Peru Finance Profile 2012

Market-based competition The foundations of a competitive market economy are largely assured. In addition, the Garcia government has markedly improved the market economy’s legal framework. The Fujimori government already rolled back dense regulation of the economy in the 1990s by lifting price controls, subsidies and restrictions on foreign investment. In the formal sector of the economy, market competition thus has a solid institutional framework. However, compared to countries like Chile, slow and costly business registration still poses an entry barrier. The private sector continued to face several constraints that hamper growth, including contract enforcement and problems starting a business, dealing with licenses and trading across borders. Despite the efforts made, the Global Competitiveness Index of the World Economic Forum ranked Peru on position 86 among 131 countries in its 2007/2008 report, identifying the country’s weakest pillars as its institutions, infrastructure and innovation capabilities.

The García government has reacted to this well-known situation. After approval of the free trade agreement with United States in December 2007, parliament conceded decree power to the executive – limited to the period from 1 January 2008 to 28 June 2008 – to implement the necessary regulations to modernize the competition framework and to promote the competitiveness of the economy. In this context, the García administration issued a series of 99 legislative decrees to enhance competition, among them statutes to strengthen state capabilities, infrastructure, education, and to address the structural imbalances caused by the large informal sector. Given the magnitude of problems, the past experiences with inefficient laws and the possibly disturbing impacts of the global economic crisis, it remains to be seen what the effects of these decrees will be.

Peru’s informal sector remains one of the most important impediments to enhancing the quality of competition and to bringing about greater social equity. Data from the National Household Survey (ENAHO) in 2006 shows that 60% of the Peruvian labor force works in enterprises with less than 50 workers. Many of them operate informally and thus impede access to social benefits. A law approved in 2003 to address this problem did not yield the expected results, because workers or employers did not find it attractive. The government has addressed this informality problem with a legislative decree in June 2008 targeting the incentive framework of small and medium-sized enterprises (e.g., affiliation to a health system will continue to be compulsory but co-financed in equal amounts by the employer and the government; similarly, affiliation to the pension insurance will be subsidized by the state).

Anti-monopoly policy Though the formation of monopolies and oligopolies is still regulated inconsistently, the institutional framework has slightly improved due to the growing awareness of the dangers of market distortions. In the course of neoliberal reforms in the early 1990s and the implementation of competition policy, anti-cartel legislation was introduced in 1991 in the form of Legislative Decree 701, which established ex-post controls for dominant position abuses and collusive practices. The aim was to eradicate monopolistic practices, controls and restraints on competition in the production and marketing of goods and in the provision of services. In June 2008, the government issued a new competition law (Legislative Decree 1034) in order to clarify anticompetitive conduct, strengthen the state’s investigative powers and assure its independence. The law does not have any provision for mergers that may produce anticompetitive effects and, generally, Peruvian law does not provide for pre-merger notification, except in the electrical sector (Law no. 26876, Antimonopoly and Antioligopoly of the Electrical Sector Law). Nevertheless, governmental authorities do follow up on mergers especially in sensitive economic sectors. The government has strengthened the competition agency Indecopi (Institute for the Defense of Competition and Protection of Intellectual Property) over the last 15 years in order to sanction abusive acts as a result of a dominant position and restrictive market practices. Created in 1992, Indecopi is an organization with autonomy at the technical and jurisdictional level. Among its jurisdictional bodies, it includes the Free Competition Commission, Consumer Protection Commission, Unfair Competition Commission and the Market Access Commission. These governmental commissions, however, apply the law only sporadically. Bureaucratic corruption still takes its toll, and the desired market dynamics continue to have priority.

Liberalization of foreign trade The state has extensively deregulated foreign trade. No fundamental state intervention in free trade remains. This particularly applies to the treatment of foreign investments and stockholding. The government has eliminated all restrictions or controls on payments, transactions, transfers or repatriation of profits. A step forward in this direction was the free trade agreement with the United States, which was approved by the Peruvian Congress in 2006 and by the U.S. Congress in 2008. It entered into force on 1 February 2009. Peru also signed a free trade agreement with Chile, which entered into force in March 2009. During the 2008 APEC Summit, Peru made important progress towards a free trade agreement with China. In addition, Peru took further steps toward bilateral negotiations with Mexico, Singapore, Thailand, the European Free Trade Association (EFTA), and the European Union. Almost two-thirds of external trade (exports) is covered under bilateral free trade agreements.

Banking system With the opening to foreign institutions in the early 1990s, the Peruvian financial system modernized rapidly and became more competitive. It now rests on a more solid foundation. The government is implementing measures to strengthen bank supervision following the principles of the Basel II accord, but these measures are still not up to the highest international standards. In June 2008, an amendment to the General Banking Law was submitted to Congress to allow the Superintendency of Banks (SBS) the introduction of capital requirements for exchange-related risk in line with the Basel II accord. In August 2008, after some delay, the government submitted another amendment to Congress to raise the minimum capital requirement for microfinance institutions. In line with Basel II, capital requirements for all types of risks, including credit, market and operational risks have been introduced.

Until now, Peru’s banking system has been remarkably resilient in the face of the international financial crisis. This is not only on account of its weak ties with the problematic operations of the international financial system, but also a result of the successful coordination between the Ministry of Finance, the Central Reserve Bank (BCRP) and the Superintendency of Banks and Insurance (SBS). Together – at least until now – they managed to ensure liquidity to the financial sector and capital markets and to minimize systemic risks. Large official reserves and strong financial soundness indicators for the banking system, along with banks’ limited reliance on external capital have helped preserve stable liquidity conditions. In sum, Peruvian banks can better withstand currency-related shocks but remain subject to dollarization risks. The long-standing problem of high “dollarization” of the banking and financial sector – with a large amount of outstanding bank loans denominated in U.S. dollars while most personal and corporate income is in Peruvian soles – has been tackled in the period under review but still might pose problems. According to the IMF, dollarization has rebounded in the last months of 2008 after declining markedly in the two years before.