PERU: An Introduction

Introduction  

Peru’s macroeconomic fundamentals remain strong, despite stormy waters such as COVID-19 and political unrest: public debt as a percentage of GDP is low, international reserves are sizeable and the Central Reserve Bank of Peru is reliable. The country has one of the lowest inflation rates in the region with 5.39%. According to Bloomberg, Peru continues to have the fourth-lowest country risk in Latin America, only surpassed by Chile, Uruguay, and Panama. The country’s macroeconomic resilience lies in the economic chapter of its 1993 Constitution, which sets forth the independence of the central bank and prohibited it from lending directly to the government, as well as equal conditions for domestic and foreign investment, freedom to own foreign currencies and a prohibition on interfering in contracts through laws, among other articles.

The political crisis that erupted in the country in the first months of the year did not have a significant impact on Peru’s strong financials, nor did it affect the dynamic “real” economy. In terms of exchange rate, the dollar in Peru costs 3.75 soles, not much more than the 3.48 soles it did cost in 2003, 20 years ago.

Regarding politics, former Vice-President Dina Boluarte took office as President following the constitutional procedure after President Pedro Castillo was impeached by the Congress for attempting to dissolve the Congress. President Boluarte, the first female president in Peru, is supporting the free-market economy legal framework.

To position itself in an increasingly competitive and demanding globalised market with clear rules of the game, Peru has formed trade alliances and signed economic treaties such as the Asia Pacific Economic Cooperation (APEC) the Pacific Alliance - together with Mexico, Colombia, and Chile - as well as several bilateral agreements with countries around the world.

Also, in 2022, Peru opened accession discussions with the OECD whose public policies would enable Peru to achieve higher standards in relevant areas such as education, corporate governance, investment, competition, financial markets, public services, environment and public administration.

Arbitration  

Peruvian legislation recognises both domestic and international arbitration. Peru has ratified the 1965 Convention of the Settlement of Investment Disputes, (the ICSID Convention) as well as several investment protection agreements that are currently in force, including bilateral investment agreements and free trade agreements (FTAs). These agreements contain dispute resolution mechanisms, including international arbitration.

Peruvian legislation recognises foreign awards which can be enforced in the country in accordance with the treaties on recognition and enforcement of arbitral awards to which Peru is a party. These agreements contain dispute resolution mechanisms, including international arbitration.

Arbitration is mandatory in Peru as a default dispute resolution mechanism whenever public contract issues between government entities and private parties are involved. There is no dual instance in Peru that allows the substance of an award to be reviewed, restraining such reviews to procedural aspects.

Mining 

Mining is the main dynamo of the Peruvian economy. It accounts for 8.5% of GDP, while mineral exports represent 63.9% of Peru’s total exports. Substantial investment has flowed to the sector over the past 20 years, mainly focussing on copper, gold, zinc and silver, the most representative minerals. Peru is the second largest copper producer in the world.

Additionally, the mining legislation authorises the State to enter into stability agreements with investors that commit certain investments in mining projects and operations, securing for them stability in tax, customs, labour matters and foreign currency rights.

Infrastructure  

Peru has an infrastructure gap estimated at USD150 billion, including social projects such as hospitals, primary healthcare centres and public schools, in addition to ports, highways, subways and a long list of further projects. The government aims to reduce this gap through government-to-government (G2G) agreements signed with the governments of France, the United Kingdom, and South Korea, which are handling the procurement through project manager offices for the construction of river defences, public schools, hospitals and a new international airport in Cusco.

In addition to G2G, the current government is boosting several PPP projects for more than USD5.9 billion that will be awarded in 2024 and after.

In addition, the government is promoting the use of “work for taxes” to permit companies to carry out certain public work projects, allowing them to set-off a portion of their income tax with the investment made in the construction of such works.

Regarding ports, Cosco Shipping Ports expects to inaugurate the USD1.3 billion mega-port of Chancay in November 2024, which will be the largest port in the Pacific Coast of South America, capable of receiving post-Panamax ships. The company expects this project to be launched during the 2024 Asia-Pacific Economic Cooperation (APEC) Forum in Lima. This mega-port will attract shipping businesses from neighbouring countries such as Chile and Colombia.

In addition, regarding highways, the construction of the new USD3.2 billion central highway will start in 2024. The 185-kilometer road will connect several cities in the central region of the country. This mega-project will make the economies of the regions that are affected by it far more dynamic.

Agribusiness 

Peru’s Agro-exports will surpass USD10 billion in 2023 and become the second most important dynamo of the economy after mining. Agribusiness was the most important sector in terms of added value within non-traditional exports. Peru is the world’s largest exporter of blueberries and has important export volumes of grapes and avocados, which together accounted for 42.5% of all non-traditional agricultural exports.

The main export markets are the United States (surpassing USD3.1 billion), accounting for 36.3% of the total, followed by the Netherlands, Spain, Ecuador, China, Chile, the United Kingdom, Mexico, Hong Kong, and Colombia.

Renewable Energy 

Peru aims to continue developing towards a low carbon energy mix. Therefore, for 2025, the government has set a new objective of 20% from renewable energy, securing access to electricity for the country and reducing imports of gasoline and diesel.

Currently, a modification of the regulatory framework is being promoted, which seeks to eliminate the barriers to renewable energies participating in regulated market tenders. Thus, the modification proposal focuses on allowing the sale of power and energy separately, as well as the possibility of submitting offers in time blocks. This will allow generation based on renewable energy to have flexibility in the delivery of energy to the electrical system.

Notwithstanding this, renewable generation projects continue to be promoted hand in hand with private requirements. During 2023, the Punta Lomitas wind farm project, with an installed capacity of 260 MW and an investment amount around USD300 million, started commercial operation, a product of the joint effort of Engie Generación and Quellaveco Mining.

M&A 

Peru has been the country that has experienced the greatest recovery in the South American M&A market, together with Chile and Argentina. Thus, from January to August 2023, 23 domestic M&A transactions have been completed, a similar number of deals reported during the whole of 2022; while inbound transactions were 43, equivalent to 69% of the figure reached last year.

The main local economic groups and players are less sensitive to political noise and are therefore seeking opportunities to acquire important or strategic assets at competitive prices. Financing is usually provided by local banks or by a syndicated mix of local and international financial institutions. Private equity funds have become important players in the acquisition of assets.

It is foreseeable that the amount of M&A will increase in the short term, but mainly in the local market with medium-scale tickets. Pursuant to recent strategic policies set forth by the Central Reserve Bank of Peru aimed at supporting economic stability, it is expected that investors will feel more confident in performing domestic transactions.