The end approaches for Castillo; inflation remains stubbornly high

PERU - Report 12 Jul 2022 by Alfredo Thorne

In this report, we discuss how long President Pedro Castillo is likely to remain in office; examine the link between private consumption and mass drawdowns from pension funds; and look at Peru’s inflation performance. With Peru’s commodity prices falling and political risk rising, we have decided to keep our real GDP growth forecasts unchanged, although we acknowledge some upside risk on the back of increased withdrawals from pension funds, and additional cash transfers aimed at offsetting the impact of inflation on the consumer.

With inflation showing no sign of easing, we have revised our 2022 year-end inflation forecast to 6.5% from 5.7% oya, and our year-end 2023 forecast to 3.4% from 3%. We have also factored in increased monetary tightening, and now forecast that the Banco Central de Reserva del Perú will increase its rates to 7% in December 2022, before cutting rates to 5.5% in December 2023, amid the risk of global recession.

Recent developments indicate that the end is approaching for Castillo. Although he has effectively become a lame-duck president, predicting the precise timing of his departure, or what exactly will trigger it, is difficult. He appears to be entangled in a web of embezzlement scandals from which he is finding it difficult to deflect the public gaze. We assign a 50% possibility that he will either resign or be ousted from the presidency in the next three to six months, and certainly well ahead of the scheduled July 28th, 2026 end of his term. That the stars are aligned for Castillo’s departure — or, at least, that the majority in Congress believes them to be — is indicated by the intensive negotiations around extending the current legislative session to July 15th, and to schedule the election of the next president of Congress for July 28th. Although, at this stage, they are only rumors, some believe that Castillo could be ousted after July 28th, Independence Day, when the new president of Congress is to take over.

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