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Peru in Latin America

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Peru Overview

Peru is one of the fastest-growing economies in Latin America and the wider world. The average growth rate of the last decade has been roughly 6%, with an inflation average below 3%. This was possible due to a combination of several factors, including structural changes in several areas, sound economic policies and a positive external environment (supported by geographic diversity and rich natural resources, among other factors).

It is expected 2017 will be a year of slight deceleration in GDP growth due to the steadiness of the mining sector and, as of yet, weak private investment due to adverse global conditions and uncertainty created by corruption scandals deriving from the "Lava Jato" criminal investigations in Brazil affecting projects under contracts executed in previous years. Additionally, Peru was hit by flooding during the summer due to "El Niño", killing 148 people and leaving thousands homeless. Recent estimates place the cost of reconstruction efforts at USD6.5 billion.

Nevertheless, Peru’s macro-economic outlook remains strong, based on the outstanding growth of recent years’ powerful impact on internal consumption and purchasing potential, improving employment and income rates. According to the Peruvian National Institute of Statistics (INEI), poverty rates fell by more than half between 2005 and 2015, going from 55.6% to 21.7% of the population. An important part of that decrease relates to extreme poverty, where the number of people living in such conditions went down from 15.8% to 4.07%.

Politics

The first year in office of Wall Street veteran Pedro Pablo Kuczinsky confirmed the business-friendly economic environment that was expected after he won the 2016 election. Kuczinsky’s government roles over the past three decades showed he certainly has the experience to back his electoral plans. Unfortunately, the generalised lack of trust fostered by corruption scandals involving infrastructure contracts signed by prior administrations and the "El Niño" flooding disaster created disruptions for his first year of a 5-year term. The Executive Branch is also finding difficulty in building bridges with Congress, where Keiko Fujimori’s party has an absolute majority.

With such perspective, Peru continues to face two major challenges in the upcoming years: achieving sustainable economic growth and strengthening the relationship between growth and equality. Both of these aspects will require continued investment in all sectors and regions of the country in order to accelerate growth and protect vulnerable populations which could fall back into poverty, hence reversing the progress made in the past few years.

Since 2008 the Peruvian government has been promoting private companies to help them close the infrastructure gap and increase life quality in the country. Through a law called "Taxes for Work" (Obras por Impuestos), companies can pay their taxes by building public infrastructure (roads, schools, water systems, etc.) and so obtain significant tax reductions.

Investment

An estimated USD63 billion is due to be spent on investment projects from 2017 up to 2020, including major mining and oil and gas projects, as well as significant infrastructure works and public-private partnerships.

Investment Opportunities - Relevant Sectors

Mining

Peru is currently ranked top in Latin America in the Mining Attractiveness Index of the Fraser Institute. This is due to a legal framework that promotes investment, a mining cadastre that provides security of tenure, the availability of skilled professionals, a strong information network and world-class geological potential. The country is the second highest producer of copper and silver, third of tin and zinc and fifth of gold worldwide; and a top-tier Latin American producer of several precious and base metals.

Oil & Gas

Peru has significant oil and gas resources in several areas of the country, with three main locations: the Northwest (Piura and Tumbes), the Central Jungle (Junín, Pasco, Huánuco, Ucayali) and the Southeast (Cuzco and Madre de Dios). Its geographical position grants Peru an advantage to supply the markets of the Pacific coast, mainly the USA, Mexico and Central America, as well as the Asia-Pacific region. Also, Peru is beginning to promote the development of petrochemical hubs along the southern coast and in the Southern Andes, including a legal framework providing tax breaks and incentives for the installation, operation and maintenance of such plants.

Energy

There are important investment opportunities in power generation projects, both increasing and building new capacity. Also, Peru has enormous hydroelectric potential, coupled with significant projects for clean energy coming from solar, geothermal and wind resources. Nine out of twenty-five regions have been identified as having wind potential. The general growth of economic activity always demands more power generation and in turn this requires the development of infrastructure to transmit and distribute energy (gas and electricity) to all regions in the country.

Infrastructure

There is a need to invest in infrastructure in order to gain access to more markets, increase the competitiveness of Peruvian companies and reduce poverty and inequality. The infrastructure gap has been recently estimated to be in the region of USD69 billion. Internal consumption has leveraged the infrastructure in Peru, as it has given the construction sector continuous growth in the past five years. The development of several projects, mining units and business centres among others, are always present as investment opportunities for roads and railways. Despite the country’s growth, for example, Peru is still really low on industrial parks and even on shopping centres when compared with the rest of the region.

Transportation

Peru has prioritised the development of transportation infrastructure to increase its competitiveness and form a logistic hub that integrates Latin America with the Asia-Pacific region. The current pipeline estimated by the Promotion of Investment Agency (Proinversion) is around USD25 billion in projects for 2017-18, which represents important investment opportunities.

Telecommunications

Through the Telecommunications Investment Fund several measures are being developed in order to reduce the digital gap in basic telecommunication services in rural areas. Also, the recent implementation of 4G technology and the increase of fibre-optics and backbone infrastructure is steadily increasing investment in this sector.

Conclusion

The fast-growing Peruvian economy has opened many doors for both multinational companies wanting to take advantage of the country’s business reputation, as well as local entities that are using the current momentum to expand beyond their borders. This has therefore increased the need for advice of an international standard and cross-border legal advice in the country. It then comes as no surprise that Peru has recorded historic M&A transactional amounts in the last decade, especially in 2007 (USD5.3 billion), 2013 (USD6.8 billion) and 2014, a record-breaking year with over USD11 billion. The mergers and acquisitions market for 2016 saw a 20% growth when compared to 2015, with a reported 131 significant transactions.

As a result, international law firms have started to enter Peru over the past four years, either independently or by incorporating an existing national firm into their structure. In return, Peruvian lawyers that have chosen to remain independent have embraced the need for increasing their regional profile, building a strong reputation to prove to their current and potential clients that they are more than capable of handling complex and even cross-border transactions with the required international standard of quality in their delivery.