Events such as the shooting of the cumbia group by extortionists Marine Water and the murder of drivers, entrepreneurs and police due to citizen insecurity are significant causes of citizen discontent that lead to protests and rejection of the political system. This puts pressure on the Government and institutions, causing political crises, institutional weakness and abrupt changes in power, such as the recent dismissal of Boluarte.
And although some economists agree that the impact of this event could be limited, it is worth remembering the damage it has caused in the past. According to the International Monetary Fund (IMF), both political uncertainty and social unrest can negatively affect private investment, undermine market confidence and increase a country’s risk premium.
Evidence in Peru
A report from the Central Reserve Bank (BCR) indicates that one of the channels through which social instability impacts the Peruvian economy is uncertainty. The BCR cites a study by IMF economist Philip Barrett, which analyzes seven episodes of political instability as an indicator of social instability (RSUI) in the period 1986-2022.
The research reveals that periods of high social instability (measured by the RSUI) coincide with those in which business confidence has remained at pessimistic levels for the longest time (see graph).
Some examples are the political crisis of 2009, caused by opposition to oil and mining exploitation in the Amazon; the dissolution of Congress (2019); the vacancy of Martín Vizcarra (2020); and the 2022 presidential elections.
According to the BCR, a deterioration in business confidence negatively impacts the economy due to its direct relationship with the growth of GDP and non-primary GDP, as well as the expansion of investment and consumption.
The chief economist for Peru at BBVA Research, Hugo Perea, explained that political instability affects the confidence of both companies and families, since it reduces the visibility necessary for decision-making. He added that it also has an impact through the financial channel, since, as country risk increases, lenders raise interest rates. However, he specified that this effect is not always immediate.
He maintained that, after Boluarte’s dismissal, no significant reaction has been observed in the financial channel because “no one perceives a disruptive change in the management of the economy.” He detailed that, the day after the vacancy, the sol depreciated, although to a lesser extent than other currencies in the region due to Donald Trump resuming his aggressive rhetoric about tariffs against China.
“We will see the final situation in the coming days, and I think it will depend on how citizens perceive this change. Whether they feel that it responds to their expectations of modification in the conduct of public policies and the political system. Also, in a key way, the appointment of the new cabinet will influence,” he concluded.
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