Castillo on a razor’s edge; Burneo warns of recession; BCRP likely to pause at 7%
We focus on three topics in this report. First, we discuss the likelihood of President Pedro Castillo’s resigning on the back of investigations conducted by the Ministerio Público Fiscalía de la Nación (MPFN, the Attorney General’s Office). Second, we explain the recent changes to our growth forecast, which predict faster growth in 2022, at 2.5%, but lower growth in 2023, at 2.2%. We also discuss claims by new Finance and Economy Minister Kurt Burneo that the economy may fall into recession, and what he proposes to do about it. Third, we discuss at which rate the Central Bank is likely to pause. We argue that the BCRP’s Board is likely to deliver two more 25-basis-point shots, and pause at 7%, and that the Bank should start easing in 2023, with the rate ending that year at 5.5%
The developments of the last two weeks indicate that Castillo is experiencing the most difficult period of his presidency. Pressures on the president to resign have mounted, as his popular support has dwindled. Although, before this point, he managed to relieve the pressure on himself, at least to the extent that he can continue in office, the scale of his fight for survival this time around is more daunting. In fact, one can argue that he has lost most of his legitimacy, and has become a “dead-alive” president. The uncertainty lies in what will be required to tip the balance, and to finally force his resignation.
There are four possibilities. The least likely at present is Castillo’s impeachment by Congress, which the latter has already twice attempted unsuccessfully. The second possibility is that Castillo will be forced out by popular opinion; both sides have threatened to appeal to popular movements to support their political objectives. The next possibility—and, in our opinion, the most likely—is that the MPFN’s investigations will force the president to resign. For this to happen, the MPFN must present evidence that Castillo is the leader of a criminal organization that has embezzled from public works projects. One final possibility is that Castillo’s main defense will be validated: that is, that the Constitution grants the president legal protection. However, the Supreme Court has already ruled that such protection extends to court sentencing but not to the investigation phase. Some lawyers now argue that should Castillo continue to evade the investigations, the MPFN can call for a judicial order to instruct a judicial suspension.
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