Castillo makes last-ditch efforts, as economy slows
In this report we discuss the political and economic outlook for Peru. On politics, we argue that President Pedro Castillo is walking a tightrope, and that the probability of his being ousted has increased substantially. In previous reports, we have argued that the preliminary investigation into alleged corruption in relation to the public works scandal could implicate him. On May 27th, Pedro Sánchez, the Attorney General and head of the Ministerio Público, Fiscalía de la Nación, announced that he was including Castillo in the investigations.
We then discuss the legality of investigating the president, given the protection afforded him by the Constitution, and the potential personal and political impact of the investigation. While we suggest that this is the most difficult period yet for the president, and that the chances of his resigning are high, when this could happen is less clear. Should Sánchez find direct evidence of the president’s involvement in corruption, Castillo may be forced to resign -- but this type of investigation typically lasts between three and five years. We expect this delay to lead to renewed political confrontation. Three areas of the political scene merit close attention: how alliances are shaping up in Congress; current popular sentiment, as gauged by opinion polls; and performance of the various parties in the October 2nd local elections.
We then move on to the economy, and offer a revision of our forecasts in light of the impacts of the political crisis, and also geopolitical shocks. We have decided to retain our real GDP growth forecast of 1.7% for 2022 and 2.5% for 2023. In our May report, we argued that three factors justify a slightly lower-than-consensus forecast: the political crisis; protests by local communities in mining areas; and a lower external impulse. Although last week the government reached a truce with the community that occupies the territory surrounding the Las Bambas copper mine, of the 89 open conflicts monitored by the prime minister’s office in March 2022, 55 involve the mining sector.[1] This indicates that mining protests will persist into the medium-to-long term as a driver of economic performance. We then benchmark our forecasts against those of the Ministerio de Economía y Finanzas and the Central Bank. We conclude that the differences between our forecasts and theirs are explained by lower levels of private and government investment and a smaller external impulse, and justify our forecasts based on high-frequency data. Finally, we argue that private consumption offers an upside risk to our overall real-GDP growth forecast.
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