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Businessman Horacio Cartes, candidate of the opposition Colorado Party, is leading polls for the April presidential elections. (Photo: Robert Servin)
Tuesday, January 22, 2013
Perspectives

Paraguay Candidates Favor FDI


Paraguay’s leading presidential candidates are pro-business.

BY CARLOS CAICEDO
Exclusive Analysis

The government of Paraguay is finalizing issuance of a dollar-denominated, $500 million bond. This will be its first venture into international capital markets since the 1990s. The sale coincides with Paraguay's efforts to restore constitutional order following the controversial impeachment of President Lugo in 2012 after a land dispute resulted in fatalities. Renewed political stability appears to be on track. The country is staging elections in April 2013. Thereafter, Paraguay´s readmission into Mercosur is highly likely. The latter suspended Paraguay following Lugo´s removal, which the regional group deemed a violation of Mercosur's democratic charter.

The main presidential candidates are pro-business, meaning that the next government is expected to favor FDI and rein in the fiscal deficit. Horacio Cartes, candidate of the opposition Colorado Party is leading Efrain Alegre of the ruling Authentic Radical Liberal Party (PLRA) by 7 percent in the opinion polls. Both candidates are most likely to honor the debt contracted by the current Franco administration.

President Federico Franco is not running for office, but is increasing public spending to improve Alegre's chances. The Franco administration plans to use the $500 million raised by the bond issuance to finance infrastructure projects that would increase employment prior to the election.

The political crisis of 2012 and a severe drought that affected agriculture saw the economy contract by 1.5 percent in 2012. The bond’s timing reflects reduced tax revenues and the government's desire for increased expenditure before the elections. While tax revenue has stagnated, spending has increased in 2012 from $4.3 billion to $5.4 billion. The consequent fiscal deficit, equivalent to 2.8 percent of GDP, was the first following nine years of surpluses. However, the government expects improved tax revenue in 2013. Agriculture is predicted to rebound strongly in 2013, assuming better weather conditions, with forecasts of GDP growth ranging from 7 to 11 percent.

The decision to turn to international capital markets has been encouraged by foreign investor demand for high yields. With benchmark interest rates close to zero in Europe, the United States, and Japan, portfolio investors have been looking toward emerging markets, including complex risks such as Bolivia and El Salvador. Paraguay's low debt-to-GDP ratio of 13 percent suggests it will not struggle to service the bonds in the next four years. Payment risk is further reduced by the likelihood of fiscal tightening after the April elections, while tax revenues will increase as economic growth resumes.

Carlos Caicedo is head of the Latin America division at Exclusive Analysis, a UK-based global risk consultancy recently acquired by IHS.

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