LATAM Paraguay

Fitch: Prudent Macro Policies to Remain After Paraguay Elections

Fitch Ratings-New York-27 April 2017: Major economic policies are unlikely to change as a result of the April 2018 Paraguayan Presidential and Congressional elections, Fitch Ratings says. We expect economic policy continuity as there is broad consensus on prudent policies across the political spectrum.

Political tensions in Paraguay flared in recent weeks around a proposed amendment that would allow incumbent presidents to run for reelection. The Lower House voted against the amendment yesterday setting the stage for a change in government in 2018. The protests against the bid for reelection did not impact economic growth prospects.

Structural and institutional challenges remain, however. The next government will have to work with a strong, independent-minded Congress to pass legislation. Structural factors remain Paraguay’s major rating constraints.

Paraguay’s governance and human development indicators are well below those of the ‘BB’ median. Per-capita income is less than $4000, which is well below the ‘BB’ median of nearly $5000. Fitch expects Paraguay’s per capita income and governance indicators to only gradually converge toward the ‘BB’ medians.

We forecast Paraguay’s growth rate to be 3.5% this year and slightly higher in 2018. Most of this growth will be based on higher investment and a pick-up in consumption. Real investment is expected to rise by 5.5% in 2017. One of the key priorities of the Cartes administration has been improving infrastructure, an area that has been one of the country’s key bottlenecks to growth. Solid economic expansions in both Argentina and Brazil in 2018 are expected to boost prospects for Paraguay’s exports, helping drive GDP growth somewhat higher to 3.8%.

Paraguay’s growth proved resilient in 2015 and 2016. Real GDP growth reached 4.1% in 2016 despite low commodity prices for key exports (soya and beef) and though Paraguay’s main trading partners — Brazil and Argentina — were in deep recessions. Paraguay’s prudent macroeconomic policy framework with sound fundamentals helped it adjust to external shocks. One of the main drivers was the government’s ability to raise infrastructure spending while containing other spending increases. Favorable weather also played a part in recent growth as it helped agriculture and electricity production to rise.

Paraguay’s monetary and fiscal framework has strengthened gradually for over a decade. In 2011, the central bank adopted an inflation target and has met that target each year since, increasing credibility. In March, the central bank lowered the target to 4.0% from 4.5%, underscoring its commitment to lower inflation. Furthermore, the central bank has allowed greater exchange rate flexibility.

Fiscal credibility has also risen due to the Fiscal Responsibility Law came that came into effect in 2015. It established a 1.5% of GDP deficit ceiling and limited real current primary expenditure growth to 4%. Although actual budget performance did not make these marks in the first year, the government met the fiscal target in 2016. Showing commitment to the fiscal target, the government vetoed the 2017 budget passed by the Congress as higher wages threatened the target. Paraguay’s debt to GDP ratio is one of the lowest in the ‘BB’ category at less than 25%.

The government is considering changing the rule to one based on a structural balance with a public debt objective based on the country’s potential GDP. This would allow for more flexibility to run countercyclical policies.


Richard Francis
Director, Sovereigns
+1 212 908-0500
Fitch Ratings, Inc.
33 Whitehall Street, New York

Robert Rowan
Senior Analyst, Fitch Wire
+1 212 908-9159

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings.


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