Boluarte fights to boost her popularity; pension reform proposal advances; real GDP to fall 0.5% in 2023, then rebound 1.7% in 2024
We discuss three key topics in this report. First, we assess the attempt by President Dina Boluarte to boost her public popularity, and discuss the deinstitutionalization of Peruvian society, with reference to recent opinion polls. Next we examine Congress’s proposal to allow workers to further withdraw from their pension funds, and discuss the government-proposed pension reform. Finally, we discuss Peru’s economic performance, and our new forecast, which projects real growth to fall 0.5% in 2023, before advancing 1.7% in 2024.
In politics, we examine the most recent failed attempt by the left-wing political parties to impeach Boluarte. Although general elections are still more than two years away, recent polls confirm significant social deinstitutionalization, indicating that the instruments adopted to keep the population united and generate democratic consensus have lost effectiveness. One side effect is an increased possibility that the next president will be a political outsider, as has been the case in Argentina and Ecuador in the past two weeks. The positive aspect is that the 2019 referendum approved open primary elections for all political parties, to be implemented for the 2026 elections. This may thin the field ahead of the general elections, ruling out politically inexperienced candidates.
There are about 15 different draft laws authorizing a seventh withdrawal from existing pension funds (the government authorized the previous six during the pandemic). At a time of recession, such a move appeals to the average worker, and our view is that it will be approved before year end.
Finance Minister Alex Contreras has proposed a multi-pillar reform. The proposed reform isn’t particularly radical, overall. Changes include a raising of the minimum pension; registering all workers over 18 in either the state-run pension scheme or a private pension scheme; and offering matched-contribution pensions to induce in particular self-employed and informal workers to save for retirement. Essentially, this loads up the pension system with subsidies to ensure the population is protected for retirement. Yet reforming the pension system is much more challenging than it was in 2017, when the government last proposed a reform. Of the approximately 18 million-strong labor force, only 30% contribute to a state or private pension scheme; the remaining 70% are unregistered or self-employed workers. Moreover, as of October 2023, only 10% of those registered as contributing workers had PEN4,950 ($1,296) or more in their accounts. The other 90% had insufficient funds to qualify for a pension.
The main message from the recent high-frequency reports is that the economy continued in recession in Q2 2023 (as of this writing, Contreras acknowledged that the economy had fallen into recession, and he was preparing a policy response.) Although we had expected a flat Q3, and some rebound in Q4, this forecast proved optimistic in light of the July and August real GDP reports, which confirmed that growth fell by 1.3% oya and 0.6% oya, respectively, in these months. Our revised forecast projects the economy contracting by 0.8% in Q3; and by 0.2% in Q4; only turning slightly positive, by 0.3%, in Q1 2024.
On the q/q, seasonally adjusted annualized comparison (arguably a better gauge, given the swings in the business cycle), real GDP is forecast to advance 0.6% in Q3 2023; 4.7% in Q4; and to then fall again, by 3%, in Q1 2024, in response to the el niño weather shock, which is expected that quarter. Economic recovery is expected to start in earnest in Q2 2024, when GDP is expected to gain 3.2%, then gain momentum in H2 2024, with 5.3% growth.
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