Paraguay: Risk Assessment
Country Risk Rating
Business Climate Rating
- Well-developed agricultural sector (soybeans and beef)
- Abundant hydroelectric resources
- Prudent fiscal and monetary policies
- 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 climatic conditions
Growth is expected to accelerate in 2020, driven by private consumption (65% of GDP) and the recovery of agricultural and electricity exports as weather conditions get back to normal. The upturn in the agricultural sector (50% of GDP) will support the agri-food industry, which is mainly export-oriented. In addition, the relatively good economic situation in Brazil, the country’s main trading partner, could benefit exports. However, the downward outlook for global growth could put a dampener on exports. Strong performances in automotive parts assembly (47% of re-exports) and textiles (33%) by the maquilas (export processing zones), thanks to an attractive tax policy for foreign investors, will support job creation and ultimately household purchasing power. A stronger showing by the construction sector, owing among other things to implementation of the Rutas 2 and 7 road project through a USD 520 million public private partnership (PPP), will also contribute to this. Private investment, which has been constrained for several years by the lack of infrastructure, should get a boost from these investments in road infrastructure as well as from the central bank’s accommodative policy. Inflation is expected to remain in the middle of the target range (2-6%) set by the central bank, which should maintain its accommodative policy if the Fed cuts US rates further. It would also intervene to stabilize the guarani in the event of a sharp depreciation.
Return to prudent fiscal policy
The 2020 budget plans for a 6.6% increase in expenditure. The government is expected to stick to the prudent fiscal policy set out in the Fiscal Responsibility Act, which limits the deficit to 1.5% of GDP. The pick-up in economic activity should contribute to the expected increase in tax revenues (8%) and finance the increase in public spending, particularly in education, health and safety. Almost half of the planned expenditure (47%) will go to paying the wage bill, 17% to social benefits and 15% to improving road and electricity infrastructure. However, the country needs to increase its tax base, as tax revenues represent less than 10% of GDP. Public debt should be contained, even if it is financed on international markets.
Barring adverse weather conditions, the relative improvement of the economic situation in Brazil, Paraguay’s main trading partner, should support agricultural exports (53% of the total) as well as electricity exports (20%) from the bi-national hydroelectric power plants of Itaipú (Brazil) and Yacyretá (Argentina). The trade surplus will be moderated by strong import growth due to brisk household consumption and investment in infrastructure and the maquilas. The balance of services will remain in deficit, due to rising imports of transport services. Expatriate remittances will not compensate for the repatriation of dividends, which will weaken the current account surplus. Conversely, regular FDI inflows (1.75% of GDP in 2018) from the United States, Spain and Brazil will strengthen the surplus. Foreign exchange reserves will remain satisfactory, covering 6.9 months of imports.
A tense socio-political situation
President Mario Abdo Benítez of the Colorado Party (PC), elected in April 2018, narrowly avoided being impeached following demonstrations in the country. A controversial agreement on the Itaipú hydroelectric power plant, which was made public at the end of July and canceled shortly afterwards, provoked major anti-government protests and triggered a political crisis. In this situation, compounded by a narrow Senate majority owing to differences with a moderate PC faction linked to former President Horacio Cartes, the government is not expected to push through structural reforms such as measures to simplify company law and reform real estate collateral. The municipal elections scheduled for November 2020 are expected to further confirm the President’s growing unpopularity.
The business environment has become even more difficult, not least because of the above-mentioned developments, but also because of the persistently large informal economy and corruption. The country is ranked 125th out of 190 in the World Bank’s Doing Business ranking in 2020 and 132nd out of 180 on corruption according to Transparency International.