Country note: Paraguay
In Short
By Christian Mejrup, Deputy CIO EM Sovereign Debt
We conducted a due diligence trip to Asuncion in September ’24, just six weeks after Moody’s upgraded Paraguay’s credit rating to investment grade (Baa3) for the first time. The upgrade was justified by Paraguay's strong structural reform agenda, improved governance, relatively high growth, and adherence to fiscal targets. We are confident that the country will continue its fiscal consolidation and achieve its 1.5% deficit target by 2026, as outlined in its Fiscal Responsibility Law. The President appears to be in a strong position to navigate the remaining four years of his term, with a solid majority in both houses. During our meetings in Asuncion, we noticed a renewed sense of determination and progress within the ministries. The purpose of our trip was also to assess the economy’s vulnerability to weather-related shocks. Although improving, the still relatively undiversified economic base suggests boom-bust growth cycles remain a risk.
Politics: Presidential power
Paraguay stands out in Latin America for its strong government institutions. Successive governments have prioritized institutional improvement, and the present government led by President Santiago Peña and the Colorado Party is no exception.
President Peña took office in August 2023 for a five- year term. His Colorado Party holds an absolute majority in both the Senate (24 out of 45 seats) and the Congress (48 out of 80 seats). This strong political position gives us confidence that the process of structural reforms will continue to make Paraguay's economy more resilient moving forward.
Economic growth outlook: Weather dependent
Over the past decade, Paraguay has maintained an average annual growth rate of 2.9%, primarily driven by agricultural production and hydroelectric power. However, growth stalled to just 0.2% y/y in 2022 due to severe drought, which reduced agricultural output, increased transportation costs due to low river water levels, and lowered hydroelectric power generation.
Paraguay experienced a strong recovery in 2023, with growth rebounding to 4.7% y/y. Economic activity in early 2024 remains above trend, with Q1:24 growth at 4.3% y/y. The economic activity index, a GDP proxy, showed 4.6% y/y growth as of July ’24, making it likely that GDP growth will outperform the IMF’s 2024 forecast of 3.4%. We expect medium-term growth to trend towards 3.0-3.5%, which aligns with Paraguay’s potential growth level. While this may seem modest in a frontier market context, it is compelling compared to many of its regional peers.
