Election risk in the spotlight; economy to grow by 3.2% in 2025, and 3% in 2026; BCRP likely to extend its policy pause through April
In this report, we discuss our most recent forecasts. We first elaborate our political scenarios, and argue that there’s a downside risk in the run-up to first-round national elections in April. We have increased the probability of our low case scenario to 30%, reduced the chance of our base case scenario to 40%, and have kept unchanged our high case, at 30%.
Next, we discuss our economic scenarios, to which we have assigned probabilities that correspond to the respective political scenarios. Better-than-expected recent economic performance justifies the forecast revisions to our base case. We now forecast real GDP to grow 3.2% in 2025, 3% in 2026 and 3.2% in 2027. Most of the additional dynamism reflects better than expected private expenditure performance, while government and trade have taken a back seat.
Government finances now pose the greatest macro risk, while external accounts are driving the strong currency, and offering indirect stimulus to the economy. Although the officially-calculated fiscal deficit would meet the 2.2% of GDP fiscal rule this year, and 2.4% in 2026 -- above the government’s 1.8% target -- close inspection of the fiscal accounts indicates that this assumption excludes defense expenditures, and Congress’ expenditure bills. We estimate the true deficit, including defense expenditure, to be 3.3% in 2025. In 2026 we expect this to be much wider than the official 1.8% fiscal rule, at 4.1%. A side effect will be an increase in the net debt to GDP ratio, from 22.5% this year to 30.1% in 2029.
Our forecast projects that the balance of payments will remain in surplus, adding substantial dollar flows to the economy, sustaining the strong currency and inducing a positive net wealth effect on private consumers. We forecast this surplus to reach 3.1% of GDP this year, before gradually easing over the forecast horizon, to 2.2% in 2029.
Finally, as widely expected, the board of the Banco Central de Reserva del Perú kept its policy rate unchanged at its December 11 meeting. But the question is: when will the board cut rates in response to lower-than-expected inflation, and the strong currency? The BCRP has offered several justifications for keeping its rates at 4.25%, but our perception is that its preference for higher rates reflects higher anticipated political risk.
We have tweaked most of our financial variables, and now project higher terms of trade, a stronger currency and lower inflation. Should the high scenario materialize, the risk of a local asset-price rally would be high. We have revised down our post-election asset price forecasts, although we expect some volatility during the election period.
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