Peru

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast

RISK ASSESSMENT

Activity to decelerate in 2022, after a strong 2021 rebound

In 2022, activity is set to decelerate sharply, owing to a high base of comparison. Growth in household consumption (66% of GDP) will lose steam, affected by escalating consumer prices, which reached a 24-year high in April 2022. More specifically, the increase has been mainly driven by food & non-alcoholic beverages, transport and housing, water, electricity, gas & other fuels. In fact, the three groups combined represent 46% of Peru´s consumer price index basket, thus the sharp negative shock on households´ purchasing power. Moreover, credit conditions have also been retightened (from a minimum of 0.25% per year up to August 2021 to 5% in May 2022). Conversely, recent measures announced by policymakers, such as the rise in minimum wages and the temporary tax reductions on basic goods and fuels could somewhat smooth the negative impact. In addition, in May 2022, Congress approved a sixth round of pension withdrawals, with the potential disbursement estimated at 3.6% of 2021 GDP. Meanwhile, private investment is expected to contract, impacted by both tighter local and global financing conditions, and the uncertain political scenario (keeping investors´ confidence subdued). Similarly, public investments should also perform poorly, influenced by the lack of political focus. Finally, exports (29% of 2021 GDP) are expected to contribute positively, benefiting from still high copper prices and the rising global green agenda that requires higher volumes of the red metal (including for renewables and electric vehicles). Nonetheless, downside risks are related to a harder landing of global growth (including in its major client China) and by frequent community-led protests at mines in Peru, which have gathered steam in the first half of 2022 (thus affecting productivity).

Twin deficits to narrow in 2022, notably the external one

After strong fiscal consolidation in 2021, the budget deficit should slightly improve this year, as activity continues to recover and the fiscal stimulus (3% of GDP in 2021 and 14% of GDP in 2020) is gradually dismantled. In April 2022, the Ministry of Finance presented to the Congress a bill that seeks a more gradual return to the fiscal rules suspended in 2020-2021 due to the COVID-19 crisis. The proposal points to a maximum gross public debt of 38% of GDP in 2023 and then converging towards 30% of GDP by 2032. Regarding the fiscal deficit, it considers that the latter should not be greater than 2.4% of GDP in 2023, then reducing the cap to 2% in 2024, 1.5% in 2025 and, finally, 1% in 2026.

 
The external account shortfall should also narrow in 2022, as the trade balance surplus is expected to increase. More precisely, decelerating domestic activity will lead to lower import expansion (26% of 2021 GDP). Moreover, strong mineral commodity prices, which represent roughly 63% of total exports or 18% of 2021 GDP (notably copper and gold), should offset the widening in the net energy deficit (equivalent to 1% of GDP in 2021). Furthermore, the income deficit should also improve thanks to lower profit repatriations. Additionally, the services deficit could also curb, underpinned by travel revenues amid the improvement of the COVID-19 health situation (albeit recent social tensions represent a downside risk to domestic tourism). On the financing side, while the jittered local political environment could affect foreign direct investments (2.8% of GDP in 2021), they should be sufficient to cover the expected lower external account shortfall in 2022. It also important to note that strong foreign exchange reserves (equivalent to 35% of 2021 GDP and ensuring 19 months of import coverage) are important buffers against potential external headwinds. Finally, total external debt (private and public) as of Q4 2021 stood at 45% of GDP (with 27% of GDP as medium and long-term public debt).

Public dissatisfaction mounts as inflation escalates, leading Pedro Castillo´s moribund government to walk a tightrope

Peru faced a wave of protests in March-April 2022, mainly driven by the sharp rise in fertilizer and fuel prices (a knock-on effect of the war in Ukraine), which led policymakers to announce a set of measures aiming to appease the protesters. These include a 10% hike in the minimum wage from 1 May (benefiting 30% of the workforce), a 3-month suspension of the excise fuel tax (at a cost of roughly USD 65 million per month) and the temporary elimination of consumption tax on some basic goods. In addition, it was also promised that USD 182 million would be allocated for the acquisition of fertilizers for small producers. Overall, this landscape has further weakened Pedro Castillo´s leftist government (in office since July 2021), with his popularity dropping to a meagre 19% in April 2022 (from 38% in August 2021). Schoolteacher, union leader, and son of peasant farmers, Castillo has never held an elected position before. He has failed to improve governability, having changed the prime minister four times and faced two impeachment attempts since the start of his mandate. Regarding his ousting attempts, the first motion occurred in December 2021 due to “moral incapacity”, a term in Peru´s constitution that holds a vague definition according to critics and that Congress has used six times since 2017 to try to remove presidents. The second attempt was in March 2022, underpinned again by “moral incapacity” encompassing corruption allegations, controversial appointment of ministers and accusations that Castillo favours giving landlocked neighbour Bolivia access to the Pacific Ocean. Furthermore, risks on government continuity go beyond the opposition’s frequent impeachment attempts. On 28 April 2022, eight lawmakers from the ruling Peru Libre party presented a bill aiming to cut Castillo's term from five to two years and to set general elections for 2023. They argued that Castillo is going through a "legitimacy crisis".

Last updated: May 2022

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.