ECONOMY TO EMERGE FROM RECESSION

In 2023, the resumption of activity should be mainly led by agriculture (7% of 2021 GDP), which is 2022 was strongly affected by a severe drought, hampering the sector´s yield (soybean output cratered 60% in the 2021-2022 crop). The expected improvement in weather conditions will also contribute to a rebound in transport (through higher river water levels) and power generation at hydroelectric plants, thus favoring the utility sector (7% of GDP). Moreover, the trends mentioned above should also lead to a rise in exports, despite the expected cooling of global activity (including in its main trade partners Brazil, Argentina, Chile, and Russia, in descending order) and assuming some softening of agriculture commodity prices. It is also worth noting that Paraguay only consumes 16% of the energy it produces; the remainder is exported to countries like Argentina and Brazil, with Paraguay equally sharing the Yacyretá and Itaipú hydroelectric plants on the Parana River with these two respective countries. Household consumption (64% of GDP) should expand, driven by a more substantial job market (amid the resumption of domestic activity) and the gradual easing of inflationary pressures, with both forces prevailing over tighter credit conditions. However, stricter global borrowing conditions should result in tepid growth in gross fixed investments. Private and public assets should be directed primarily to manufacturing and infrastructure, thereby favoring the construction sector. The government has tried to increase public-private partnerships (PPP), which include the ongoing implementation of the USD 520 million Rutas 2 and 7 road projects.

LOWER FISCAL DEFICIT - CURRENT ACCOUNT TO RETURN TO SURPLUS

The 2023 budget estimates the fiscal deficit at 2.3% of GDP. This means that the Fiscal Responsibility Law, which limits the nominal debt to 1.5% of GDP, will remain suspended (the deficit is only likely to return below the ceiling by 2024). The fiscal deficit will narrow chiefly on the back of the rebound in activity, which will favor tax collection. This should offset the expected rise in interest payments amid higher global borrowing costs. It is important to note that, in August 2022, roughly 87% of public debt was external. That said, by year-end 2023, gross public debt as a percentage of GDP will decline and should not exceed the 40%-of-GDP limit established by the statutory fiscal framework.

Regarding its external accounts, Paraguay´s current account should switch back to surplus in 2023 as the trade balance returns to positive territory. The improvement in agriculture and power exports should outpace the rise in imports (assuming some easing of energy commodity prices leading to lower expenses in fuel purchase from abroad). Agriculture commodity exports include soybean and meat, and account for 55% of total exports, while electricity contributes another 11%. In addition, the services deficit could marginally narrow due to lower transport costs. By contrast, the primary income deficit is expected to widen due to higher profit repatriation by foreign companies (amid an upturn in activity). In contrast, the secondary income surplus will narrow but will remain supported by expatriate remittances (1.3% of GDP). Gradual weakening of job markets in the leading countries originating the resources (namely Spain and the US) will likely contribute to the expected downward trend. Last, foreign exchange reserves in September 2022 stood at USD 8.5 billion, covering roughly seven months of imports.

RULING POLITICAL CAPITAL WILL REMAIN WEAK AS THE COUNTRY HEADS TO GENERAL ELECTIONS

President Mario Abdo Benítez, leader of the long-dominant conservative Partido Colorado (PC) Party, rules with fragile political support. His approval rating stood at a meager 17% in July 2022. He survived two impeachment attempts, the first in 2019 amid the discovery of a controversial agreement with Brazil on the Itaipu hydroelectric plant and the second in 2021, when Mr. Benítez was accused of mismanaging the Covid-19 response. Furthermore, Vice President Hugo Velázquez resigned in August 2022 after we sanctioned him for “major corruption.” Overall, Benítez’s lack of political support and friction within his party will probably hamper the passing of relevant bills in Parliament until the end of his mandate in August 2023. The incumbent government must renegotiate the treaty signed with Brazil on creating the Itaipu hydroelectric plant. The 50-year period in which there was no possibility for changes in areas such as energy tariffs and commercialization will expire in August 2023. Paraguay can only sell the electricity it does not use to Brazil. It has signaled that it wants to be free to sell the surplus on the Brazilian free market or to Argentina for a higher price. Otherwise, Paraguay recognizes Taiwan as an independent territory. In September 2022, Benítez urged the island nation to invest USD 1 billion in his country to help it resist “enormous” pressure to shift diplomatic recognition to rival China. A major exporter of soy and beef, Paraguay does not have access to the Chinese market due to its relations with Taipei. Last, Paraguay will hold presidential elections on April 2023, renewing the 80 members of the Lower House and the 45 members of the Senate. According to preliminary polls from September 2022, Santiago Peña, from the Honor Colorado Party, is the best-positioned candidate for the 2023 presidential elections over any candidate from a disparate coalition united in their opposition to the PC. He is an economist, a former member of the Board of the Central Bank of Paraguay, and a former Minister of Finance. In 2018, Santiago Peña lost the primary election to the incumbent president. In the same year, the ruling party split into two factions. On this occasion, supporters of former and very influential president Horacio Cartes founded the Honor Colorado Party.