File Photo: CarlosEduardoPA via Wikimedia Commons. CC BY-SA 4.0.

Gene Kuleta, Editor, Latin America Advisor publications

Keiko Fujimori took office July 28 as Peru’s president, nearly two weeks after Congress approved a 10 billion-sol ($2.8 billion) expansion to this year’s budget to finance infrastructure projects, essential public services and other spending priorities. The budget approval came after Peru’s central bank raised its 2026 economic growth forecast to 3.4 percent from 3.2 percent, citing strong domestic demand and private investment, even as the country faces fiscal pressures and the potential economic effects of an El Niño weather event. What does Congress’ approval of the additional 10 billion soles in spending signal about the space Fujimori will have to pursue her economic agenda? What changes in economic policy can be expected under her government? What risks would a harsh El Niño event pose to Peru’s economic outlook, public finances and inflation, and how well positioned is the new government to respond?

Luis Miguel Castilla, former Peruvian finance minister and ambassador to the United States and senior visiting fellow at the London School of Economics and Political Science: “The approval of a 10 billion-sol supplementary budget just days before the transfer of power is unprecedented as Congress leaves the incoming administration a narrower fiscal margin than headline growth figures suggest. The Constitutional Tribunal’s recent ruling reaffirming that spending initiative rests exclusively with the executive branch is welcomed, but it puts the ruling Fuerza Popular party in the awkward position of reversing populist laws its own bench supported. Expect President Keiko Fujimori to modify the fiscal rules to accommodate a strong public-private investment shock and expanded social policies. The bet is that stronger GDP growth over the next two years raises tax revenues, that efficiency gains trim a public sector wasting roughly 3 percent of GDP and that a technocratic finance minister makes a slower convergence to a 1 percent deficit by 2031 credible to markets. It can work, but only with unambiguous political support from the presidency. El Niño is the most pressing short-term challenge. The central bank now assumes a strong coastal event as fishing has already collapsed and agriculture is faltering, though buoyant private investment and internal demand should more than offset the negative shock. The main risks are disrupted roads and logistics, pushing up food prices that may force the central bank to raise rates temporarily. Nonetheless, Peru’s fundamentals and historically high commodity prices provide room to absorb these shocks. The real test is whether the new government can tackle the competitiveness and social inclusion reforms that largely excluded segments of the population are demanding.”

Eileen Gavin, head of sovereign analysis at Verisk Maplecroft: “Notwithstanding concerns expressed by the independent Fiscal Council, Peru’s headline budget position has improved. The central bank reported a non-financial public sector deficit of 1.3 percent in May, the lowest in two years, on stronger growth and mining revenues. This, along with a public debt ratio of 30 percent, sits well below the median of countries with BBB credit ratings. With the central bank forecasting GDP of about 3.4 percent this year and an impressive reserve adequacy ratio of almost $100 billion, Peru has ready access to emergency financing on favorable terms in response to El Niño or other shocks, with the lowest regional spreads after Chile. Beneath the hood, its structural problems are well known: a relatively low tax take of 15 percent of GDP on a narrow base, entrenched informality of more than 70 percent and a trajectory of inefficient and corrupt governments. This includes populist, self-serving congresses that have continually increased current spending and looked to deregulate yet summarily failed to deliver key public services and infrastructure, including El Niño defenses. For a decade, political irresponsibility has held back this mining economy, with the central bank serving as the sole policy anchor. While average GDP of about 3 percent outperformed much of the region, it likely could have been double that if not for the instability. The question now is whether Fujimorismo will amend its ways and provide Peru with the responsive, responsible and accountable government it deserves. A July 10 constitutional court ruling putting the lid back on congressional spending absent Ministry of Economy and Finance oversight was an important development.”

Joanna Kámiche Zegarra, director of the Centro de Investigación de la Universidad del Pacífico: “Keiko Fujimori will face two major challenges: public insecurity—violent crime and extortion—which has escalated in recent months and years; and the effects of a potentially very strong El Niño–Southern Oscillation (ENSO), which will persist through 2027. The recently approved budget expansion represents only 5 percent of last year’s national budget, and it is funding social demands and investment projects; moreover, half of the expansion goes to regional and local governments. This does not determine the total resources Fujimori will have to address the challenges mentioned alongside her broader economic agenda. Fujimori must act strategically from day one, signaling stability by appointing experienced professionals to key posts and approving immediate strategies to combat insecurity. Peru’s ENSO preparedness is fragile: none of the three levels of government— national, regional or local—have allocated or implemented sufficient resources to reinforce vital infrastructure such as highways, bridges, water treatment plants and electrical systems, and to clean riverbeds to prevent major flooding. Insurance coverage for public infrastructure also remains limited, constraining risk transfer—despite clear lessons from past disasters (ENSOs of 1982–1983, 1997–1998, and the 2016–2017 coastal ENSO). Both challenges demand urgent attention but should not eclipse the need for longer-term action. As proposed in Agenda 2026 the new administration should also prioritize reducing fiscal pressures; boosting productivity, capacity building and digitalization; strengthening food security; coordinating water management among different stakeholders; improving trade competitiveness; and investing in education and health, among others.”

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Résumé

What Is Peru’s Economic Outlook Under Fujimori?