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Peru

Peru

Population 33.2 million
GDP per capita 6,958 US$
A4
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A4
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 4.0 2.2 -11.1 9.0
Inflation (yearly average, %) 1.3 2.1 1.8 3.0
Budget balance (% GDP) -2.3 -1.6 -8.9 -5.9
Current account balance (% GDP) -1.7 -1.2 0.7 -0.4
Public debt (% GDP) 25.8 26.8 34.8 36.4

(e): Estimate (f): Forecast

STRENGTHS

  • Membership of the Pacific Alliance and Andean Community
  • Mineral, energy, agricultural, and fishery resources
  • Low level of public debt
  • Independence of the central bank

WEAKNESSES

  • Dependent on commodities and demand from China
  • Underdevelopment of credit (42% of GDP)
  • Inadequate infrastructure, healthcare, and educational systems
  • Huge informal sector (70% of jobs)
  • Regional disparities (poverty in the Andean and Amazonian regions)

RISK ASSESSMENT

Peru’s economy is set to recover in 2021

The Peruvian economic activity is recovering from the significant 2020 contraction. Due to its insufficiently developed health sector, the COVID-19 pandemic forced the government to impose drastic social and mobility restrictions. These have been eased throughout 2021, and although some are still in place, the outlook has been greatly improved relative to 2020. As such, activity has rebounded. GDP increased by a strong 41.9% year-on-year (YoY) in Q2 2021 (from –29.8% YoY in Q2 2020). Government consumption rose by 14.3% YoY and fixed gross investment was up 157.1% YoY. That said, GDP in Q2 2021 was still 0.4% below the Q4 2019 pre-pandemic level. The resumption in activity improves the labour market outlook, and unemployment should decrease from an annual average of 13.6% in 2020 to 9.7%. This positively impacts private consumption, which was up by 2.1% during Q1 2021, relative to the same period of 2020. The rebound in domestic demand majorly drove the YoY increase in GDP.

Increases in commodity prices and currency depreciation pressures have driven inflation to a level above the Central Bank’s target (3%). Thus, the commitment to inflation-targeting policy resulted in the adjustment of the key interest rate, with a marginal increase from 0.25% to 0.5% in August 2021. This should not change the Central Bank’s accommodative stance, still favouring liquidity access. Regarding external sales, high copper prices in 2021 and solid global demand will help increase the level of exports. Risks are mostly related to new COVID-19 variants that could impact the economic reopening process and the uncertainty regarding the future economic policies of the new government.

 

Current account back to a small deficit, while budget deficit should partially narrow 

Despite a progression in exports and better trade terms, the current account will be in a slight deficit in 2021, majorly driven by the widening of the income deficit (thanks to the increase in foreign companies’ profits). Foreign direct investments fell by 67% YoY during 2020 but are expected to recover partially in 2021. They should also be enough to fully cover the current account deficit. Peru maintains a high level of international reserves - roughly USD 77 billion (35% of GDP, a coverage ratio of 2 years of imports) - giving further cushion in case of a sudden change in external investors’ mood. External debt stood at roughly 45.2% of GDP in Q1 2021 and is mostly publicly owed (25.7% of GDP). The part owned externally increased significantly in 2020 (from 8.5% of GDP in 2019 to 15% of GDP in 2020).   Regarding the financial sector, the economy has been successful in curbing the dollarization of its local credit market (from the peak of 51% of total credit in 2008 to 22.3% in Q1 2021). Moreover, the banking system can count on sound capital adequacy ratios and low level of leverage. Regarding public accounts, the COVID-19 crisis required a strong fiscal response from 2020 onwards, with policy measures amounting to 19.2% of yearly GDP. These measures pushed the fiscal balance further in deficit and increased the overall public debt. In 2021, as fiscal support narrows and tax revenue recovers, the fiscal balance deficit will shrink.

 

The election of the leftist Pedro Castillo increases uncertainty in the business environment (in the short-term at least)

The leftist Pedro Castillo won the runoff of the presidential elections in June 2021, defeating candidate Keiko Fujimori from the Fuerza Popular party by a small margin. Schoolteacher, union leader and son of peasant farmers, Pedro Castillo has never held an elected position before. His victory has worried financial markets, since his Perú Libre party defines itself as Marxist-Leninist and that he has defended the redrafting of the constitution to increase the state’s role in the economy. Nonetheless, he has recently eased his positions, alongside his advisor and former World Bank economist Pedro Francke. In order to calm down the markets, they have pledged to guarantee a stable economy, respect private property, private investment and the autonomy of the central bank. Overall, he is expected to increase public spending in health, education and rural communities, to be financed mostly by higher royalties and taxes on mining. Furthermore, Julio Velarde, the Central Bank’s chief since 2006 agreed to stay as acting head of the institution, ensuring its credibility. Although Congress confirmed Castillo´s Cabinet on 27 August 2021, governability will remain challenging, as frictions between the executive and the legislative are not expected to ease significantly. For better or worse, Castillo will not have a majority in Congress (his party got 37 out of 130 seats). On the one hand, this will help to undermine the chances of passing disruptive changes to the current economic model. On the other, Fujimori´s Fuerza Popular (24 seats) should contribute negatively to the relationship between the executive and the legislative. The party was decisive in removing president Martín Vizcarra from office in 2020.

 

Last updated: October 2021

Payment

Electronic payment is prefered for both high-value and low-value transactions. Post-dated cheques are commonly issued in Peru. Credit transfers are used for both high-value and low value payment transactions. The majority of low-value electronic credit transfers in Peru continue to be made between accounts in the same bank, known as intrabank or “on-us” transactions. Bills of exchange are a commonly used payment instrument for debt collections.

 

Debt collection

The Peruvian judicial system is structured hierarchically. The Corte Suprema (Supreme Court) is the highest court, followed by courts that specialise in civil law, criminal law, constitutional law and labour law. These sit above the Corte Suprema in each judicial district, which deal with civil and commercial law cases. The Juzgados Especiales (specialised judges) are located in major cities in the country and deal with matters concerning, among others, civil and commercial law. Following this is the professional Juzgados de Paz (peace judges), located in major cities, and in charge of low economic value cases and other minor issues. Finally, Cortes de Paz (peace courts) are located in cities with lower populations, comprised of one judge who may or may not have the status of lawyer.

 

Amicable phase

The amicable phase in Peru is characterised by phone calls, written reminders, visits, and meetings, with the goal of settling the debt between two parties without triggering legal proceedings.

 

Legal proceedings
Conciliation Proceedings

Prior to judicial proceedings, Peruvian law requires of a conciliation process in order to reach a debt settlement agreement. The process constitutes two hearings, if an agreement cannot be reached, the proceeding ends, and both parties have to sign a conciliation act, which is then presented at the beginning of the judicial process.

 

Fast-track proceedings

The below text makes reference to the Unidad de Referencia Procesal (Unit of Procedural Reference), which is a reference value according to Peruvian law: each URP is 10% of the Unidad Impositiva Tributaria (UIT), which can be used in tax regulations to determine tax bases, deductions, limits of affectation and other aspects of taxes that the legislator deems appropriate. It may also be used to apply sanctions and to determine accounting obligations, The UIT is set at the beginning of the year by the Economic Ministry.

Two fast-track proceedings are available in Peruvian law:

  • simplified proceedings (proceso sumarisimo) concern cases which the value is below URP 100. Juzgados de Paz have jurisdiction for amounts between URP 50 and 100. Defendants have five days to file a dispute after they received the notification from the judge. Within 10 days, the judge organises hearing for discovery, conciliation, evidence and judgment;
  • shortened proceedings (proceso Abreviado) concern cases in which the value is between URP 100 and 1,000. Juzgados de Paz have jurisdiction for amounts between URP 100 and 500 and Juzgados Civiles have jurisdiction in cases for amount above URP 500. The defendant has 10 days to file a dispute from the admission of the petition by the judge. Discovery and conciliation will be examined during one hearing. If the conciliation was not successful, the judge mentions the disputed points and evidence to be provided or updated. Within 50 days of the conciliation hearing, the judge sets up an evidence hearing.
Executive proceedings

When creditors are owed an undisputed and certain debt, they can start executive proceedings. The debtor has five days from the notification to submit his defence. The judge will render a judgment, after which each party has up to three days to file an appeal.

 

Ordinary proceedings

Ordinary proceedings apply to cases with a value of over URP 1,000. The plaintiff sends a written petition to the court. The defendant can file a defence expressing the facts on which he intends to argue, within 30 days from the service of the writ. If the claim is complete (i.e. includes all the relevant information), the judge sets up a hearing for conciliation. If the parties reach an agreement, it has the same effect as a judgment. If an agreement is not reached, the judge organises a hearing within 50 days of the conciliation hearing. The proceedings end when the judge delivers his or her decision. The length of proceedings depends mainly on the nature of the conflict, the number of parties involved, the complaints that occur, and the caseload of the judge in charge of the process. Based on these criteria, a first-instance judgment in a typical commercial litigation case may take approximately twelve to 18 months.

 

Enforcement of a Legal Decision

A domestic judgment becomes final and enforceable once all venues for appeal have been exhausted. The first instance judge is in charge of enforcing judgments, and will issue a writ of execution ordering the relevant party to comply with the judgment within five working days. If the order is not complied with during the five-day period, the judge must order the seizure of the debtor’s assets in order to sell them at auction. For foreign awards, creditors located in Peru must file a claim before the Superior Court located in the debtor’s place of domicile. The Court will consider whether the foreign judgment is compatible with Peruvian law and any international treaties between the two countries. If it is found to conform, the judge shall authorize the enforcement of the judgment in the Peruvian Jurisdiction.

 

Insolvency proceedings

The Instituto Nacional de Defensa de la Competencia y de la Proteccion de la Propriedad Intelectual (INDECOPI) is the specialized administrative agency that deals with insolvency proceedings.

 

Out-of-court proceedings: preventive proceeding

Preventive proceedings aim to provide a forum for debtors to reach a consensual restructuring agreement with their creditors. It is intended to be a fast track process that only debtors can initiate.

The PARC was created by Indecopi to prevent the insolvency and bankruptcy of those companies that, because of the health emergency caused by the coronavirus pandemic, lack liquidity to meet their obligations.

This procedure is regulated in Legislative Decree No. 1511 and its Regulations.

With this bankruptcy procedure, Indecopi offers an alternative that seeks to reschedule the unpaid obligations of the rated entity, avoid its insolvency, the loss of business and sources of employment and, with this, contribute to the recovery of credit and continuity in the chain of payments in the national economy.

Joining the PARC is very simple, fast and safe, since the entire procedure is carried out virtually.

 

Reorganisation

If creditors decide to allow their debtors to restructure, they will be asked to approve a reorganisation plan within 60 days from the decision to proceed with reorganization. Both the decision to reorganise and the organisation plan must be approved by more than 66.6% of the allowed creditor claims. During the process, creditors decide whether to allow the debtor’s management, to continue operating the business, or to replace the debtor’s management. Once the reorganisation plan is approved and all the pre-publication claims are paid according to their terms, then INDECOPI grants a decision declaring the formal conclusion of the reorganization proceeding.

 

Liquidation

If the creditors decide to liquidate, then a liquidator will be appointed at the Creditors’ Meeting from the list registered with INDECOPI or under La Ley General de Sociedades 26887. The will be asked to approve a liquidation plan for the debtor and decide whether the debtor should be authorized to continue its business during the liquidation. Whether voluntary or involuntary, the liquidator must follow a mandatory order in the payment claims. To conclude the liquidation process, the liquidator files a petition before the Public Registry in order to register the extinction of the company. However, if creditors remain unpaid, then the liquidator must file a petition before a civil judge to obtain a judicial bankruptcy declaration.

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