The country's political environment during the first quarter of 2018 was dominated by uncertainty until President Kuczynski resigned towards the end of the Peruvian summer. Following this, his successor, Vice President (currently President) Vizcarra is working to complete the term with little help from Congress, a reduced trusted entourage of people willing to help and a complex economic situation both locally and abroad.
Internationally, the development of a potential trade war between the US and China, and eventually other countries, presents a challenge for commodity prices, in particular minerals. Peru being a mining country could potentially end up an affected party.
But notwithstanding, the Peruvian economy has shown signs of some growth and progress amid the uncertainty, providing long time investors with opportunities even if the short term may present its challenges. Some new mining projects may begin to see light this year as well as a few infrastructure projects, which is good for the economy since they tend to involve large sums of money per project and therefore individually have an impact. However, many are still on hold, waiting to be acquired from their current owners, consumed in different crises, by more able new developers. This year Congress finally approved legislation directed at permitting projects owned by companies involved in corruption scandals to be transferred to new owners under certain conditions. The idea behind this new legislation is that projects do not suffer the fate of their corrupt owners as long as those owners are willing to forgo certain funds from the sales to secure eventual payments of damages or penalties, to which they are or could be subject.
Commercial activity has increased, as well as investments in real estate. Export activities, particularly agriculture and fishing, have shown signs of growth and new investment.
In comparison with last year:
• 2016 and 2017 had not seen any new large infrastructure projects, 2018 brings a slight increase in activity, although it seems that more activity will come only in 2019.
• The retail sector had been affected last year by less consumption and lower consumer confidence. 2018 has seen an increase in activity.
• The residential and commercial construction sector had also been affected in 2017 by lower consumption and a reduction in demand for new homes and new store and office space. 2018 is bringing an increase in these activities.
• Last year in the financial sector, issuance of new corporate debt had seen a reduction and focused on refinancing of obligations. This trend has continued.
As a result of the above, the expectations of growth for the Peruvian economy are being estimated at 3.6% (from an original 4.0%) for 2018 and at 4.3% (from an original 4.0%). The current context keeps pressure on companies to find ways to be more efficient and at the same time improve their market positions. In this context, many Peruvian enterprises are being sold and others look for a more long-term growth strategy and seek growth or strategic alliances. Many businesses believe that this is a temporary phase and the long term opportunities are good. Additionally, mid-sized and large businesses are not limiting their focus to Peru, and have redefined their markets of scope to include other Latin American countries, most frequently the countries of the Pacific Alliance.
Law firms and their corporate and M&A practices are no exception to the challenges facing clients. Law firms must also look for ways to be more efficient. They have to adjust to their clients' strategies for dealing with economic pressure and competition. However, and notwithstanding, in dealing with these challenges there is a need for legal services. Companies are refinancing their obligations, and are rising to the challenges of taking in investors or forming alliances with third parties, which was not common for Peruvian businesses. Peruvian companies looking to sell are having a bit more difficulty than a few years before, but there is an array of private equity funds and operators wanting to invest or expand and that keeps sale processes competitive.
At least until now, it appears that the economic downturn is affecting many businesses and conditioning their short term view and their business strategies for the medium and long terms. While some may have a pessimistic view which may result in the sale of their business, others may combine a realistic view of the present with a positive view for the future, and adopt strategies which will further their business. Unlike a few years ago however, by now most businesses know that a longer term strategy has to be supported by the help of new equity and not debt alone.