Peru's Economy Seems to Be On the Road to Recovery, But It's a Bumpy Road

Last year was a tough year for Peru. First, there was the social unrest that resulted from the ousting of then-President Pedro Castillo. Then there were the climate-related shocks caused by El Niño. These phenomena were potent enough to cause a 0.6 percent contraction in Peru's GDP, one of the worst in the past thirty years, pandemic notwithstanding. At least for now, it looks like Peru's economy is on the mend. According to an International Monetary Fund (IMF) report released this past Tuesday, Peru's economy is projected to create a GDP over 2 percent starting in 2024 (p. 36). 

In spite of Peru's heightened inflation in 2023, Peru's contractionary monetary policy brought the inflation back down. Even with a shortfall in tax revenue, Peru was still able to keep its debt-to-GDP ratio low (IMF, p. 8) with its prudent fiscal policy (OECD), which is more than can be said for the United States. A favorable debt structure will at least help Peru not deal with any near-term financing pressures. The financial sector also remains strong with adequate capital, liquidity, and profitability (ibid.). There is also to be a strong recovery in fishing and agriculture, as well as a boost in the mining industry (IMF, p. 10). 

Although there are multiple factors in favor of recovery, there is one that is still getting in the way of economic progress: political turmoil. It is the reason why the credit rating agency Standard & Poor's downgraded Peru's credit rating last month to BBB-. Political gridlock and social unrest do a bang-up job of undermining both the government and economy's ability to perform. Since 2018, there have been six presidents, three Congresses, and 150 cabinet shuffles (Fitch). Ousting Pedro Castillo did not exactly give President Dina Boluatre a strong mandate to rule, especially with a weak representation in Peruvian Congress. It will be at least be before the next presidential elections in 2026 when Peru can see political stability once more. This in turn limits the government's ability to implement policies that boost investment and economic growth. Political stability would go a long way in ensuring investor confidence. 

While things are mainly looking promising, political instability creates a big unknown for how that recovery will look. Peru nevertheless has a history of corruption, weak institutions, and political unrest, as previously illustrated even in the past few years. Hopefully, Peru can pull itself out of its 2023 rut and develop macroeconomic stability for long-term growth. 

Sources Used

• Banco Central de Perú. Notas de Estudios. 
• BBVA Research. Peru Economic Outlook: March 2024.
• Fitch Ratings. Fitch Affirms Peru at 'BBB'; Outlook Negative.
• Heritage Foundation. Peru. 
• International Monetary Fund. 2024 Article IV Consultation. 
• OECD Economic Surveys: Peru 2023.