The evolution of the Peruvian economy

Peru has long since been the quietest of the emerging South American powerhouses. Without an eccentric leader or an upcoming World Cup, it has quietly developed into a modern and efficient democracy

November 5, 2012

Nestled between the cold waters of the Pacific, the foothills of the northern Andes and the southern seat of the Amazon, lies the country of Peru. With less than 30 million inhabitants, it is one of the smaller South American nations. But over the past decade, Lima has been diligently reforming its structures, emerging as both a fast-growing economy and a desirable business centre.

Merely 20 years ago, Peru was virtually a failed state. After years of protectionism, price controls, expropriation of foreign companies and restrictions on foreign direct investment, the country was plagued with hyperinflation. The economy was in turmoil and Maoist guerrillas like the Shinning Path (Sendero Luminoso) brutalised the population on a regular basis. But after 1990, the government worked diligently to reverse restrictive policies, and to contain the terrorising guerrillas.

The country has experienced a fruitful economic boom over the last decade. It also managed to capitalise on its fast growth and transform it into long-term sustainable development through intelligent and moderate legislation. Though there is still ample opportunity for growth, particularly in the building and tourism industries, many foreign companies are turning to Peru as a safe and desirable investment. In fact, as the IMF busies itself slashing the growth forecasts for almost every other country, it has raised Peru’s growth prospect to six percent this year, miles ahead of the 1.5 percent growth predicted for Brazil, the region’s biggest economy.

Attorneys at Marroquín and Merino law firm have been observing developments on their home turf with cautious enthusiasm. The company is a boutique law centre, catering exclusively to international corporations of the Fortune 500 variety and to high-net-worth families in Peru and other parts of Latin America. Victor Marroquín, a Partner at the firm, believes that while Peru has managed to sustain phenomenal growth for a long period of time, it is still a nation in flux, and some of the old enemies, like terrorism and civil unrest, are never far from the surface. But Peru is full of potential, and if anything the decades of hardship have yielded an unparalleled preparedness for tough times and crisis. There is little doubt that Peru will continue to grow; the only question is how fast it will happen. Victor Marroquín, Partner at the company, spoke to World Finance about regulation and investment.

How do you feel the Peruvian economy has benefited from recent regulatory changes?
Immensely. For a long time now, Peru has resisted the temptation to over-regulate that is so typical of fast-growing economies. Instead, it has streamlined old regulations to make them more efficient and enacted new statutes in areas where regulation did not exist before, or was deficient. Clear examples are Peru’s very modern financial and insurance regulations, as well as the significant progress made in consumer protection and tax legislation.

What other changes do you think should be made in future?
Peru’s bankruptcy system is the country’s regulatory Achilles heel. It needs emergency repairs. There is only one Bankruptcy Commission made up of four members that deals with all restructurings and liquidations. The result is grave regulatory inefficiency and public distrust. As an example, if one needs to file a civil or commercial lawsuit there are over 80 civil courts in Lima, the capital, alone. Cases are assigned to any one of these courts by random computer lottery. Thus, forum shopping is restricted.

Conversely, if one has a bankruptcy case, it always goes to the same Bankruptcy Commission with the same four individual members, who have not been renewed for many years. Peru’s Bankruptcy Commission at INDECOPI is part of the Executive Branch, so debtors and creditors waste precious time, sometimes even years, trying a case before the Bankruptcy Commission, only to appeal it all over again to the Peruvian judiciary at several levels of review. This needs to change. A developed economy cannot afford to have an inefficient bankruptcy system.

Why is Peru an appealing destination for international investors?
The country’s economy is growing faster than almost all other Latin American countries. While Peru is still a small market with a population of only 30 million people, purchasing power has increased considerably in the last 10 years. A new middle class is being formed that spurs demand for goods and services, many of them imported. Additionally, there is a construction boom most visible in Lima that creates new opportunities for many types of new businesses, from decorator houses to construction crane importers and lessors. And we cannot ignore the role that Peruvian gastronomy is playing in attracting many tourists from all over the world. Peru’s hospitality industry is still in its infancy; anyone building a good hotel in Peru these days is bound to receive an excellent return on his investment.

Have you altered your operations and the way you deal with clients since the global financial crisis began?
Yes. We have tried to adapt our services and legal products to new, pressing client needs and timetables. We also have helped our clients by developing a very efficient corporate compliance service, which is tailored to each client’s specific needs. This service is much appreciated by our foreign clients.

How have recent mergers and acquisitions (M&A) trends affected your business?
There has been a marked increase in the number and quality of M&As in Peru, and this has led to new business for our firm. The number of countries from which investments originate also has increased. This has been very positive for the Peruvian M&A market.

Do you think 2013 will present as much business as 2012 for your firm?
I do, but at the same time I am very much concerned with the growing trend of political unrest that is returning to Peru rather quickly. In the 1990s, the Fujimori administration captured all terrorist leaders and pacified the country. That’s when the wave of new foreign investment began. Just 12 years later, at the beginning of October 2012, we have medical doctors and public school teachers on national strikes that are lasting weeks, and terrorists have just destroyed three helicopters belonging to the company that exploits the Camisea gas field. Investors are alarmed, and some large mining projects have been cancelled. Unless the government shows itself able to revert this trend and to ensure a peaceful environment for business, what we gained as a country in the last 20 years may go away very fast.

What do you offer clients that your competition does not?
We are a highly specialised corporate and litigation boutique. As such we offer our clients the unique individual care and attention no other firm can deliver. Our firm creates interdisciplinary teams and designs creative legal strategies that go beyond the usual. And we do not shy away from bringing the best talent from outside the firm if the case requires it. In a small country like Peru, no firm has all the best minds, the best specialists, under one roof. We bring them together as a team when the client needs them; our competitors do not.

Finally, what are your aspirations for the firm going forward?
To continue being the leading corporate and litigation boutique firm in Peru; to improve the quality of our services – thus helping our clients to reach their goals; and to contribute – through our legal work – to the social and economic development of our country.