Paraguay: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Back to cruise growth rate after a strong recovery in 2010
After a strong recession in 2009, the economic rebound of 2010 is attributable in particular to the rebound in agriculture and the record levels of soybean production. The previous soya campaign had been affected by a particularly severe drought. The economy also benefited from a rise in raw materials prices and a recovery in demand from the main trading partners (Brazil, Uruguay, and Argentina). The government has raised interest rates only gradually. These factors have spurred household consumption and private investments. After the 2010 rebound, the growth rate will slow in 2011. The economy is expected nevertheless to grow at a strong pace, comparable to the average of the years preceding the crisis. Assuming good harvests, the farming sector will contribute positively to growth but much more moderately than in 2010. Thanks to strong demand from emerging countries and buoyant raw material prices, revenues from exports, particularly of soybeans and beef, is expected to continue to underpin household consumption and private investment. An agreement with Brazil on raising prices for energy sold to that large neighbour could facilitate increases in public investment (notably on infrastructures and housing). In this context, services (transport, wholesale and retail trade), food-processing industries and construction are expected to perform well. Hydro-electric potential and the exploitation of titanium deposits will attract foreign investors, paving the way for development of the mining sector and the metal industries in the longer term.

A manageable financial position
Thanks to higher-than-expected revenues, fuelled by the robust recovery, and improvements within the tax and customs administrations, public accounts are expected to be in balance for 2010. For 2011, a slight deterioration in the budgetary balance is expected due to the rise in public sector wages and the acceleration in welfare and investment spending. Revenues are expected to benefit from the increase in energy prices charged to Brazil, but Congress has postponed the introduction of a personal income tax for three years.
Although the current account deficit is not expected to grow, it remains vulnerable to raw material price fluctuations. Foreign debt is moderate and financing needs will likely be covered by borrowing abroad and foreign direct investment. Foreign exchange reserves enhance the resilience of Paraguay's financial position.

Political uncertainties and the slow pace of reforms have undermined the business environment.
The election in 2008 for a five-year term of President Lugo, who belongs to the left-wing Patriotic Alliance for Change party, put an end to more than 60 years of rule by the Colorado party of conservative and nationalist tendencies. Implementation of a social and structural reform programme (privatisations, tax increases, and public/private partnerships for the improvement of infrastructures) has been hindered by the lack of a majority in Congress and the divisions within the centre-left government coalition. To foster political stability, the President opened key posts to opposition parties. The Colorado party thereby holds the presidency of both chambers of Congress, but this situation weakens the government's ability to control the legislative calendar and delays reform implementation. Insecurity and cross-border narcotics trafficking are still major factors of political instability. Furthermore, the President's health had led to uncertainty as to his capacity to pursue his mandate until 2013.

Strengths

• Dominant economic role of agriculture, both crop cultivation and livestock breeding (soybeans and cattle)
• Abundant hydroelectric resources
• Prudent economic policies
• Support of international financial institutions
• Democratic institutions being implemented
• Discovery of titanium deposits that will spur mining sector development
• Member of Mercosur and main beneficiary of its structural convergence fund

Weaknesses

• Land-locked country, often a platform for illicit activities, insufficient infrastructure
• Exposed to many extraneous influences: climatic changes, fluctuations in world oil and agricultural prices and the economic conditions prevailing in Brazil and Argentina
• Difficult restructuring of public sector
• Weak institutions and corruption adversely impact the business environment
• One of the poorest countries in the region
• Weak governance and insecurity linked to narcotics trafficking