Elections in Peru: how political crises led the country to have a ‘zombie economy’

Experts believe that the growth of the Peruvian economy could be greater Ernesto Benavides via Getty Images Peru, the country that will choose its new president in elections this Sunday (12), has been an example of macroeconomic management for years. Despite the permanent political instability and the constant changes of president in recent years, the country managed to keep its public accounts healthy, attract significant foreign investment, continue growing and maintain the value of its currency. The apparent impermeability of its economy and the swing of Peruvian politics are admired and envied by other Latin American countries, punished by financial turmoil. And they contributed to prolonging the success story that the country began writing at the beginning of this century, when aggressive economic reforms overcame its serious crisis and laid the foundations for decades of GDP expansion. But experts warn that not everything that glitters is gold. And, despite their positive indicators, Peruvians pay a price for political instability and constant changes of government. See the videos that are trending on g1 “This question that Peru’s economy and politics walk on separate lines is a half-truth. There is a point from which politics affects the economy”, economist Armando Mendoza, from the Peruvian Center for Social Studies, explains to BBC News Mundo, the BBC’s Spanish-language service. For him, Peru has long had “an economy that runs on autopilot, in zombie mode.” On Sunday, Peruvian voters will elect their new president and National Congress. According to the latest survey released by the Peruvian newspaper El Comercio, the two favorites to go through to the second round are Rafael López Aliaga, former right-wing and conservative mayor of the capital, Lima; and Keiko Fujimori, daughter of former president Alberto Fujimori, convicted of human rights violations, and who has been trying to become president for four elections. Here we analyze the impacts of the political storms that have occurred in recent years on the country. The foundations of strength The Peruvian economy has structural strengths that have benefited it over time. It is an open economy that, in general, has been offering legal security to investors in recent years. Unlike other countries on the continent, which are used to facing financial problems, Peru has one of the most stable currencies in Latin America, the sun. A fundamental factor is the management of the Central Reserve Bank of Peru (BCRP). Thanks to the autonomy granted to it by the country’s Constitution, the organization remains outside political disputes and carries out management guided by technical criteria. Experts recognize that this is one of the fundamental factors for the country’s macroeconomic stability. ‘Missed opportunity’ In the first two decades of the 21st century, Peru saw its Gross Domestic Product (GDP) grow by around 4% per year. And, in a few years, the country surpassed the 10% interannual growth barrier. But the pace of growth has been decreasing since 2018, with the resignation of then-president Pedro Pablo Kuczynski, the PPK. She began a chaotic succession of presidents — eight since then. If we ignore the years of the Covid-19 pandemic, the Peruvian economy has grown on average by around 2.3% since 2022. According to experts, this index is far from its potential. “The Peruvian economy continues to grow, but there is a cost of lost opportunities,” explains Mendoza. “If we had sustained policies, we wouldn’t be growing at 3%. We would probably be growing at levels of 5 or 6%.” Following the same line, the director of the Peruvian Institute of Economics and member of the BCRP board, Diego Macera, told the BBC that Peru should have benefited more from the current situation of high prices for gold and copper, two of its biggest export raw materials. “With current international prices and the macro stability we are experiencing, there is no reason why we wouldn’t have grown by more than 4.5% if our governments had been reasonably predictable and competent,” he explains. All of this explains why, despite years of growth, the Peruvian economy expanded below expectations and the country was unable to return to pre-pandemic levels of poverty and formal employment. In 2019, 20% of Peruvians lived in poverty and this rate reached 27.6% in 2024. And the country’s National Institute of Statistics and Informatics indicates that formal real income in 2024 also did not return to 2019 levels. State, generating protests across the country. That year, the country’s economy contracted by 0.55%. “It was a year in which it became very clear that the political imbalance affected the progress of the economy”, says Mendoza. The price of the ‘political carousel’ For Mendoza, when Peru entered the “political carousel” of recent years, “it became impossible to have sustained economic policies.” And Macera recalls that “presidents, on average, didn’t stay in office for two years.” The current president, José María Balcázar, was elected by Congress on February 18, replacing José Jerí, who was removed after just over four months in office. If presidents last a short time, ministers even less so. “An Economy Minister today lasts, on average, seven or eight months”, highlights Macera. “With this volatility, it is very complicated to have reasonably consistent State policies and make sure the private sector knows clearly who their interlocutors are within the ministries.” In Peru, presidents don’t last long. The current president, José María Balcázar, took office in February and will need to leave in July. Jorge Cerdán via Getty Images For sectors that require large investments and years of planning, such as mining, which is one of the main sectors of Peru’s economy, knowing for sure what the country’s future policies will be is essential when deciding and executing investments. “How can you plan if ministers and their teams change every few months?” asks Macera. Furthermore, this year’s electoral cycle further exacerbates the uncertainties that have become routine in Peru. In a few months, general elections will be held (to choose the president and Congress) and local and regional elections will be held to elect mayors and governors. Judging by the discontent of voters, reflected in the polls, it is likely that a decision will be made to change the majority of government officials. All surveys indicate that Peruvians consider corruption to be one of the country’s main problems. Peruvian political life has been marked, in recent years, by scandals that have cost almost all of the last presidents their positions, one after another. Mendoza regrets that “significant segments of the State have been captured and vandalized by the mafias.” For him, “it is no longer just traditional corruption, but criminality linked to common crime.” And criminal activities have economic impacts. “There is a broad pending agenda to combat illegal mining”, according to Macera. “We estimate that last year there was about US$11.5 billion [cerca de R$ 58,2 bilhões] of illegal gold exports, a number similar to that exported by the Peruvian agroindustry in 2014.” What could happen now All forecasts are now at the mercy of what happens with the war in the Middle East, which has already caused an increase in oil prices and could cause a global recession, if not ended quickly. The Peruvian Central Bank calculates that the country’s GDP will grow by around 2.9% this year. Again, a positive growth figure that, if confirmed, would place Peru as the second fastest growing economy on the continent. But the scenario could change if the conflict in the Middle East continues. Peru continues to benefit from the high prices of metals, the stability of its currency and the solidity of its public accounts. And it is expected that investments and formal employment will continue to increase. indicates Macera. He hopes there will be a consensus to keep Julio Velarde as president of the Central Bank. He has been heading the institution for 20 years and is widely considered one of the guarantees of Peru’s macroeconomic solidity. But this still awaits definition, like almost everything in Peru, in this election year.

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