance. We now expect lower risk, consistent with our forecast that a candidate from the political center will win the next presidential election. Accordingly, we have reduced the probability of our low case occurring, and have increased that of the high case. However, we now forecast increased risk in the months leading up to the April 12, 2026 elections, undermining economic performance. We are keeping unchanged our below-market consensus real GDP forecast of 2.7% for 2025, and 2.6% for 2026.
We also focus on government finances, and review the 2026 budget that the government submitted to Congress on August 30th. While the budget headlines suggest that the government has opted for a tight fiscal policy, close inspection of the details indicates the opposite. We argue that the government has under-reported its headline deficit, by shifting some expenses directly to the financing account.
Finally we discuss the markets, arguing that, while local market performance has surprised on the upside, talk of a surge may be overdone. We expect at least a partial reversal of the rally in the months before the elections. Nevertheless, our forecasts consider the rallying effect to date, and we acknowledge that any reversal may be moderate, given that market expectations are well-anchored.
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