Electioneering for 2026 starts early; economy expands into Q2 2024, and government plans for a larger fiscal deficit; we expect the BCRP to resume cuts in October

PERU - Report 16 Jul 2024 by Alfredo Thorne

In this report, we discuss three topics. We observe that the campaign program for the 2026 elections has been brought forward. We then explain that the economic rebound that started in April 2024 was sustained into Q2. Finally, we discuss the drivers of the decision by the Board of the Banco Central de Reserva del Perú (BCRP, the central bank) to extend its policy pause at its July meeting. We predict that the next cut will take place in October, and that the BCRP will deliver three cuts in total before year end.

Although national and regional elections are still around two years away, two events in the past two weeks have moved the electoral calendar forward. First, on July 12th, the window for potential candidates to register with a political party closed. Surprisingly, prior to this, many new candidates came forward. On July 1st, the so-called “Cocktails Trial” against Keiko Fujimori, the leader of the Fuerza Popular political party and its likely presidential candidate, along with 47 other individuals, began.
The main message of recent high-frequency reports is that the economy continued to expand in Q2 2024. Also relevant is Congress’ approval of the government´s delegated legislative faculties, allowing the latter to pass urgent legislation on behalf of the former. With this mandate, the government has passed new legislation raising the overall fiscal deficit target from 2% of GDP to 2.8%.

Against this backdrop, we retain unchanged our real GDP growth forecast of 3% for 2024, 2025 and 2026. However, the government’s decision to set a higher fiscal deficit target, and its pushing back of the long-term fiscal deficit target of 1% to 2028 and convergence with the 30% of GDP gross public sector debt to 2035, increase the risk of another credit rating downgrade. This risk is further exacerbated by the fact that two out of the big three credit rating firms already accord Peru a negative sovereign credit rating outlook.

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