Want to do Business in Latin America? Part 2 – Peru…

Peru, South America (courtesy andix.com)

Recent allegations that Walmart was involved in a $24 million corruption scheme in Mexico prompted me to begin writing a blog series on the perils of doing business in Latin America; perils that blind-side many Americans and Canadians wanting to do business there.  This series will focus on the better countries in which to do business.

Of course, the term “better” is highly subjective.  By better, I mean those countries in Latin America where it is relatively easy to incorporate an American or Canadian subsidiary, buy land, obtain construction permits, register property and assets, obtain bank financing, enforce contracts and/or trade across borders.  “Better” does not necessarily mean that there will be more market demand for your products or services.

In fact, the opposite may be true.  For example, when I worked in the wealth management industry, I personally did a lot more business in the “worse” countries.  That’s because local residents wanted to avoid the many in-country risks for their hard-earned money.  Those dangers could range from corrupt police forces and big banks laundering drug money, to organized kidnapping gangs and crooked government officials.  In an effort to minimize those dangers, my clients would keep their money in the United States with the bank I worked!!

In part 1, I wrote briefly about the 3 Spanish-speaking Latin American & Caribbean (LAC) nations that have surpassed the American territory of Puerto Rico in ease of doing business: Chile, Peru and Colombia.  I then focused on Colombia, and the many excellent opportunities there.  In this part 2, I want to explore Peru.

According to the World Bank’s 2012 ‘Ease of Doing Business’ rankings, Peru stands at #41 (out of 183 countries).  This score is pretty good relative to the rest of the LAC region.  It can be attributed to progress in several areas, such as taxation and shareholder protections.

But the most important improvement in Peru’s business landscape in recent years occurred with the reform of the collateral laws for bank financing.  Before 2006, it was almost impossible to create and register on a timely basis security interests over non-fixed, short-term property (such as inventory, accounts receivable, commercial fishing boats, taxi fleets, etc.).  There were over 20 types of security interests and 17 government registries for different kinds of assets.  The process was long and costly for lenders.

And that was just the beginning.  When a borrower actually defaulted on a loan, the procedures for the lender to seize and sell the asset were a nightmare. The judicial process could take so long (usually 18 to 24 months) that by the time the lender’s security interest could be executed, often the asset had depreciated to nothing.  So it’s understandable why banks would either not lend money against short-term assets, or charge exorbitant interest rates.

By May 2007, a new legal framework consolidated the 20 different types of pledges into 1 guarantee, and the 17 old registries into one unified system.  Thanks to this new law, almost any type of moveable asset can now secure a loan and this has spurred more lending (registrations have jumped from about 100 per month prior to the reforms to well over 5,000 per month).

This is good news for borrowers.  However, there are some flaws with the new procedures.  Unfortunately, they are outside the 600-word limit of this article — perhaps next month.  In the meantime, if you intend to use your Peruvian subsidiary’s non-fixed assets as collateral with a local bank, be sure to retain good legal counsel that is well-versed in this relatively new law.