Fitch: Paraguay credit outlook remains positive post election

Tuesday, April 24, 2018

Press Release from Fitch Ratings

23 April 2018

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Fitch Ratings-New York-23 April 2018: Paraguay is unlikely to see significant changes to its economic policy framework following the general election held on April 22, says Fitch Ratings.

We believe that President-elect Mario Abdo Benitez's new government will maintain the previous administration's strong fiscal discipline. Passage of the 2019 budget in line with the Fiscal Responsibility Law (FRL) and without significant congressional amendments will be a key test for fiscal policy and the executive-congressional relationship.

Abdo Benitez's focus on raising revenues to increase spending indicates that he intends to maintain fiscal discipline going forward. The president-elect's key pledges include reforming the judiciary, widening the tax base, reducing tax evasion and raising education spending to 7% of GDP from 4.5%. Efforts to improve the judiciary and efficacy of public sector institutions could eventually boost low governance indicators, which would help to lift a key rating constraint.

Paraguay has posted central government deficits of 1.4% of GDP or lower over the past two years, meeting the 2013 FRL that limits the deficit to 1.5% and real current spending growth to 4% per year. Combined with robust GDP growth, this has kept the general government debt to GDP ratio relatively stable at 21%, among the lowest in the 'BB' rating category sovereigns.

Proposals to reform the FRL to allow for greater infrastructure spending and move to a structural fiscal balance target could emerge in the new Congress. A structural target would theoretically give the government greater flexibility for counter-cyclical spending, potentially allowing higher deficits and debt during economic downturns but requiring greater restraint during years of strong growth.

We expect Paraguay to continue to meet the 1.5% deficit limit currently set by the FRL in 2018. Although the salary increases included by Congress led the 2018 budget's planned deficit to exceed the 1.5% limit, we expect the government will be able to meet the FRL deficit limit via spending re-allocations if needed.

Fitch projects that Paraguay's recent trend of robust growth and diversification will continue. Real GDP grew 4.3% in 2017, the highest in South America and above the 'BB' median of 3.3%. The economy should grow at a similar pace in 2018 and 2019. Favorable growth has been supported by low local costs (taxes, labor and energy) and it could be further bolstered by government efforts to boost infrastructure spending, in part through public-private partnerships.

Relations between the new Congress and president will be a factor in determining the economic policy agenda, although we expect the broad policy framework to remain unchanged. Rocky relations between President Cartes and the Congress led to sharp disagreements on several legislative agenda items including passage of the 2016 and 2017 budgets. A forthcoming GDP data revision could highlight some of the positive trends around Paraguay's credit profile. The revision is likely to show a significantly larger nominal GDP, which would lift Paraguay's relatively low per-capita income and further reduce its already low public debt-to-GDP ratio. The revision could also show less volatile real GDP growth rates compared to the current 1994-base series (highly sensitive to weather-related shocks affecting the agriculture sector) and, thus, better underscore the economy's resilience and stability.

Fitch Ratings revised the Rating Outlook on Paraguay's 'BB' rating to Positive last December. Policy continuity under the new administration with low fiscal deficits and debt levels, improved governance indicators and sustained solid rates of GDP growth with less volatility could lead to improved creditworthiness.