Peru

Activity to decelerate in 2023

Activity is set to decelerate in 2023. Household consumption (66% of GDP) will continue to drive GDP, but the pace of growth will lose steam. The outlook is underpinned by durably and historically high inflation, the delayed impact of tighter credit conditions (from a minimum of 0.25% per year up to August 2021 to a benchmark 7.75% interest rate in January 2023) and as the job market weakens. Conversely, the Con Puche Perú economic reactivation plan (estimated at 0.6% of GDP) announced in December 2022, in a failed attempt to curb protests, will help slow the slide in private consumption. The package encompasses the expansion of welfare provisions like pensions and access to natural gas in homes, among other measures. Meanwhile, private investment should remain weak, impacted by both tighter local and global financing conditions, and the uncertain political scenario that subdues investor confidence. Similarly, public investments should also perform poorly, influenced by the lack of political focus. Last, exports (29% of 2021 GDP) are expected to post a positive albeit smaller contribution on back of relatively sharper growth momentum in China, which is Peru’s main export destination. This could also favour copper prices and thus Peru’s foreign sales. Nonetheless, downside risks for the red metal’s exports are related to frequent community-led protests at mines in Peru.

A narrower external shortfall and a marginally wider fiscal deficit

The current account deficit should narrow in 2023. More precisely, the trade balance surplus should widen as decelerating domestic activity will lead to lower import expansion (26% of 2021 GDP) which slows faster than exports. Furthermore, the income deficit should also improve thanks to lower profit repatriations. Additionally, the services deficit should remain broadly stable. While freight costs are expected to shrink, prolonged protests impacting the popular tourist region of Cusco will prevent the travel account from converging towards its historically pre-pandemic large surplus. On the financing side, while the unstable local political environment could affect foreign direct investments (3.3% of GDP in 2021), they should be sufficient to cover the expected lower external account shortfall in 2023. It is also important to note that strong foreign exchange reserves (equivalent to 30% of estimated 2022 GDP and ensuring 15 months of import coverage) are important buffers against potential external headwinds. Last, total external debt (private and public) at Q3 2022 stood at 42.5% of GDP (with 24.8% of GDP as medium and long-term public debt).

On the fiscal front, the budget deficit is expected to weaken slightly this year. Public revenue growth is set to lose steam as activity dips. Meanwhile, the 2023 budget approved in November 2022 earmarked a 9% rise in public expenditure this year, notably for capital investment projects. While political turmoil could hamper its execution, the fiscal package announced in December 2022 and the higher financing cost will contribute to the deeper budgetary deficit. Overall, Peru’s sound macro fundamentals have softened the market´s negative reaction to the country’s current political crisis.

No end in sight to political upheaval

Peru’s highly fragmented political environment has further deteriorated since December 7 2022, when the incumbent President Pedro Castillo (July 2021 – December 2022) from the left-leaning Perú Libre party announced that he was instituting an “exception government” and dissolving Congress in order to “restore the rule of law and democracy”. He intended to rule by decree, while waiting to organise a constitutional assembly. This announcement came on the same day that he was set to face a third impeachment motion in Congress following allegations of corruptions and “moral incapacity”. The move sparked the resignation of several ministers, while the armed forces, the police and the Supreme Court warned Castillo that he was acting in breach of the Constitution.

Indeed, according to Peruvian law, the President can only dissolve Congress if the legislature carries out two no-confidence votes in Cabinet, which was not the case. Hours later, the Congress voted by an ample margin to oust Pedro Castillo (101 votes in favour out of 87 required) and he was arrested on charges of rebellion and conspiracy. Pursuant to the Constitution, Vice President Dina Boluarte took office on the same day, but has failed to appease a tense political environment. Large-scale protests and blockades have gained strength and spread across the country, particularly to the poor rural Andean regions in the south and in the capital Lima, prompting to a death toll of at least 48 people at end-January 2023. Protesters are calling for Boluarte’s resignation, a snap general election, the dissolution of Congress, a new Constitution and Castillo’s release from prison. It is not yet clear how the ongoing political crisis will be resolved. Amid mounting social discontent, Boluarte has proposed holding elections this year. However, Parliament, which initially supported bringing forward the scheduled 2026 general elections to April 2024, has refused her proposal.

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.

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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.

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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.

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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.

Last updated:April 2023