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Paraguay: Hidden Gem in the High-Yield Space
Paraguay has sound macroeconomic management and strong credit metrics.
BY WALTER T. MOLANO
Paraguay is one of the most interesting countries in Latin America; with a complex history and a unique culture. It is also one of the better managed economies of the region.
Like its neighbor, Bolivia, Paraguay is land-locked. It is also surrounded by two of the largest countries of the continent: Brazil and Argentina. It was born as a backwater of the Spanish empire, bereft of precious metals, and ended up being one of the buffer states that physically separate the largest countries of South America. The other buffer states are Uruguay, Ecuador and Bolivia. Its only access to the outside world is through the mighty Parana River. It is home to the Guarani, a proud and vast indigenous population that spreads well into Southern Brazil, Northern Argentina, Eastern Bolivia and Northern Uruguay.
During the early 1800s, Paraguay was one of the most technologically advanced countries of Latin America, boasting the first telegraph, railroad, iron foundry and shipyard. In 1864, it was the victim of a genocidal war with the Triple Alliance of Brazil, Argentina and Uruguay. They felt that the Guarani posed an existential threat to their nations, since the indigenous people had a greater allegiance to each other rather than to their respective countries. As a result of the war, Paraguay lost 40 percent of its landmass and 60 percent of its population. Yet, the Paraguayan government was able to hold on for six years, and today its culture still survives.
Modern-day Paraguay is relatively small, about half the size of Chile. It has a population of 7 million and a GDP of only $39 billion. The country is abundant in water, serving as the drainage basin for much of the southern Amazon. Not surprisingly, its major exports are agricultural products, such as soy beans, vegetable oils and proteins (beef and poultry). It also has hydrocarbon deposits in the west, under the Chaco desert. This was the region, and the reason, for a vicious war with Bolivia during the 1930s. Sadly, the two sides were supported by international oil companies, Royal Dutch Shell and Standard Oil, as the vied for control of the oil fields. Last of all, Paraguay is a major exporter of electricity, from its impressive Itapúa hydroelectric facility. Most of Paraguay’s trade is inter-regional. A third of its trade is with Brazil and a quarter with Argentina, thus making up half of its exports and imports. Paraguay has averaged a steady GDP growth rate of 3.5 percent y/y during the last five years.
However, growth was a dismal 0.2 percent y/y in 2019, and the economy is expected to contract 1 percent in 2020. The country suffered several setbacks. The first was a drought in 2019, followed by severe rains and flooding, which wreaked havoc with agricultural production and hydro-electric production. Exports also suffered from the deep recessions in Argentina and Brazil. As a result, the current account deficit widened out to 2.8 percent of GDP, due to the decline in exports. The low levels of domestic demand also triggered a decline in the inflation rate to below 1 percent. Fortunately, COVID-19 has not been much of an issue for the country. As of early July, Paraguay had only registered 19 deaths, ranking it one spot better in Latin America than Uruguay. The IMF expects GDP growth to rise to 4 percent y/y next year, as the effects of the drought subside and the agricultural sector bounces back to life. Unfortunately, the risk aversion produced by the onset of COVID-19 resulted in a depreciation of the currency, losing more than 5 percent since April.
Paraguay is a solid double-B credit, with a gross debt to GDP ratio that is better than most of its double-B peers, and a net debt to GDP ratio of only 19 percent. However, it does not stand out as strong on the fiscal accounts. It has a primary fiscal deficit of 2 percent of GDP and an operational deficit of 2.8 percent of GDP. The country has a well-populated yield curve, with seven major bond issues, which range from 2022 to 2050. On the political side, the political drama has subsided after the 2012 impeachment of President Fernando Lugo. Starting in 2013, Paraguay has been governed by presidents from the center-right ANR Colorado party. The current president, Mario Abdo Benitez, was elected in August 2018, and his term will end in 2023; but he cannot be re-elected. The only meaningful downside to the country is its high level of crime, which is an impediment to investment and development. The center of the crime is in Ciudad del-Este, an important city that sits at the junction of Brazil, Argentina and Paraguay, and it is a notorious transit point for arms, contraband and money-laundering. Still, the problems in Ciudad del Este seem to be contained to its region.
Overall, despite the drama of Ciudad del Este, Paraguay is one of the hidden gems of the high-yield sovereign space, with sound macroeconomic management and strong credit metrics.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.
