MercoPress. South Atlantic News Agency

S&P places Paraguay with “stable outlook” and anticipates strong growth in 2013

Like other Mercosur members, Paraguay is betting on an abundant soy crop

Standard & Poor’s credit risk rating agency improved the prospects of Paraguay, removing the country from credit-watch where it had been placed with negative implications last June 25 when the political situation that removed Fernando Lugo as president and subsequent suspension of Paraguay from Mercosur.

The agency confirmed its ‘BB-B’ foreign and local currency sovereign credit ratings, with outlook stable and considers that the suspension from Mercosur and Unasur will have a limited impact on the Paraguayan economy.

“We expect that Paraguay will be reinstated to these organizations after the April 2013 presidential election” therefore S&P expects the economy “to rebound strongly in 2013 with a bumper soy crop, driven by the end of the local drought and record-high soy prices”.

Further on, the report is confident the Paraguayan government has room to meet its projected 2012 and 2013 financing requirements of 2.1% of GDP and 1% of GDP, respectively, through a combination of local debt issuance and the use of general government deposits that total more than 10% of GDP.

“The ratings on Paraguay reflect its solid fiscal position, low debt burden, and improved external indicators”.

S&P also expects the central government to return to a balanced budget in 2013, supported by the introduction of an income tax and higher value-added tax receipts as a result of the rebound in economic activity. The fiscal position has resulted in a steadily declining general government debt burden, which we expect to reach 14% of GDP (or 4% in net terms) in 2012.

At the same time, the country's external indicators have continued to strengthen as a result of solid export growth (except in 2009 and 2012) and rising international reserves, which now cover more than five months of current account payments.

However Paraguay has high levels of corruption, as indicated by Transparency International's 2011 Corruption Perceptions Index, which measures perceptions of public-sector corruption. It ranked Paraguay 154th out of the 182 countries it surveys (with 1 being the best and 182 the worst).

The Paraguayan economy is highly dependent on agriculture and international trade, which makes it more exposed to fluctuations in world commodity prices, weather cycles, and the economic prospects of its key trading partners. The high level of domestic credit growth, averaging over 30% over the past five years, is an additional source of concern. We expect domestic credit to GDP to reach 45% by year-end 2012 from just 20% in 2007.

Finally the stable outlook balances the country's narrow economy and substantial infrastructure needs against the government's improving fiscal underpinnings and low debt.

“We could raise the ratings if important investment projects are undertaken, which would further boost growth prospects and external indicators. Additional reform measures in the areas of debt management, financial supervision, and the recapitalization of the central bank, a precursor to inflation targeting, would also improve rating prospects”.

On the other hand, rapid credit growth that impairs external and fiscal flexibility or leads to financial sector problems could lead to a downgrade. “We could also consider lowering the ratings if the political and economic isolation of Paraguay is more severe or lasts longer than we currently expect”.