Paraguay special report 2014: Paraguay’s rising score trend is more than just an economic story

Responding to Euromoney’s longstanding survey of country risk, global economists are increasingly buoyant about the prospects for Paraguay’s economy, with rating indicators of political and economic health suggestive of higher growth and better times ahead for the small but vibrant Latin American country. Paraguay’s $1 billion worth of bond sales this year were preceded by an improving risk trend underpinned by the election as president last year of right-wing Colorado Party candidate Horacio Cartes, a prominent businessman. Elected in April 2013 and sworn in last August, Cartes is driving through substantive reform in spite of popular resistance, and his efforts are diminishing his country’s risk.

These positive signs have translated into the country receiving an improved assessment from economists participating in Euromoney’s Country Risk Ratings, a development which bodes well as the country attempts to shake off the economic and social challenges of the past three years.

Euromoney’s country risk rankings can be a useful guide to how macroeconomists perceive the sovereign risk profile of different countries over time. The survey uses a simple methodology to measure political and economic risk, as well as the structural factors that affect a country’s risk profile, applying the same criteria to both advanced and emerging economies. As the survey is compiled on a real-time basis, the ratings often illustrate trends in risk perception earlier than other leading indicators, such as traditional credit ratings.

With the exception of perennial crisis-sufferers Argentina and Venezuela, the past decade has been a golden one for many Latin American sovereigns, with commodity-producing countries such as Brazil, Chile and Colombia receiving their highest-ever rankings in the Euromoney survey. However, many of these countries saw their rankings start to slip in 2013 as a reduced rate of growth, higher inflation and a wider sell-off in emerging market assets by international investors saw a reversal of the previously buoyant economic outlook.

Bucking the trend

In contrast, Paraguay’s ECR score, which had previously remained static due to a combination of political gridlock, macroeconomic uncertainty and insufficient investment, has greatly improved in the past two years as political reform and surging economic growth have made the country one of the most attractive investment destinations in Latin America, at a time when larger countries such as Brazil have seen their economies stall.

Since 2010 Paraguay’s risk score has increased by almost 3.2 points. The increase reflects rapid economic growth in recent years, as well as the economic reforms and increased foreign investment that have boosted the country’s prospects. This year alone, Paraguay’s ECR score has climbed 1.8 points, to 42.4 out of a maximum 100, placing it 80th out of 186 countries in ECR’s global rankings. This is four places higher since the end of last year, and seven in all since 2012. No wonder Moody’s and S&P felt compelled to upgrade Paraguay recently, to Ba2 and BB respectively. ECR experts had foreseen the shift.

Paraguay’s economy is one of the most dynamic in the region. After registering a stunning 13% growth rate in 2013, growth this year has settled down to a third of that rate in real terms. Private sector forecasters polled by consultancy Focus Economics predict 4.8% growth this year. BBVA Research, a longstanding contributor to the risk outlook for several countries in ECR’s survey, predicts 5.3% growth based on “a strong agricultural sector and further boost of investment, both private and public”.

The outlook is not without challenges. A score below 50 shows there is reason to be cautious in a country where political opposition may curtail the president’s ambitious programme -  as was highlighted by a general strike in March, the first in 20 years, by angry voters opposing job cuts.

Economic growth can be volatile, too, in a country relying on a good harvest of soybeans, sugarcane and other cash crops, while female workforce participation could be improved alongside worrying poverty indicators.

Nevertheless, such impressive growth in recent years is a far cry from the depressed state of neighbouring Argentina, an economy in decline and, worse still, in default.

Political and structural shift under way

For a picture of the effect that the government’s economic reforms are having, look no further than Euromoney’s political risk indicator, a measure of the country’s stability and the strength of its institutions and the rule of law. Paraguay’s score has significantly improved in recent quarters as the measures put in place by policy-makers have begun to take effect.

Traditionally, Paraguay has scored badly for corruption, transparency and government policy blighted by an obtrusive regulatory regime. Yet the shift in political ethos back to the right following six years of left-wing government has seen those risks subside. Five of Paraguay’s six political indicators have improved since last year, notably the government stability sub-factor.

Also showing signs of improvement is Paraguay’s score in the access to capital markets indicator. This metric, which measures the ease with which syndication desks at the largest global banks believe they could arrange dollar funding for a corporate or sovereign in a given market, has improved by nearly two points since the beginning of 2013, reflecting the increased attractiveness of Paraguay to investors since the successful return to the capital markets the previous year.

Experts have also upgraded the score for ‘hard infrastructure’, one of four structural indicators – a key policy target for this administration and a recipient of the majority of the market borrowing. A new terminal at the Silvio Pettirosi airport in Asunción due for completion in 2018 will help the country cope with growing passenger traffic. Other transport and energy projects are planned.

The IMF is impressed, too, noting in its most recent field report an “ambitious agenda of growth-enhancing reforms and poverty reduction initiatives”. These can only benefit the country’s development and raise productivity growth, turning it into a “dynamic emerging economy”, the IMF adds.

Low inflation and debt, a current account near enough to balance and solid reserves are sure to excite investors alarmed by the less orthodox economic experiments taking place in some other Latin American economies. 

President Cartes has a tough job on his hands, not least in persuading his own party of the merits of his governing style, but his first report card has shown considerable promise. Investors will be watching closely.