Do Paraguay’s public works debts herald bigger problems?

Bnamericas Published: Wednesday, January 18, 2023
Do Paraguay’s public works debts herald bigger problems?

The US$300mn owed by Paraguay’s public works ministry (MOPC) to local banks for infrastructure projects is not an immediate risk to the country’s sovereign rating nor the banking system as a whole, but it could eventually be seen as a symptom of weakness at a time when the government is trying to reduce its fiscal deficit.

“Delays in reimbursing banks may indicate weaker fiscal policy effectiveness,” Samar Maziad, VP and senior analyst for Moody’s Sovereign Risk Group, told BNamericas. However, she does not expect the government to have much trouble paying, even though MOPC is now resorting to funds from multilateral loans to do so. 

Since 2021, banks in Paraguay have been financing public works contracts under a debt reassignment mechanism in which contractors transfer the right to charge for work certificates to local banks. 

However, at some point the government has to pay the banks, and Maziad added that once the payment certificates come due they will be part of government debt.

The analyst noted that Paraguay is currently working to reduce its fiscal deficit to deal with slower economic growth. 

“In an effort to rebuild policy buffers and fiscal space, the government targets a fiscal deficit ceiling of 1.5% of GDP by 2024, which will be critical to ensure macroeconomic stability and preserve Paraguay’s fiscal strength; a key support factor for Paraguay’s ‘Ba1’ sovereign rating," she said.

As for the risks for the local banking sector, the VP and senior analyst for Moody’s Financial Institutions Group, Daniel Girola, told BNamericas that the US$300mn that MOPC is estimated to owe banks only represents 2% of the system’s total loan book.

“We also expect credit growth for the construction sector to remain small in the next 12 months, banks’ risk exposure concentration to the activity is actually reducing,” he said, adding that in the 12 months ending November credit granted to Paraguay’s construction firms grew 7.9%, well below the 14.1% expansion of the total loan portfolio in the same period.

“The amount is manageable, especially when considering the loss buffers granted by the system’s adequate reserve coverage, as loan loss reserves represented 119% of past due loans as of November 2022, and total capital to risk weighted assets was at 17.6%,” Girola said.

Construction firms are far less optimistic and some have warned that the debt reassignment scheme is no longer sustainable as banks are discounting interest from the payments for work certificates.

The head of Paraguay’s construction chamber, Daniel Díaz, has been warning since last July that the discounted rate is too high for firms to keep using the mechanism. Díaz has also told BNamericas that he does not expect a solution soon due to the upcoming general election on April 30.

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