Paraguay. Summary. Economic Indicators

Transcription

1 Paraguay Summary Moody s Ba1 / S&P BB / Fitch BB- 1 Economy: Agriculture 20%, Industry 30%, Services 50% Paraguay s strong economic fundamentals are reflected in its high economic growth rates, relatively stable inflation, continued commitment to fiscal reform, and its ability to maintain macro-stability. The country s small and open economy is dependent on the economic performance of its neighboring countries, as well as exports of commodities and energy. Business-friendly conditions have helped attract higher value-added foreign direct investment (FDI), especially from Brazil. As an export-oriented economy, Paraguay has historically maintained a small current account surplus, which is expected to turn slightly negative in the medium term. Among its vulnerabilities are its relatively weak institutions, low education levels, and a large informal economy. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 4,416 4,639 4,038 4,003 4,139 4,332 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank, Haver Analytics, IMF 415

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BB+ BB+ BB BB- BB BB- B+ B+ B B B- B- CCC+ CCC CCC CCC Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Paraguay 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 416

3 Paraguay Strengths Energy Exporter While the country is landlocked and has no access to ports, Paraguay is rich in hydroelectric power due to a wealth of rivers, including the Itaipú dam, the world s largest hydroelectric dam. Itaipú generated a record high 103 terrawatts (TW: 1 terrawatt =1 million megawatts) in By comparison, China s Three Gorges Dam generated 93.5 TW. 3 Paraguay is a large net exporter of energy (its second most important export) to Brazil and Argentina. Energy exports are a key aspect of the country s economy, as its stable source of foreign earnings often helps offset the volatility of food exports. Paraguay is naturally hedged in the event of currency depreciation, as energy contracts are negotiated and quoted in US dollars, reducing the risk profile of the country. While the annual revenue varies depending on total energy production, subject to the flow of the Parana River, energy exports contribute more than US$2 billion in revenues per year, approximately 7% of GDP. 4 Balanced External Sector Paraguay is among the few countries in Latin America that has not consistently run a current account. More critically, it has a stable source of energy export revenues. These factors, combined with remittances from abroad, have led the country to have a minor current account surplus (usually less than 1% of GDP). This surplus has gradually increased the level of international reserves, noted at US$8.0 billion in 2017, more than 25% of GDP. 5 Higher Value Exports While soy and meat continue to be key exports, a transformation in the export strategy of Paraguay s agribusiness is shifting from raw materials to higher value-added products. For instance, instead of exporting soya seed, Paraguay aims to export soya oil. The proportion of processed soya oil is now 50%, up from almost zero a couple of years ago. Similarly, meats are being pre-cut into smaller pieces prior to export. In addition, due to trade agreements such as Mercosur, Paraguay is becoming more integrated into the Brazilian production chain through the establishment of maquiladoras. 6 Maquila sectors make up approximately US$298 million in exports as of September 2017, an amount very close to the $313 million in Better Foreign Direct Investment Levels and Business- Friendly Conditions Paraguay s consistent weakness has been its relatively low level of FDI, averaging US$200 million per year. However, a recent announcement of new FDI could reverse this trend. Two of Paraguay s more high profile investors are Brazil s JBS, which is expanding with another food-processing plant, and Leoni-AG, a German auto supplier. The government is targeting a gradual increase in FDI levels from its historical US$200 million to a US$ million range in the short term, targeting US$1 billion in the longer term. 8 Paraguay has also benefitted from the trend of Brazilian manufacturing relocating to the country, due to the crisis in Brazil. Manufacturers are attracted to Paraguay s lower labor and energy costs which are 21% and 64% cheaper than Brazil, respectively. Paraguay also offers financial incentives, 9 such as a 10% corporate tax rate, the lowest in Latin America. 10 In 2015, the government expected FDI of US$500 million and highlighted that it is now opening 24 factories per year on average, compared to only three per year in the past. 11 Though the target did not materialize in 2015 as the FDI was only at US$260 million, in part due to the economic situation in Brazil, it did increase in 2016 to US$274 million

4 Lazard Emerging Markets Debt Sound Public Finances and Fiscal Position Government finances are in a solid position as they tend to hover between a small surplus and deficit. From 2004 until 2011, Paraguay had a fiscal surplus that turned to a small deficit in 2012, due to a large public sector wage increase. 13 The 2018 deficit is estimated at -1.4% of GDP, within the parameters of Paraguay s Fiscal Responsibility Law. 14 Partly as a result of a balanced budget, Paraguay has one of the lowest debt level in Latin America at 25.4% of GDP. 15 Weaknesses Weak but Improving Institutions Governed by a very young political structure, Paraguay was declared a democracy in the early 1990s. As such, the country is behind the curve in many aspects of good governance and institutional development. As a legacy from its authoritarian and dictatorial past, Paraguay s institutional strength and governance rules are weak. For instance, smuggling was a frequent economic activity during Alfredo Stroessner s dictatorship from 1954 to 1989, which was widely tolerated and controlled by government officials. 16 However, the country has recently undergone positive changes. There is a developing precedent for political stability, as demonstrated by the impeachment of former President Lugo in 2012, and the orderly election process of April Moreover, the Paraguayan society demonstrated strong aversion to presidential re-elections when President Cartes attempted to amend the Constitution, leading to a political crisis. Re-elections are forbidden by the Constitution as a safeguard against any re-emergence of power continuity that can potentially lead to a return of dictatorship. 18 The next presidential election will be held in Another positive development, the passage of the Fiscal Responsibility Law in 2013, effective 2015, requires the deficit to be maintained below 1.5% of GDP. It also limits the discretionary power of Congress an institution that has been historically influential in budget expansions. 19 Prevalence of an Informal Economy Paraguay has the largest informal economy in the region estimated at approximately 70% of GDP by the International Monetary Fund (IMF) prevalent mainly in the agriculture, construction, and commerce sectors. 20 This takes form in weak labor and tax law enforcement of the thousands of micro-enterprises and urban street vendors residing in Asunción, the capital of Paraguay. The lack of restraint is also seen in the large number of agricultural workers who often do not have formal contracts, and in the traditional entrepôt role of Ciudad del Este City, where merchandise is imported and re-exported, often without paying full custom duties to Brazil and Argentina

5 Paraguay Vulnerable to Mercosur Fluctuations/Commodities The country s economic performance is tied to that of its main trade partners in Mercosur. Exports to Mercosur represent 49.7% of total exports in the first ten months of Given that Brazil is the largest member of Mercosur, its economic conditions have significant impact on Paraguay. The IMF estimates that a 1% decline in Brazilian output translates into a 0.5% decline in Paraguay. 23 The economic performance of trade partners also plays a key role in the country s service industry, given that Brazilians often travel to Paraguayan cities, such as Ciudad del Este, to buy cheaper products. Paraguay also receives royalties from both Brazil and Argentina, which operate the two hydroelectric power plants built in the 1970s, located on the border of each country. 24 Additionally, Brazil and Argentina have significant agricultural investments in Paraguay, due to its quality of soil and relatively low tax rates. Several large Brazilian companies are also planning to move Paraguay, especially within the banking and manufacturing sectors. Brazil s BRF, one of the biggest food companies in the world, is also considering investing in Paraguay. 25 Vulnerable to Weather Shocks and World Commodity Prices Paraguay s agricultural-focused exports consist mainly of soybeans and meat. As an agribusiness-based economy, unpredictable weather events increase the volatility of the country s economic growth. For instance, a severe drought in 2012 was the main culprit of an approximate 1.2% decline in GDP, while a bumper crop in 2013 raised GDP by 13%. Although soybeans are its principal export, as the world s sixth-largest producer, Paraguay is a price taker in world markets. As exemplified in its 2017 soybean production of 9.4 million metric tons (mmt), it pales in comparison to the United States production at mmt, Brazil s mmt, and Argentina s 57 mmt. 26 Similarly, Paraguay ranks seventh in worldwide frozen beef exports, valued at US$582 million in 2016, shadowed by Brazil s US$3.6 billion. 27 As such, the economy faces several hurdles over which it has little control including weather events, such as El Niño, and worldwide agricultural commodity prices, as seen in the sharp fall in soybean prices from their 2014 level. Human Capital Constraints A major structural obstacle preventing the country from moving up the value chain is its poor ranking in educational achievement, both on a global and regional standpoint. In the World Economic Forum Quality of Education report, Paraguay came in 134 th place out of 144 countries. 28 Whereas in UNESCO s Third Regional Comparative and ExplaNATOry Study (TERCE) of literacy, math, and science ability of 11-year-olds, Paraguay ranked second to last in Latin America, far behind poorer countries such as Nicaragua and Honduras

6 Lazard Emerging Markets Debt Country Background Size Capital Population 406,752 KM 2 (61th) Asunción 6.9 Million Religion Roman Catholic 89.6%, Protestant 6.2%, Other 4.2% Median Age 28.2 Years Literacy Rate 95.1% Independence 14 May 1811 Political System Government Leadership Next Election April 2018 Legislative Branch Presidential Republic President Horacio Cartes Bicameral National Congress Economy Agriculture 20.0%, Industry 30.3%, Services 49.7% Labor Force Agriculture 26.5%, Industry 18.5%, Services 55.0% Merchandise Exports Soybeans, Livestock Feed, Cotton, Meat, Edible Oils, Wood, Leather, Gold Export Partners Brazil 35.4%, Argentina 10.5%, Russia 7.6%, Chile 6.1% Currency As of November 2017 Source: CIA Paraguayan Guarani (PYG) 420

7 Paraguay Country Timeline 1811 Paraguay becomes independent Paraguay loses over half of its population and large tracts of land in war with Argentina, Brazil, and Uruguay over sea access General Alfredo Stroessner seizes power in coup, ushering in more than 30 years of ruthless dictatorship New democratic constitution promulgated, paving way for free elections. Despite a failed coup attempt in 1996 and a succession of presidents, there is a long period of political instability and party infighting President Cubas resigns in wake of assassination of Vice-President Luis Maria Argana. Luis Gonzalez Macchi appointed caretaker president, forms government of national unity. A military coup is foiled the following year State of emergency declared after violent street protests. Protesters demand resignation of President Gonzalez Macchi and scrapping of free-market policies Paraguay hosts the first-ever conference of landlocked nations. More than 30 states take part and demand preferential treatment in world trade talks Leftist former bishop Fernando Lugo achieves historic victory in presidential election, defeating the ruling party candidate and ending 61 years of conservative rule Brazil and Paraguay reach a deal to end their long-running dispute over the cost of energy from the giant Itaipu hydro-electric plant on their border December US diplomatic cables revealed by WikiLeaks show that Paraguay asked US Drug Enforcement Administration to spy on Paraguayan People's Army Horacio Cartes is elected president. Parliament votes to give President Cartes new powers to deploy the military against left-wing rebels Paraguay is the worst-hit as South America experiences its worst floods in decades, forcing more than 100,000 residents to evacuate Rioters set fire to Congress in protest against moves to amend the constitution to allow the president to stand for re-election. Source: BBC 421

8 Lazard Emerging Markets Debt Notes 1 As of December, accessed 1 December accessed 1 December Paraguay: 2017 Article IV Consultation, July Issues/2017/07/24/P+araguay-2017-Article-IV-Consultation-Press-Release-and-Staff-Report accessed 1 December Meeting with Carlos Fernandez, President Central Bank of Paraguay and Daniel Correa, Vice-Minister of Economy, 1 August Accessed 1 December Meeting with Carlos Fernandez, President Central Bank of Paraguay and Daniel Correa, Vice-Minister of Economy, 1 August Firma brasileña planea cerrar su fábrica y migrar a Paraguay, La Nación, 13 September 2014, accessed on 13 December Margolis, Mac, Brazil Needs to Pay Attention to Paraguay, Bloomberg View, 9 November 2014, 2015, accessed on 14 December 2015, 11 Inversión extranjera dejó al país más de US$ 500 millones, La Nación, 16 August 2015, accessed on 13 December 2015, millones/ accessed 3 December Supplementary Analysis: Republic of Paraguay, Standard and Poor s, 9 December World Economic Outlook Database, International Monetary Fund, October 2017, accessed on 1 December 2017, 15 IMF World Economic Outlook October index.aspx 16 Paraguay: Taming the Paseros, Bloomberg, 12 December Investor Presentation, Republic of Paraguay, January 2013, accessed on 26 November 2014, hacienda.gov.py/bonos/archivos_bonos/documentos/py_investor_presentation.pdf accessed 3 December Fitch Revises Paraguay s Outlook to Positive, Affirms at BB-, Business Wire, 31 January 2014, accessed on 26 November 2014, Paraguays-Outlook-Positive-Affirms-BB-#.VHXlMMl1WeU. 20 Informality in Paraguay: Macro-Micro Evidence and Policy Implications, November 2015, org/external/pubs/ft/wp/2015/wp15245.pdf. 21 Encuesta Permanente de Hogares (EPH) Central Bank Monthly Report December 2017, Anexo Estadistico del Informe Economico del Banco Central, December Economico_01_12_2017.xlsx 23 Paraguay IMF Article IV Consultation, International Monetary Fund, IMF Country Report No. 15/37, February Paraguay 2023 Bond Prospectus, Citigroup and Bofa Merrill Lynch, 25 January accessed 17 November US Department Agriculture database, Table 11 Soybean: Yield and Production, accessed on 3 December accessed 3 December Competitiveness Rankings, World Economic Forum, 2015, accessed on 14 December 2015, reports.weforum.org/global-competitiveness-report /rankings/. 29 Sanchez Zinny, Gabriel, Latin America s wake-up call on global school tests, BBC News, 8 April 2015, accessed on 13 December 2015, 422

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