Country Risk Rating

B
Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable. - Source: Coface

Business Climate Rating

B
The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.

Strengths

  • Well-developed agricultural sector (soybeans and beef)
  • Abundant hydroelectric resources
  • Prudent fiscal and monetary policies

Weaknesses

  • Poor infrastructure (river transport, roads, power lines)
  • Dependent on the agricultural sector and a handful of trading partners, notably Brazil and Argentina
  • Weak governance (corruption and cronyism)
  • Large informal market (40% of GDP)
  • Vulnerable to climate conditions

Current Trends

A solid recovery expected

The economy contracted sharply in 2020. However, it has been one of the most resilient in the region, thanks to the strict health measures taken to combat COVID-19. The first measures (border closures, cancelling rallies, school closures) were introduced in March 2020, followed by a period of lockdown (March-May). The measures were lifted gradually, in several phases: first a "smart quarantine" from June 2020 onwards, until the reopening of the border with Brazil for cars only in October 2020. The recovery is expected to be solid in 2021, thanks to a recovery in consumption, investment and exports. Announced in early October, the budget for 2021 is a balance between counter-cyclical and austerity measures, prioritising spending on education, health and investment to support the recovery and employment. It also provides for investment in infrastructure amounting to 2% of GDP. The already dynamic construction sector, notably with the implementation of the Rutas 2 and 7 project through a USD 520 million public-private partnership (PPP), is expected to benefit from these investments. Private consumption (65% of GDP) is expected to suffer from the shock that the informal sector has suffered because of the crisis. The agricultural sector (50% of GDP) will be the driving force of the recovery, with one third of the World Bank loan (USD 320 million in March 2020) being devoted to it. The accommodative policy of the central bank is being accentuated by the fight against the COVID-19 crisis. In addition to a lowering of key rates by 325 basis points, reaching 0.75% in March 2020, the central bank has set up a national emergency special credit facility (ECF) to provide up to USD 760 million in liquidity support to SMEs. It would also intervene to stabilise the guarani in the event of a sharp depreciation. Inflation is expected to remain at the centre of the central bank's target range (2-6%).

 

Prudent fiscal policy put on hold

Due to the COVID-19 crisis, the government is not expected to succeed in complying with the Fiscal Responsibility Law that limits the deficit to 1.5% of GDP. It is therefore expected to request a 3-year deviation from this law from Congress. The recovery in economic activity is expected to contribute to the projected increase in tax revenues in 2021 and finance the increase in public spending, particularly in education, health and safety. Public debt is expected to be contained and will be financed on international markets. In March 2020, the government borrowed USD 1.6 billion (4.8% of GDP), of which 50% from multilateral organisations and 50% through the issuance of sovereign bonds. In April, it successfully issued international sovereign bonds for USD 1 billion.

Exports of agricultural products (soybeans, beef) and energy (from the bi-national hydroelectric power plants of Itaipú in Brazil and Yacyretá in Argentina), which account for 64% and 24% of total exports respectively, declined in 2020, mainly due to the unfavourable economic situation in Brazil and Argentina, its main trading partners (55% of total exports). The sharp drop in imports has largely offset the drop in exports. Imports are expected to grow as domestic demand picks up, while exports will depend on the strength of the economic recovery in its main trading partners. The services balance will remain in deficit due to growing imports of transport services. The decrease in expatriate remittances is offset by lower profit repatriation by foreign companies operating in Paraguay. Foreign exchange reserves remain satisfactory, covering 5 months’ worth of imports in September 2020.

 

Tense socio-political context

The president, Mario Abdo Benítez, of the Partido Colorado (PC), elected in April 2018, narrowly avoided impeachment in 2019. The renegotiation of the Itaipu Treaty with Brazil on the distribution of hydroelectricity has begun, since it expires in 2023. The terms of the treaty are a source of discontent in Paraguay. A controversial agreement on the Itaipú hydroelectric plant, which was made public at the end of July 2019 and cancelled shortly afterwards, provoked strong anti-government protests and triggered a political crisis. In this context, in addition to a narrow majority in the Senate due to divisions with a moderate PC faction allied to the former president, Horacio Cartes, the government is not expected to push through structural reforms such as the simplification of company law and the reform of real estate guarantees. The municipal elections scheduled for October 2021 (originally scheduled for November 2020) are expected to confirm the president’s growing unpopularity.

Moreover, the business environment has become even more difficult, not least because of the above-mentioned facts, but also due to the continuing importance of the informal economy and of corruption.

Source:

Coface (02/2020)
Paraguay