Paraguay: A South American powerhouse rises

paraguay flag

A feature on the state of economy in Paraguay

Throughout all the instability the country has seen since the impeachment of former President Lugo, and even during the years of isolation at the end of the Stroessner regime, Paraguay has had some of the strongest macro-economic circumstances in the region. With the strongest currency in the region – with no devaluations in over 70 years – consistently low inflation, low taxation, solid reserves of foreign currency thanks to the strong exports of the agricultural sector, and business-friendly legislation, it is no surprise that asunción was recently voted the cheapest big city in which to open a business in the Americas in the FDI American Cities of the Future 2015/16 report.

In February 2014, Naoyuki Shinohara, Deputy Managing Director of the International Monetary Fund (IMF), visited the capital Asunción and said he was impressed by the government’s ambitious agenda of growth-enhancing reforms and poverty-reduction initiatives.

“The reforms would help improve Paraguay’s social and economic development, increase productivity growth, and support the country’s transition to a dynamic emerging market economy over the next decade.”

“The Central Bank of Paraguay (BCP) has made important advances in implementing an inflation-targeting regime along with greater exchange-rate flexibility. Paraguay has a strong economic basis from which to manage regional or other problems. The country’s solid bases, including low debt, sizeable official reserves, small fiscal and current-account deficits, greater exchange-rate flexibility and below-target inflation, as well as a sound financial system and increased policy certainty brought about by the FRL and the inflation-targeting regime, have provided the government with better buffers than in the past to cope with the impact of softer commodity prices, tighter external financing conditions and unexpected regional problems. Overall, the outlook for Paraguay is positive.”

In 2014 Paraguay tapped international bond markets with stunning success, selling $1 billion of dollar bonds in August, an offer that was oversubscribed by four, a strong endorsement of the June 2014 rating upgrade from Standard & Poor’s. The MERCOSUR member issued 30-year bonds with a yield of 6.1%, which compares well with the average of 6.29% for countries that shared Paraguay’s BB rating.

The agency Moody’s raised the rating of government bonds Paraguay to Ba1 from Ba2, driven by the implementation of a reform package approved in late 2013, and efforts to diversify the economy. Moody’s also changed the outlook from Positive to Stable, mentioning that the country’s improved governance and institutional strength were big factors behind the rise in its rating.

The president of the Central Bank, Carlos Fernandez, said in an interview about the change in rating: “This comes at a very important moment, when we are seeing a less supportive environment in the region, with many countries going through a difficult situation. We are a step away from reaching investment grade, and we will continue working in that direction, but we would not be so imprudent as to expect an improvement every year.”