Paraguay's improving risks are more than an economics story
The sovereign’s rising score reflects a fundamental shift in the political and structural outlook since the new president took office last year.
Paraguay’s $1 billion-worth of bond sales this year were preceded by an improving risk trend underpinned by the election of the right-wing Colorado Party candidate Horacio Cartes, a prominent – if somewhat controversial – businessman as the new president last year.
Elected in April and sworn in last August, Cartes is driving through substantive reform in spite of popular resistance, and his efforts are diminishing his country’s risk.
Since 2010, Paraguay’s risk score has increased by almost 3.2 points. This year alone, the score has climbed 1.8 points to 42.4 out of a maximum 100, placing the sovereign 80th out of 186 countries in Euromoney Country Risk’s (ECR) global rankings – four places higher since the end of last year, and seven in all since 2012.
No wonder Moody’s and S&P felt compelled to upgrade Paraguay recently to Ba2 and BB respectively; ECR experts had foreseen the shift.
The outlook is nonetheless rather mixed. A score below 50 shows there is reason to be cautious in a country where political opposition – highlighted by a general strike in March, the first in 20 years by angry voters opposing job cuts – might curtail the president’s ambitious programme.
Rising insecurity is a notable political problem, as the military tackles insurgent guerrillas.
Economic growth is rather volatile, too, in a country relying on a good harvest of soybeans, sugarcane and other cash crops, while female workforce participation could be improved alongside worrying poverty indicators.
Country-risk experts are slightly more concerned too by the economic-GNP outlook, employment/unemployment situation and government finances than a year ago, with growth this year settling down to a third of the stunning 13% rise witnessed in 2013 (that’s in real, not nominal terms).
Still, it’s a far cry from the depressed state of neighbouring Argentina, an economy in decline and worse still in default.
Private-sector forecasters surveyed by Focus Economics, a consultancy, predict 4.8% growth for Paraguay this year. BBVA Research, a longstanding contributor to the risk outlook for several countries in ECR’s survey, predicts 5.3% growth based on “a strong agricultural sector and further boost of investment, both private and public”.
Political and structural shift under way
Traditionally, Paraguay has scored lowly for corruption, transparency and government policy, blighted by an obtrusive regulatory regime. Yet the shift in political ethos back to the right after six years of left-wing government has seen those risks subside.
Five of Paraguay’s six political indicators have improved since last year, notably the government stability sub-factor.
Experts have also upgraded the score for ‘hard infrastructure’, one of four structural indicators – a key policy target for this administration and a recipient of the majority of the market borrowing.
A new terminal at the Silvio Pettirossi airport in Asunción, due for completion in 2018, will help the country cope with growing passenger traffic. Other transport and energy projects are planned.
The IMF is impressed, too, noting in its most recent field report an “ambitious agenda of growth-enhancing reforms and poverty-reduction initiatives”.
These can only benefit the country’s development and raise productivity growth, turning it into a “dynamic emerging economy”, the IMF adds.
Low inflation and debt, a current account near enough to balance and solid reserves are sure to excite investors appalled by some of Latin America’s more heretical experiments in economics.
Cartes has a tough job on his hands, not least in persuading his own party of the merits of his governing style, but his first report card has shown considerable promise. Investors will be watching closely.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.