EKONOMİ YAYINLARI
Paraguay

Paraguay

Population 7.3 million
GDP 4,918 US$
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%)* -0.4 -0.6 5.0 0.5
Inflation (yearly average, %) 2.8 1.7 3.5 4.0
Budget balance (% GDP) -2.9 -6.1 -4.0 -3.0
Current account balance (% GDP) -1.1 2.2 3.5 2.1
Public debt (% GDP) 25.8 36.7 38.4 39.5

(e): Estimate (f): Forecast *2020 fiscal year: from july 2019 to june 2020

STRENGTHS

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

WEAKNESSES

  • Poor infrastructure (river transport, roads, power lines)
  • Defective health and education services
  • Low fiscal resources (17% of GDP)
  • 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

RISK ASSESSMENT

Growth to strongly decelerate in 2022

In 2022, household consumption (65% of GDP) will expand, driven by the gradual recovery on the job market as the economy reopens. This should prevail over the recent inflationary pressures (amid higher international commodity prices) that have led the central bank to tighten its monetary policy since August 2021 (expected to continue in 2022). Moreover, private and public investments should remain robust, notably in manufacturing and infrastructure, respectively, favouring the construction sector as well. In fact, the government has tried to increase public-private partnerships (PPP), which includes the ongoing implementation of the USD 520 million Rutas 2 and 7 road project. Nonetheless, the agricultural sector (50% of GDP) will contribute negatively, despite still supportive international prices. Paraguayan authorities expect the 2021/2022 crop (mostly soybean) to reach 6 – 7 million tonnes (from 10 million tonnes in the previous year), due to the dryness brought by the La Niña. Still, the Parana River, which winds through Brazil, Paraguay and Argentina, has dropped to its lowest levels in 77 years. This could compromise exporters’ ability to get their products to port, forcing them to look for alternatives, such as land routes to ports in Brazil. Lastly, the drought also affects power generation at the large Itaipu hydroelectric plant that straddles the Brazil-Paraguay border.

 

Not yet back to Fiscal Responsibility law, current account surplus to narrow

The 2022 budget estimates the fiscal deficit at 3% of GDP. This means, that the Fiscal Responsibility Law, which limits the nominal deficit to 1.5% of GDP, will remain suspended (the deficit would return below the ceiling only by 2024). In 2022, the fiscal deficit will narrow mostly due to the rollback of COVID-19 related expenditure, still making up for lower revenues from reduced hydroelectricity exports. Still, by year-end, gross public debt will hover the 40% of GDP limit established by the statutory fiscal framework. It is important to note that as roughly 80% of its debt is external, the government is likely to face rising financing costs (albeit rates should remain low) amid the expected gradual dismantling of the accommodative monetary policy by developed markets´ central banks.

 

Regarding the external accounts, Paraguay should continue to observe a current account surplus, albeit it will narrow due to a lower trade balance surplus. While agricultural commodity prices should remain strong, favouring the sector´s exports (including soybean and meat, and accounting for 64% of total foreign sales), the current drought tends to affect the volume of grain and energy exported (24% of total exports). In addition, the services balance will remain in deficit due to growing transport costs. Finally, the primary income deficit is expected to widen somewhat due to higher profit repatriation by foreign companies, while the secondary income surplus will remain supported by expatriate remittances (1.6% of GDP). Foreign exchange reserves covered roughly 9 months of imports in October 2021.

 

Ruling political capital will remain weak

President Mario Abdo Benítez, of the country´s long dominant conservative Partido Colorado (PC), counts with a fragile political capital. In March 2021, the main opposition party, Partido Liberal Radical Auténtico, filed an impeachment against the president in Congress. Mr. Benítez was accused of mismanaging the COVID-19 response, but the lower house rejected it (The PC holds 42 out of 80 seats in the house). Indeed, this was the second impeachment request (the first one was triggered in 2019 amid the discovery of a controversial agreement with Brazil on the Itaipu hydroelectric plant). Benitez managed to keep his post thanks to the support of the Colorado´s party faction linked to previous president Horacio Cartes (2013-2018). In fact, the ruling party split into two factions during the 2018 general election. In this occasion, supporters of former president Horacio Cartes built the Honor Colorado. As a result, Cartes still holds a relevant political role. Moreover, despite the government´s weak popularity, the Colorado Party won mayoral seats in 11 out of 17 department capitals (including capital of Asunción) during the October 2021 municipal elections. Overall, Benítez’ lack of political support, and frictions within his party, will probably hamper the passing of relevant legislative bills until the end of his mandate in 2023. Finally, the government must renegotiate the agreement signed with Brazil on the creation of the Itaipu hydroelectric plant. In August 2023, the 50-year period in which there was no possibility for changes in topics such as energy tariffs and commercialization will expire. Currently, Paraguay can only sell the electricity it does not use to Brazil. It has signalled that it wants to be free to sell the surplus either on the Brazilian free market or to Argentina, for a higher price.

 

Last updated: February 2022

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