Thursday, September 1st 2011 - 01:13 UTC

S&P upgrades Paraguay’s rating on greater revenue from the Itaipú dam

Standard & Poor's ratings services upgraded Mercosur member Paraguay's credit status a notch after the country reached an agreement with neighboring Brazil to take more revenue from the shared Itaipú hydroelectric complex, the world’s largest operational dam.

Brazil’s decision to pay a fairer price for the surplus power from Itaipú was decisive

Paraguay's annual share of funds from the Itaipú Dam on the Parana River is expected to rise by about 1.5% of Paraguay's GDP, S&P said, after Brazil's congress recently enacted a more favorable revenue-sharing agreement with the country.

The expanded take will help Paraguay fund social programs and much-needed infrastructure projects while maintaining fiscal discipline, allowing the country to lower poverty rates and at the same time spur economic growth, the ratings firm said.

Paraguay has a solid position in international reserves, has considerably reduced sovereign debt and excellent prospects such as the 3.5 billion dollars Rio Tinto-Alcan aluminum project, although the extreme dollarization of the economy (as in other Mercosur members) stands out as a limiting factor.

S&P now rates Paraguay at BB-, three steps below investment-grade territory. Its outlook is stable.

Paraguay's weak political institutions, less developed economy and limited monetary flexibility still constrain the ratings, S&P said, though the central government has run fiscal surpluses since 2004.

Moody's Investors Service in December upgraded Paraguay's local and foreign currency government bond ratings to B1, a notch below S&P new rating.

Paraguay is the smallest and most vulnerable economy of Mercosur four full members, which also includes Argentina, Brazil and Uruguay.
 

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