Economic Studies
Paraguay

Paraguay

Population 6,9 million
GDP per capita 4,003 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

Main economic indicators 2015 2016 2017(f) 2018(f)
GDP growth (%) 3.0 4.1 4.3 4.5
Inflation (yearly average, %) 3.1 4.1 3.6 4.2
Budget balance (% GDP) -2.4 -0.5 -0.7 -0.8
Current account balance (% GDP) -1.1 1.5 -1.8 -2.0
Public debt (% GDP) 24.0 24.9 25.5 26.5

(f): forecast

STRENGTHS

  • Well-developed agricultural sector (soya and beef)
  • Abundant hydroelectric resources
  • Prudent fiscal and economic policies

WEAKNESSES

  • Inadequate infrastructure (river transport, roads, electricity power lines)
  • Dependent on the agricultural sector and a small number of trading partners (in particular, Brazil and Argentina)
  • Weak governance (corruption and patronage)
  • Large informal market (40% of GDP)

RISK ASSESSMENT

Resilient growth in 2018

Activity is expected to remain firm in 2018, buoyed by domestic demand and agricultural exports. The latter will benefit from the improved economic situation in both Brazil and Argentina, the country's main trading partners, as well as from the moderate rise in the price of soya (42% of exports). Nevertheless, the contribution of external trade to growth will be negative due to the lively pace of imports. The healthy state of the agricultural sector is set to benefit the industrial sector, mainly centred on the processing of agricultural products such as soya (oil, flour) or beef (mainly leather). The dynamism of the automotive equipment assembly segment and textile sector within the country's maquilas (foreign-built factories, typically in free trade zones), as well as that of the construction sector, should help support private consumption by creating jobs. Households also benefit from the higher minimum wage. Higher public spending will underpin activity, but political disagreements could delay the implementation of some infrastructure projects (roads, metro, airports). Private investment will be limited by the still-underdeveloped infrastructure, despite an attractive fiscal policy for foreign investors. Inflation is expected to settle in the middle of the central bank's target range (2-6%). The central bank  will not likely tighten its monetary policy  except on the event of strong inflationary pressures, particularly on food prices. It will, however, probably intervene to stabilise the guarani, the local currency, if it depreciates too strongly following a potential fall in the price of soya or an increase in the price of oil. Meanwhile, the banking system remains fragile, as it is highly dollarised and heavily dependent on the agricultural sector, which represents most of the loans granted.

 

Prudent budget policy and balanced external accounts

The government is expected to continue with the implementation of the budget reforms approved at the end of 2013, which include a law on fiscal responsibility (limiting the deficit to 1.5% of GDP), tax reforms, and a framework permitting public/private partnerships (PPP). In 2017, the budget deficit remained below the limit fixed by law and this position is expected to last until 2018. The lively pace of economic activity should help boost tax receipts and offset the increase in public spending, mainly on infrastructure. However, the country is expected to widen its tax base – one of the narrowest in Latin America – in order to more easily reach its fiscal deficit targets, while developing its infrastructure. Given the fiscal prudence, the public debt is expected to remain contained, even if financing it will still broadly be through external finance, in particular via the issuance of dollar-denominated bonds (bond issuance of USD 530 million in March 2018 on international markets).

Economic recovery in Brazil and Argentina is expected to stimulate agricultural and energy (mainly hydroelectric) exports, excluding any negative weather events. The trade surplus will likely be moderated by strong import growth associated with dynamic private consumption and infrastructure investments. Under these conditions, FDI flows, chiefly in the agricultural and infrastructure sectors, will help maintain foreign exchange reserves at a satisfactory level (seven months of imports).

 

Continuity emerges from last general elections

As expected, the April general elections saw the victory of Mario Abdo Benitez from the Colorado party. A former senate president, and son of the Private Secretary to former President Alfredo Stroessner (1954-1989), Mr Benitez succeeds Horacio Cortes (also from the Colorado party). As a result, little change can be expected in terms of social and economic policies. Business-friendly measures – including low-tax policies to favour foreign investments and soya production – should continue to be implemented. However, little progress can be expected in the fight against poverty, given the small amount of resources available under the current restrictive fiscal policy. Also, the absence of an absolute majority in the Senate for the Colorado party (18 out of 45 seats) will force the government to seek allies during the five-year mandate, which will likely hinder any substantial reform. Meanwhile, the business climate remains difficult, particularly because of the size of the informal economy, and the widespread corruption: it remains difficult to assess Mr Benitez’s commitment to fight against the phenomenon, given that his party has ruled the country for the past seven decades.

 

Last update : April 2018

Top
  • English