Paraguay special report 2014: Providing a solid base

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An interview with Carlos Fernandez Valdovinos, president of the central bank of Paraguay.

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Paraguay's economy is dependent on commodities: primary goods accounted for 24% of GDP in 2013, and agriculture 18%. This leads to volatility in GDP growth, especially in recent years, when a poor harvest in 2012 led to a contraction in GDP of 1.2%, but growth bounced back last year with a 13.6% increase in GDP. Moody’s estimates that growth in 2014 will be 4.8%, which is in line with the average for the past 10 years. That figure is strong, especially within the context of a wider economic slowdown, but comes from a low base.


How can Paraguay’s GDP volatility be reduced?

What is more important than volatility per se, is its effects on the economy. Volatility is a function of the economy’s reliance on the agricultural sector but the two key issues for the central bank are: does this sector impact the country’s fiscal position? Or does it negatively affect the financial sector? In both cases, the answer is no. Agricultural producers make enough margins to withstand any years of downturn and even after two bad years NPLs didn’t rise and we didn’t see any contagion from agriculture to other sectors or to the financial system. Also, the agriculture industry is not a big source of tax revenues - I am not saying that is necessarily a good thing but at least it doesn’t create fiscal problems.

There are things we can do to reduce volatility, and one of those is to diversify. Diversification is easy to say but difficult to implement, but the government is focusing on developing the construction sector and widening the economy’s industrial base. For the past 10 years our GDP has averaged 4.8% but I think that, in the medium term, trend growth of about 7% is achievable given improvements in investment in both infrastructure and technology.

The country plans radically to increase investment in infrastructure. What are the central bank’s views on funding this programme?

Today we have external debt of less than 10% of nominal GDP, and 3% domestic debt. Total debt is 12% of GDP. The IMF says that for emerging market countries a ratio of 60% is manageable. However my concern is not so much the ratio but how we get there. We are now at very low levels but that doesn’t mean we have to jump to 60% in five years – that would create a problem of liquidity when we get to repayment. We clearly have room to add debt. I don’t have a specific number in mind and it depends upon how fast we can implement infrastructure spending. What is more important is the need to be intelligent about how much we add and for what reasons. We need to be careful about the use of the proceeds. A country with so many infrastructure needs cannot afford a policy of no debt but we need to see it as an investment that, if we solve some logistics problems, will increase productivity across all sectors of the economy.

The central bank has been building up its FX reserves and the currency has been one of the region’s most stable. Is this a key policy goal?

Carlos Fernandez Valdovinos, president of the central bank of Paraguay
"We just celebrated the 70th anniversary of our currency, which is an incredible achievement in a region that has been characterized by episodes of hyper-inflation. We are committed to a stable economy and currency and we are improving our monetary policy in line with that aim"
Carlos Fernandez Valdovinos, president of the central bank of Paraguay
The central bank is very aware that the best contribution we can give to the economy and to the people of Paraguay are the stable conditions that encourage the private sector to commit to the investment that is needed to create rent, increase employment and reduce poverty. Macro-economic stability is the basis for everything else – we are not going to put what we have achieved in the last 10 years in jeopardy. We just celebrated the 70th anniversary of our currency, which is an incredible achievement in a region that has been characterized by episodes of hyper-inflation. We are committed to a stable economy and currency and we are improving our monetary policy in line with that aim.


With regards to our reserves, I would like to emphasize the cushion that this [currently $7 billion including the recent sovereign issue, which corresponds to 22.6% of GDP] provides when we face external shocks. We have a flexible exchange rate – we are not shadowing the dollar – but it is important to have a level of reserves that is sufficient to deal with excess volatility. We are now a net creditor, our net reserves are 2.2 times our foreign debt and that puts us in a comfortable position. As well as demonstrating our ability to withstand external shocks it is also important to show foreign investors when they are thinking of bringing money to Paraguay that they can take money out whenever they wish. There is no restriction on capital leaving the country and we have sufficient reserves to ensure that free flow of capital.