Coface Group
Paraguay

Paraguay

Population 6,756 million
GDP per capita 4102,297 US$
C
Country risk assessment
C
Business Climate
Change country
Compare countries
You've already selected this country.
0 country selected
Clear all
Add a country
Add a country
Add a country
Add a country
Compare

Synthesis

major macro economic indicators

   2014 2015  2016 (p) 2017 (p)
GDP growth (%) 4.7 3.0 4.1 3.3
Inflation (yearly average) (%) 5.0 3.1 4.1 4.1
Budget balance (% GDP) -0.7 -1.3 -1.1 -1.1
Current account balance (% GDP) -0.4 -1.1 0.6 0.6
Public debt (% GDP) 19.8 24.0 24.7 24.7

 

 (e) Estimate (f) Forecast

STRENGTHS

  • Agriculture sector (soya and beef)
  • Abundant hydroelectric resources
  • Prudent budget and economic policies

WEAKNESSES

  • Infrastructure weakness (river transport, roads, electricity power lines)
  • Dependence on the agriculture sector
  • Shortfalls in governance (corruption and nepotism)
  • Scale of informal market (40% of GDP)

RISK ASSESSMENT

Resilient growth in 2017

In 2016, the Paraguayan economy stood out from other economies in the region because of its relatively high rate of growth, despite the recessions in its leading trading partners, Brazil and Argentina. The country, which is particularly reliant on the production and exports of its primary sector (almost 20% of GDP), recorded a very good soya harvest and expanding beef production, alongside increased hydroelectricity generation and private investment. Growth in 2017 should prove resilient, with the dynamism of the automotive parts assembly and textiles segments within the country’s “maquillas” and of the construction sector, and should help offset the potential negative impact of the La Niña climatic phenomenon on hydroelectricity generation and the agriculture sector. Improvements in the Brazilian and Argentinian economies should prove positive for Paraguayan exports, subject to unforeseen climatic events. Increased public spending will also help underpin activity but political disputes could delay the implementation of a number of infrastructure projects (roads, urban transit, airports). Household consumption should also remain at a sustained level bolstered by the ongoing reduction in extreme and chronic poverty (the country improved from 11th place to 5th out of 18 Latin American and Caribbean countries between 2011 and 2014, according to the World Bank).
Inflation is likely to remain below the Central Bank’s upper target (4.5%), excluding any major external shocks that could hit domestic food prices. The central bank could thus resume its expansionary monetary policy by lowering its key interest rate, which has been maintained at 5.5% since July 2016. Nevertheless, this decline is expected to remain modest in order to prevent an excessive increase in inflation.

 

Prudent budget policy

The government is expected to continue with the implementation of the budget reforms approved at the end of 2013, including the law on fiscal responsibility, in force as of 2015 and restricting the deficit to 1.5% of GDP, the tax reforms, and the public-private partnership (PPP) context aimed at boosting infrastructure investments. In 2016, the budget deficit was held below the limit set by the law on fiscal responsibility and this trend is expected to continue in 2017. The dynamism of economic activity should continue adding to increased tax revenues and help offset the growth in public spending, essentially in infrastructures. The government is also hoping other measures will help boost revenues. In 2016, VAT (10%) exemptions were approved for loans taken out by cooperatives, and it also promised to clamp down on tax fraud in Ciudad del Este, a re-exporting and trading platform. Paraguay however needs to widen its tax base, one of the narrowest in Latin America, to enable it to achieve its budget deficit reduction targets. The government is however facing public opposition. Finally, the efficiency of public corporations, operating in a number of sectors (ports, airports, telecoms, cement, alcohol), is poor because of a lack of investment. With the cautious management of the public budget, public debt is likely to stabilise at around 25% of GDP.

 

A current account in deficit, despite expected increases in exports

The recovery in economic activity in Brazil and Argentina should boost agriculture and energy exports (respectively 70% and 25% of exports), by volume, excluding any negative climatic events. The benefits associated with the surplus in goods will however be somewhat moderated by the slight rise in oil prices. Beyond the traditional terms of trade, the main determining factor in how the current account evolves in 2017 will be infrastructure investments. At the same time as public spending in partnership with the private sector becomes a reality, this will also trigger an increase in the volume of imported inputs and will in part offset the expected growth in export volumes. Direct foreign investment will help to prevent to some extent any significant weakening of reserves, which are at a satisfactory level (7 month’s imports).

 

Political difficulties in implementing the reforms

The next presidential and parliamentary elections are scheduled on April 22nd 2018. President Horacio Cortes of the Colorado (PC) party will not be able to stand for re-election because he withdrew his proposed amendment to the Constitution allowing for presidential re-election. This proposal hampered the implementation of the reforms by arousing strong disputes from the opposition as well as within its own party. In addition, several members of the Colorado (PC) party also criticized its reform program based on the opening of the capital of state-owned enterprises to private participation and the multiplication of infrastructure projects in public-private partnership. However, the withdrawal of the proposed amendment to the constitution could allow H. Cortes to continue his reforms until the next elections. The business climate remains difficult mainly because of the scale of the informal economy. The country is also the most corrupt in Latin America after Venezuela.

 

Last update : June 2017

Top
  • English
  • Français