Paraguay survived ‘real stress test’ — central bank

Paraguay’s central bank governor tells Emerging Markets how his minnow LatAm economy has survived the recent downturn and how it plans to replace China as a regional supplier.

10/04/2016 | Thierry Ogier

Paraguay is looking to compete with China to win orders from its large neighbours as the small South American state tries to wean itself off a dependency on revenues from commodity exports.

Carlos Fernández Valdovinos, Paraguay’s central bank governor, told Emerging Markets that the economy’s capacity to adapt to sudden changes has been put under the spotlight. “This was a stress test — a real stress test,” Fernández said.

Economic growth in the landlocked country had survived amid recessions in the Mercosur area, country officials have said.

Fernández said Paraguay was working to diversify an economy that was still dependent on agriculture in order to foster industrialisation. Its low level of tax and its geographical location act as incentives to attract investment, especially from neighbouring Brazil.

“Brazil imports $70bn from Chinese factories. We have already identified around $7bn which can be produced cheaper in Paraguay,” said Fernández. “Instead of importing from China, Brazilian industries may produce cheaper from Paraguay, it would be Brazilian companies who would be doing that. We do have comparative advantage.”

Fernández said he believed that productivity would be the “the new engine for growth”.

Thomas Zanotto, director of foreign trade and international affairs at the São Paulo industry federation in Brazil, said that instead of closing a plant or becoming a mere distributor of Asian products, a company could make part of its output from Paraguay, “where the costs of certain type of products are comparable to those in Asia”.

BANKING REFORM

Paraguay, whose economy is traditionally highly dependent on the price of commodities and on its neighbours, which are all in crisis or suffering a sharp deterioration, is expected to enjoy a 2.7% GDP growth this year, after a 3% expansion in 2015, according to Itaú Unibanco, a Brazilian bank that is also the largest financial institution in Paraguay.

“It was easy to grow at 4.8% on average in 2003-2014 when the region was growing at almost 4% on average but it is really a merit of the country to grow at 3% when the region is contracting,” said Fernández.

Paraguay is one of the few South American countries to experience growth this year. It is one of the smallest in the region, with still high levels of poverty, but it has been praised by economists for its orthodox policies.

A banking reform has recently been launched in the country, and further reforms of the public sector development bank and pension funds will follow. Recently a key fiscal responsibility bill was approved as well as a public private partnership legal framework to boost investment in infrastructure.

Paraguay will be hosting next year’s IADB meeting. Officials see this as an acknowledgement of its stability and economic health.

EMERGING MARKETS

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