Sturdy fundamentals, political headwinds

Peru’s macroeconomic fundamentals are among the strongest in Latin America: The export-oriented country has a low public debt-to-GDP ratio, a rules-based fiscal policy, a flexible exchange rate, large foreign reserves and a credible central bank. Despite these strengths, the country faced a challenging year in 2023, when it entered a technical recession, with the real GDP contraction estimated at around -0.6%. This was the result of the ongoing political instability that has plagued the country since the ouster of then-President Pedro Castillo in 2022. While the intense anti-government protests that followed have largely subsided, the political atmosphere remains tense. President Dina Boluarte, Castillo’s successor, is expected to remain in office until the end of her term (in 2026), but her tenure is overshadowed by widespread unpopularity and is sustained by a fragile coalition. This political uncertainty, compounded by the negative impact of Castillo’s presidency on the business environment, continues to impede Peru’s economic stability and growth. Additionally, the country’s exposure to extreme weather events has further complicated the economic landscape. In 2023, El Niño weighed on fishing, agriculture and related industries.

In spite of these hurdles, Peru’s economic outlook shows signs of improvement, with real growth projected to rise to +2% in 2024 and +2.5% in 2025. This expected rebound is driven in part by disinflation, with average inflation forecasted to fall from 6.3% in 2023 to 3% in 2024. As a result of this trend, the Banco Central de Reserva del Perú (BCRP) is likely to continue its monetary easing policy that began in September 2023, offering further support to the economy. However, agricultural disruptions caused by El Niño pose a risk to these projections. Increased prices resulting from such disruptions could hinder the disinflation process and potentially prevent the BCRP from keeping the pace of monetary policy easing.

In recent years, Peru’s business environment has navigated through a period of significant challenges. The tenure of ousted President Pedro Castillo led to a marked deterioration, with his hard-left platform frequently clashing with the private sector. The repercussions of this, including the halting of large-scale projects by firms, continue to affect Peru’s economic performance into 2023. Although President Boluarte has adopted a more business-friendly stance, her tenuous grip on power and dependence on a fragile coalition government imply that only modest progress can be anticipated in improving the business environment.

Despite these challenges, Peru’s business environment remains relatively strong, albeit with a decline in its global and regional rankings in recent years. The country’s openness to foreign trade is a significant advantage, but this also introduces vulnerabilities, particularly due to its high dependence on Chinese demand and on commodity exports. This reliance can be problematic as it exposes the economy to external shocks, such as fluctuations in Chinese market demands or changes in commodity prices. Peru also exhibits strengths in areas such as registering property, managing construction permits, facilitating credit access and investor protection. Nevertheless, substantial gaps persist, especially in the ease of starting a business and tax payment processes. The political environment, marked by instability and uncertainty, further constrains progress in these areas. Moreover, concerns regarding the rule of law and control of corruption are significant and underscore the urgent need for concerted efforts to refine the business climate.