Paraguay

Strong growth momentum, despite still-challenging external environment

Country Rating C2

Strengths

  • A contained fiscal budget and public debt
  • Low current account deficit
  • Ample foreign exchange reserves
  • The government pursues business-friendly policies

Weaknesses

  • The economy is highly dependent on the agricultural sector and weather conditions
  • One of the poorest countries in Latin America with high inequality and sub-standard infrastructure
  • Wide informal economy
  • Low diversification of the economy
  • High level of corruption, criminality and poor rule of law

 

ECONOMIC OVERVIEW

 

GDP growth above regional average

Paraguay is one of the poorest and most unequal economies of South America. 22.2% of the population lives below the national poverty line according to the World Bank. The World Economic Forum competitiveness index ranks it 118th out of 140 in terms of quality of infrastructure. Paraguay’s structural vulnerabilities stem from a reliance on the agriculture sector. Hence it is exposed to commodity-price shocks and weather conditions.

 

Yet GDP growth has been dynamic and above regional average since 2013, driven by domestic demand in a still challenging external environment in 2015-16. Growth should stay robust, reaching +3.6% in 2017 after a good soy harvest, and +4.0% in 2018, with the recovery of Brazil and Argentina (accounting for 40% of trade with Paraguay)

 

Banks, while exposed to the agricultural sector, are well capitalized. But credit growth has tumbled from +5.2% in average in 2016 to -0.8% in June 2017 as commodity prices declined. Paraguay’s business climate remains weak. According to the 2017 World Bank Doing Business Survey, the country ranks 106th out of 190 on ease of doing business. Particular shortcomings include “rule of law” and “control of corruption”.

 

Appropriate policies amid external risk

The central bank’s policy has gained credibility by taming inflation and anchoring expectations through inflation targeting (4% target since 2017). Moreover, since passing the Fiscal Responsibility Law in 2013, the government has showed restraint in public spending. The fiscal deficit should stay low and stable in 2017 (-1.2%) and 2018 (-1.1%) along with public debt-to-GDP ratio (25.9% in 2017). In addition, the implementation of the New Banking Law passed in December 2016 will be crucial for stronger risk-based supervision. After president Cartes planned to amend the constitution to allow his own re-election, the country plunged into crisis. Although he eventually backed out in the face of popular protests, renewed political tensions could pose a risk to the pursuit of structural reforms by a new president.

 

Although the current account balance turned slightly negative, Paraguay should register only small deficits going forward. The deficit is financed by FDI (up to 82% in 2016) and external loans.

 

Yet export dependency on primary commodities remains very high (90.6%) and Paraguay’s real effective exchange rate correlates to a large extent with commodity prices. Foreign currency reserves cover about 7 months of imports (up from around 5 in 2013), providing an external liquidity buffer.

 

Last review: 9/22/2017