Private sector finance: Paraguay shrugs off neighbours’ problems

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By:
Rob Dwyer
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Santiago Peña helped secure Paraguay’s relentless upward trajectory while minister of finance – now he has switched to the private sector and has the perfect perspective to judge the outlook for the Mercosur countries.

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Santiago Peña, board member of Banco Basa


Little, land-locked Paraguay hasn’t typically been on the list of country visits for bankers and investors in Latin America. Apart from a trickle of private bankers that can sometimes be found in Asuncion’s Sheraton hotel, meeting with the small number of the country’s rich that have diversified their wealth internationally, few make regular trips to this country of fewer than seven million people.

And while it would be an overstatement to say that all that is changing, the country has been forging its own path in recent years. It has differentiated its macroeconomic model from its large neighbours, Argentina and Brazil, and by doing so has spectacularly separated its performance from those moribund economies. 

Since a bad drought hits Paraguay’s agriculturally dominated export sector in 2012, when GDP fell by 0.5%, the country has posted very strong results: annual GDP growth of 8.4%, 4.9%, 3.1%, 4.3% and 4.3% followed. Itaú Unibanco expects growth of 4% this year and the same in 2019. 

This is all the more remarkable given that in that time Brazil has suffered its deepest recession in 100 years and Argentina has been, well, Argentina. 

This year, Paraguay has continued to avoid importing these countries’ financial crises. Its currency has been stable, recording a volatility of just 0.27% for the three months to mid July, compared with 0.89% for Brazil and 2.01% for Argentina. The yields of its bonds and the credit default swap spreads of the sovereign have also been much more stable. 


The last five years were exciting in the public sector – with lots of change,” he says. “In the next five years, the changes that will change the country will come from the private sector 
 - Santiago Peña

The performance is not just notable because it offers a potential model for other Latin American countries, it is also becoming of greater interest to international investors. In mid September, for example, the New York hospital Mount Sinai announced a $100 million investment there in its first project in Latin America. 

This contrasts with Argentina, which, despite all the fanfare given to reformist-minded president Mauricio Macri, “hasn’t seen one single factory opened in the past two years,” according to Santiago Peña, Paraguay’s finance minister during the previous Horacio Cartes administration.

Meanwhile, Brazilian companies invest in industrial zones (called maquilas) that are growing along the border between the two countries. These plants enable Brazilian companies to integrate Paraguayan costs into their processes, which are better in terms of corporate tax rates and labour and energy costs. 

Last year, this trend was given a high-profile boost when Brazil’s toymaker Estrela closed down its Chinese factory and spent $2 billion on a new operation in Paraguay, saying that it provided cheaper production costs, as well as much quicker and cheaper freight.

Peña, who ran for president (he was beaten by Mario Abdo Benitez) makes it clear that his comment on Argentina’s lack of foreign direct investment is not a criticism of Macri but rather the state of that country’s economy after decades of rule by the Peronists. 

It also shows the Paraguayan development model in a favourable light. More than 100 maquilas are now in operation – about 80% are owned by Brazilian companies – and that has led to diversification for an economy that has long been based on commodities and, in particular, soy.

International interest

International investors are taking notice. Peña has moved into the private sector and is a board member of Banco Basa – a financial institution that is part of the Cartes group. The bank focuses on corporate lending, and Peña says international interest in Paraguayan investments has increased. 

“We have received a couple of missions from equity funds – that is something quite new for Paraguay,” he says. “In the past, we would talk to debt investors, but it wasn’t very common to meet equity funds that were interested in buying shares in companies.”

Peña says the amounts are still small – a few million dollars at a time – but it is a start. The focus is on startup opportunities (Peña says Paraguayans are not ready to open equity investments in established, family-run operations) and the financial sector, as well as infrastructure and healthcare.

Basa is responding to the growing interest by opening a stockbroking subsidiary, which should begin operating at the beginning of next year, and by building an investment banking platform. The move anticipates growth that would be accelerated with an investment-grade rating, but the bank has already been active with private debt placements in the international markets.

Peña says the bank has been working on private liability management deals, refinancing debts that are of a scale difficult for the domestic banking market to digest. He highlights the steel industry as one that saw corporates take on debt a couple of years ago when prices were high and now needs international liquidity to refinance.

Basa is also working with international partners to finance infrastructure projects governed by the 5074/13 law that provides a framework for public procurement of public infrastructure in which the bidder must obtain financing to perform the required works. 

Peña namechecks partner banks, such as Citi and Morgan Stanley, that he developed relationships with during his time at the ministry of finance when issuing the well-received sovereign transactions, but says Basa has no exclusive banking relationships. 


In the past couple of years, we have been doing massive investment in infrastructure, and that has been driving the numbers we have been seeing 
 - Santiago Peña

Peña says that these projects can be worth up to $100 million and, with no domestic capital markets to speak of, international investors are the logical source for finance. A public-private partnership (PPP) law is as yet untested but would lead to even greater international financing needs. 

“My role at Basa is to lead all those projects that will integrate the bank into the international financial system,” says Peña. “It is a nice combination of what the bank has been doing in the last couple of years and bringing my experience of the international capital markets. We are at the stage of development in Paraguay where the large corporates can’t be serviced by the local banks, but the step up to London or New York [investors] is very high, so we need to help them go through the process.”

The country’s high-yield sovereign rating is “of course always an issue”, according to Peña. “But more and more investors are looking at the corporate level [to assess and price risk].” 

However, the bank’s business model anticipates greater flow that would be generated by an investment-grade rating.

Yet, according to Marina Neves, Standard & Poor’s primary credit analyst for the sovereign, there is little prospect of Paraguay attaining investment grade in the short term. In June, the agency reaffirmed its double-B rating with a stable outlook – two notches below investment grade. 

While Neves admits that the country’s metrics are better than similarly rated countries, it is institutional weaknesses that weigh on the rating – and those cannot be resolved quickly. Neves points to previous frictions between Congress and the executive, a lack of stability around policymaking, “perceptions of corruption”, as well as a lack of a track record of institutional capacity around PPPs. 

“These things take time for us to see the changes,” she says, adding that she would also like to see further economic diversification away from commodity production.

Neves says the new president’s agenda, which includes the creation of a sovereign wealth fund to capture the expected $1 billion-plus a year from 2023 that will be generated by the Itaipu hydroelectric dam when the project’s debt is fully paid, is positive in scope but needs to be executed.

Peña says that the new president, who is from the same party as himself and the previous president, will continue the country’s recent fiscal discipline and he believes that international investors recognize the country’s progress.

Domestic opportunities

But until and unless that investment grade arrives, Peña says Basa has plenty of domestic opportunities for growth in the fast-growing economy. The bank has been developing its corporate model to take advantage of its low costs and small number of branches. 

“In the past couple of years, we have been doing massive investment in infrastructure, and that has been driving the numbers we have been seeing,” he says. 

Those numbers are healthy: return on equity is now around 50% as technology has enabled the bank to reach more companies and boost revenues without a corresponding lift in costs. 

Peña also cites the bank’s treasury management team as a strong factor in the profitability: “We have a very efficient treasury that has one of the best results [in Paraguay] in capturing long-term financing deposits and a system that allows us to make good use of our cash cushions.” 

Roughly half of Basa’s deposits are term deposits, longer and more stable in nature than the time deposits that make up 80% of the banking system, giving the bank a competitive advantage in funding. 

“In the past, clients had to adapt to the bank, but now we are adapting the bank to them,” says Peña. 

The bank has recently signed partnership agreements with the country’s dominant agricultural association and this year added a similar agreement with the country’s industrial union. This has helped the bank’s strategy of penetrating the small and medium-sized enterprise sector.

Ultimately, the bank aims to move into retail banking services, using technology to offer digital platforms to consumers rather than creating a branch network.

“This is an area we are going to develop in the medium to long term, based on technology,” he says. But the bank is in no rush; the corporate sector offers a “huge opportunity”.

Peña says he would run for president again, and hints at 2023, but seems satisfied with his switch to the private sector.

“My take is that the last five years were exciting in the public sector – with lots of change,” he says. “In the next five years, the changes that will change the country will come from the private sector.”