Raul Larios

Is Peru a Safer Investment After Debt Upgrades?

Peru, South America (courtesy andix.com)

S&P and Moody’s recently upgraded Peru’s debt.  Does this mean that it is truly safer to invest there?

It cannot be denied that the business climate in Peru has improved many fold.  It is a welcome consequence to the recent evidence that President Ollanta Humala (elected in June 2011) appears to be keeping his promise to the international community that most (if not all) business-friendly policies of previous administrations will be honored, especially the 1993 constitutional guarantee that foreign investors shall receive the same treatment as nationals.  With this assurance of stable macroeconomic policies, foreign investors are flocking into Peru to take advantage of the many attractive investment opportunities.

However, do not ignore the fact that nearly half of Peru’s population continues to live in abject poverty. Despite the economy having grown over 8% annually over the past 5 years and inflation hovering at low rates for almost 10 years, most government efforts to alleviate social and economic inequality have failed.  According to some critics, these failures are due to the meager efforts from the last two administrations.

In the long-run, this deep inequality may be extremely dangerous to your Peruvian subsidiary’s financial health.  If it is not addressed effectively, such widespread poverty could easily set the stage in the next election for an extremist President, who may adopt expropriation or nationalization policies against foreign-owned assets, such as is happening right now in neighboring Bolivia.

If you choose a direct foreign investment in Peru (such as a factory, infrastructure, mining, etc.), you will be “all in,” so to speak, by the time of the next election in 2016, and thus highly vulnerable to political risk.  So pay close attention to President Humala’s commitment and success (or failure) in bringing about some social justice in the next couple of years.

In addition, be forewarned that according to the World Economic Forum Global Competitiveness Report 2012-2013, excessive red tape and corruption are the two most problematic factors for doing business in Peru.  Moreover, according to the report, government officials routinely hand out contracts only to “the well-connected”.

In fact, most companies consider the occurrence of irregular payments and bribes in Peru as very common, especially in the process of obtaining business licenses.  Foreign subsidiaries, in particular, struggle with Peru’s extensive bureaucracy, and thus often resort to the use of “facilitation payments”, or to the hiring of local agents who promise to “expedite” their business transactions.  This can also be detrimental to your subsidiary’s financial health.

Remember that companies can be held accountable for the corrupt behavior of their hired agents.  So be sure to conduct rigorous and extensive due diligence on potential local partners and agents when doing business in Peru.

Fortunately, all of the above problems and challenges have not gone unnoticed by public and private Peruvian organizations soliciting your investment dollars.  They have attempted many remedies, with limited success.  However, there is one attempt that really stands out — the private investment agency ProInversion, which was established as a ‘one-stop shop’ government institution for current and potential investors.  I don’t have personal experience in working with them, but I hear that the program is managed professionally and transparently.

ProInversion has successfully completed several privatizations of state-owned enterprises, as well as natural resource concessions.  Here is a link to their current schedule of projects (current as of August 20, 2012) http://www.proinversion.gob.pe/0/0/modulos/JER/PlantillaSector.aspx?ARE=1&PFL=0&JER=4588

As a foreign direct investor, you may want to consider registering with ProInversion in order to obtain some sort of guarantee that you will be able to repatriate your capital, profits and royalties — even after the 2016 elections.

I hope you find this post helpful.  I welcome all comments related to your experience on doing business in Latin America.

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September 10, 2012 - Posted by | New York | , , , , ,

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