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.
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.