Paraguay

major macro economic indicators

(e): Estimate (f): Forecast 

RISK ASSESSMENT

Economy to rebound in 2023

In 2023, the resumption of activity should be mainly driven by agriculture (16% of GDP), which in 2022 was strongly affected by severe drought, thereby hampering the sector´s yield (soybean output slumped by 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 favouring the utility sector (7% of GDP). Moreover, the aforementioned trends 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 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 such as 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 stronger job market (amid the resumption of domestic activity) and by 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 investments should be directed primarily to manufacturing and infrastructure, respectively, thereby favouring the construction sector as well. In fact, the government has tried to increase public-private partnerships (PPP), which include the expansion and modernisation of the PY01 route (at an estimated cost of USD 445 million).

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 deficit 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 back of the rebound in activity, which will favour tax collection. This should offset the expected rise in interest payments amid higher global borrowing costs. It is important to note that at March 2023 roughly 88% of public debt was external (53% of it with multilaterals). That said, by year-end 2023, debt-to-GDP ratio 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. In fact, the improvement in agriculture and power exports should outpace the rise in imports (assuming some easing of energy commodity prices compared with 2022 leading to lower expenses in the purchase of fuel 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). Furthermore, the secondary income surplus will narrow, as expatriate remittances (1.3% of GDP) will be affected by the gradual weakening of job markets in the main countries originating the resources (namely Spain and the US). Last, foreign exchange reserves stood at USD 8.8 billion as at April 2023, covering roughly 7 months of imports.

The Colorado ensured the continuity of its long power dominance

In April 2023, Paraguay held its single-round general elections, when Santiago Peña of the ruling right-wing Colorado party won the presidential race after snaffling 42.7% of the votes. Mr. Peña is a US-trained economist and previously worked at the International Monetary Fund. He was Minister of Finance during Horácio Cartes’ term as president (2013-2018). He took office on 15 August 2023 for a five-year term. In addition to retaining the presidency, Colorado was also able to increase its number of seats in Congress, reaching a simple majority in both houses of Parliament. In the Lower House, it will hold 49 out of 80 seats (from 43 before the elections), while in the Senate, it will hold 23 of the 45 seats (up from 17). In addition, it won 15 of the 17 state governorships that were up for grabs in the election. Moreover, it remains to be seen if the new President will be able to improve the fight against corruption. According to the 2022 Corruption Perception Index, Paraguay ranks 137th out of the 180 countries surveyed by Transparency International. Regarding the country’s long-lasting strong relationship with Taiwan, while the new government has promised to maintain these ties, it is likely to face continued pressure from farmers to switch them towards China. The agricultural sector claims that ties with Taiwan have made it difficult for them to sell soybeans and beef to China. On top of this, in January 2023, during a bilateral meeting the presidents of Brazil and Uruguay mentioned their intention to start negotiations for a free trade agreement between the Mercosur trade bloc and China. However, as Paraguay recognises Taiwan’s sovereignty, this would complicate the negotiation process. Last, the incoming government must soon renegotiate the treaty signed with Brazil on the creation of the Itaipu hydroelectric plant. The 50-year period ruling out changes in areas such as energy tariffs and commercialisation expired in August 2023. In this regard, Mr. Peña stated that he would seek to increase revenues in order to expand investments in transmission and distribution lines, and generate jobs

Last updated: September 2023