Political protests could impede Paraguay’s new fiscal responsibility law
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Political protests could impede Paraguay’s new fiscal responsibility law

New counter-structural rules were planned for next government; aversion to higher government debt could impact infrastructure.

Protesters set alight the Congress building in Asunción, Paraguay

The increase in political uncertainty in Paraguay – as demonstrated by protesters setting the country’s Congress building alight during last week’s Inter-American Development Bank (IDB) annual meeting in Asunción – might slow the country’s economic growth, but not derail it.

That is the assessment of senior bankers in the country.

Raul Vera Bogado, executive president at Banco Regional, argues that the biggest consequence of the violence will be a slowdown in proposed changes to the country’s fiscal responsibility law.

The current law caps the fiscal deficit to 1.5%, but Paraguay’s finance minister Santiago Peña has been working to increase the law’s flexibility to allow greater investment in infrastructure and give the country an ability to take a counter-cyclical stance.

“The protests [which were sparked by a constitutional amendment to allow president Horacio Cartes to run for a second presidential term] will make the proposed changes to the fiscal discipline law more difficult, which will also slow the growth of investment in infrastructure,” says Bogado in an interview with Euromoney at the bank’s Asunción headquarters.

“Infrastructure investment was going to be classed as structural deficit category – in line with the fiscal discipline rules adopted in Chile. These changes will be more difficult now – as will convincing people to accept higher government debt, which is a very sensitive issue in Paraguay.”


In March, Peña told Euromoney he had been working with Felipe Larrain, once Chile’s finance minister, for a year and a half on a replacement fiscal law that provides counter-cyclical flexibility.

Peña argued a simple cap of a 1.5% fiscal deficit is an unnecessary straitjacket on a country with such low debt (18.4% of GDP) and cyclical tax revenues – external revenues related to trade and the Brazilian economy, and internal exposure to weather and agricultural productivity.

“We have exceeded capacity,” Peña told Euromoney. “Not financially, but legally in terms of the fiscal responsibility law. [The law] is extremely tight and doesn’t make any sense for a country like Paraguay that has the lowest debt-to-GDP [in the region] to have a maximum deficit of 1.5%.” 

We have had great results in the past couple of years given our exposure to agribusiness and commodities - Raul Vera Bogado, Banco Regional

Peña had planned to introduce the new fiscal rules later this year with the intention it will govern the fiscal plans of the next government. 

However, Bogado says that despite the likely slower growth in government-led investment, the country should continue to grow strongly – especially when compared with the rest of the region.

“We have a new PPP [public-private partnership] law, which will help investment to continue without relying on large government expenditures,” he says.

The first PPP, for two highways, was signed at the end of 2016 and ground should be broken on those soon. A second – for a new terminal at the international airport – is also about to be announced. Other infrastructure PPPs are expected to follow.

Bogado also says the business-friendly policies – 10% corporate tax, 10% VAT and 10% income tax – and its recent economic decoupling for neighbouring Brazil and Argentina (Paraguay has had annual growth above 4% in the past few years as those countries have been stagnant or in recession) have seen a lot of international interest.

“We are seeing lots of interest from international companies interested in investing in Paraguay,” says Bogado.

Ricardo Maduro, finance director at BBVA Paraguay, agrees with this assessment of the outlook for the Paraguayan economy.

He says the bank’s retail operation has been growing strongly in recent years – and has been enjoying growth above the average of the banking system, which itself has been rapid: in the past 10 years, the ratio of deposits to GDP has grown to 47% from 21% and loans have grown to 41% of GDP from 18%.

Despite this strong growth, the banking sector remains solid: the average tier-1 ratio is 12% (8% mandatory) and tier-2 is 12% (mandatory range of between 15% and 16%). The non-performing loan ratio is 2.8% and the coverage ratio is more than 110%.


Maduro says BBVA will look to increase its market share in the small and medium-sized enterprise (SME) sector in the coming years – which might be a key battleground for Paraguayan banks – while continuing to invest in technology to improve digitization of channels and increase cross-selling of financial products within its client base.

Regional is also looking at the SME sector for coming growth, albeit with a strategy that keeps its sector-specific approach.

Regional is primarily an agricultural bank,” says Bogado. “We will continue to focus there, but we see potential in extending credit down the supply chain and covering logistic companies that serve the agribusiness industry.”

Regional has only a 6% market share in retail – largely driven by the workforces of clients. And despite heavy investment in digital services, Bogado says Regional doesn’t plan to push into the broader retail market.

“We are performing well – we have a return on equity ratio of 21.1% – which is in line for the industry, but considering our low retail share (which is typically a higher margin business),” he says.

“We have had great results in the past couple of years given our exposure to agribusiness and commodities, and, as we expect these areas to bounce back in the next couple of years, we are well placed for even stronger performance.”

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