Paraguay was given a BB+ rating in Fitch's latest report, which is one step away from investment grade. Although in Asunción the South American country's Economy Ministry highlighted the achievement, the agency also warned about challenges in terms of credibility.
Fitch underlined that Paraguay's ratings reflect its history of broadly prudent and consistent macroeconomic policies, low public debt, and robust foreign currency liquidity, but also pointed out that there were limitations due to weak governance indicators, a shallow local capital market, and vulnerability to adverse climate shocks, as shown by the high volatility of the Gross Domestic Product (GDP).
While Economy Minister Carlos Fernández Valdovinos pledged to boost economic growth, Fitch Ratings underscored Paraguay's track record of sound and consistent macroeconomic policies, relatively low public debt compared to countries with similar credit ratings, despite an increase in recent years, and solid external liquidity.
This is excellent news. Fitch has ratified our sovereign rating and raised the rating ceiling for Paraguay. This opens the door for Paraguayan companies, which have performed outstandingly well, to be rated Investment Grade. We continue to work tirelessly to improve our country's economy, said Fernández Valdovinos.
Fitch's report also highlights the efforts of President Santiago Peña's administration in promoting a green and business-friendly agenda. The goal is to increase private sector participation in the economy and encourage formal job creation. Significant progress has already been made, such as the approval of the carbon credit law.
In addition, further reforms are planned under the Policy Coordination Instrument (PCI) agreed with the International Monetary Fund (IMF). These reforms include the creation of a pension regulator and modifications to the public sector pension system (Caja Fiscal).
However, Fitch Ratings also mentioned the challenge posed by the intended credible fiscal consolidation, which is considered essential to stabilize the ratio of Public Debt to Gross Domestic Product (GDP) and restore the credibility of fiscal policy after a period of deterioration in the last five years.
The rating agency projects a rebound in economic growth of around 5.2% for this year, driven largely by the recovery of the agricultural and hydroelectric sectors after a severe drought that affected economic growth in 2022.
For 2024 and 2025, Fitch forecasts solid growth of 4.5%, supported by a pipeline of investment projects in pulp (Paracel), green hydrogen, and biofuels. These investments, together with the gradual growth of the maquiladora sector, support Paraguay's economic diversification efforts, which could help mitigate vulnerability to climate shocks that have become more frequent and severe in recent years, the agency said.
Regarding inflation, Fitch noted that the variation of the consumer price index has fallen dramatically this year (3.5% as of September), driven mainly by lower fuel and food prices. ”The Central Bank of Paraguay (BCP) gradually cut interest rates from a high of 8.5% to 7.75% in October. Inflation expectations are well anchored (4% over 12- and 24-month horizons), reflecting the BCP's prudent management and entrenched credibility.”