2021-07-29-牛津经济研究院-Peru_Castillo_risks_are_more_in_the_optics_than_the_agenda_3页_206kb

Summary of Peru Economic Briefing (July 27, 2021)

Political Context

Pedro Castillo, Peru's president-elect, faces significant challenges in enacting his agenda due to a fragmented Congress. His party, Peru Libre, holds 37 seats but needs 66 for a simple majority. Constitutional barriers, such as autonomy of the Central Bank and fiscal rules, further limit legislative actions. Castillo's populist measures, like raising the minimum wage and increasing subsidies, are possible early in his term, but broader reforms are unlikely without congressional support.

Economic Background

Peru suffered a severe 11% GDP decline in 2020, driven by the pandemic. Health system weaknesses and high informality exacerbated economic fragility, leading to widespread job losses and closures. The economy remains heavily dollarized, with over 27% of private loans in foreign currency, increasing vulnerability.

Key Risks and Impacts

• Castillo risking investor confidence loss could cause sol devaluation to 4.50/$1, rising external debt to 45% of GDP, which strains households and firms.
• Without confidence recovery, private consumption and investment may stagnate, delaying GDP per capita recovery to pre-pandemic levels until 2023 or later.
• Increased debt service costs and inflation risks could prompt Central Bank rate hikes, further complicating economic stabilization.
  Overall, while Castillo's election is more symbolic than substantive, the unaddressed economic challenges pose severe risks if confidence is not regained.