Moody's Investors Service has upgraded Paraguay's sovereign bond rating from Ba3 to Ba2, changing its outlook from stable to positive.
According to the firm itself, "the decision to upgrade Paraguay's rating is attributed to:
- Improvement in the position of Paraguay's main fiscal indicators relative to the median of its peers in the 'Ba' rating category.
- Strengthening of the institutional framework as a result of the legislative package approved last year.
- Smooth political transition after the removal of former president Fernando Lugo in 2012.
In Paraguay, further developments are still awaited in relation to the second point. Among them, the regulatory decree of the Public-Private Partnership Law that will grant the possibility of making investments of this type in the country. The government estimates that the decree will be ready in early March.
RATIONALE FOR UPGRADING
FIRST ELEMENT - IMPROVED POSITION OF MAJOR FISCAL INDICATORS IN RELATION TO THE AVERAGE OF THEIR PEERS IN THE 'Ba' RATING CATEGORY
After the central government reported debt indicators of 18% of GDP and 112% of revenues on average during the 2003-2012 period, which compares to the median of 39% and 149% for countries rated in the 'Ba' category for the same period, these indicators declined to 12.7% of GDP and 79% of revenues in 2013. These levels are well below the median for the 'Ba' category of 36% and 151%, respectively. The financial burden of government debt, as measured by the interest payments to revenue ratio, is low with payments of less than 2% (Ba median: 7.7%) due to the concessional nature of Paraguay's debt. The average term of the country's debt is over 20 years.
While most of the government's debt is denominated in foreign currency, Paraguay has a natural hedge as revenues from hydroelectric power sales to Brazil and Argentina are denominated in U.S. dollars.
SECOND ELEMENT - STRENGTHENING THE INSTITUTIONAL FRAMEWORK
The government of President Horacio Cartes, who took office in August 2013, managed to pass several important bills within months of taking office. These include a tax reform, the Fiscal Responsibility Law, the Law for the Modernization of the Financial Administration of the State, the Public-Private Partnership (PPP) Law, and a revision to the Sovereign Bond Law.
THIRD ELEMENT - SMOOTH POLITICAL TRANSITION
The transition to power following the ouster of former president Fernando Lugo has been smooth, including the interim government of Luis Federico Franco and, more recently, the Cartes administration. There was no significant impact on the economy or the country's solvency during the transition period. In addition, Paraguay was ultimately reincorporated into MERCOSUR. During the transition period, the technical capacity of the Ministry of Economy and the Central Bank remained unchanged.
RATIONALE FOR POSITIVE OUTLOOK
The positive Ba2 rating outlook reflects our expectation that, while it will take time for the government to implement several laws passed in late 2013, it is likely to improve fiscal oversight (e.g., through the Fiscal Responsibility Law) and enable higher levels of infrastructure investments (e.g., through the PPP Law and/or the revision to the Sovereign Bond Law) in the medium to long term.
FACTORS THAT COULD RAISE/LOWER RATINGS
Upward rating pressure could result from: (i) successful implementation of the recently approved laws; (2) investments in the economy that diversify the economy and/or significantly improve infrastructure projects.
Downward pressure could result from: (1) a reversal in fiscal discipline; (2) a significant and prolonged commodity shock driven by either lower prices or adverse weather conditions; (3) sustained political instability.
TECHOS PAÍS
As a result of this rating action, the ceilings for long-term local currency bonds and deposits changed to Baa3 from Ba1, while the ceilings for short-term local currency bonds and deposits changed to P3 from Not Prime. The ceiling for long-term foreign currency deposits changed to Ba3 from B1, while the ceiling for short-term foreign currency deposits remains at Not Prime. The ceiling for long-term foreign currency bonds remains at Ba1, while the ceiling for short-term foreign currency bonds remains at Not Prime.
GDP per capita (PPP basis, US$): 6,053 (2012) (also known as Income per Capita)
GDP growth (percentage change): 13.6% (2013 Estimate)
Inflation rate (percentage change dec/dec): 4.2% (2013 Estimated)
General Government Fiscal Balance/GDP: -1.9% (2013 Estimate)
Current Account Balance/GDP: 0.8% (2013 Estimate) (also known as External Balance)
External Debt/GDP: 18.2% (2013 Estimate)
Level of economic development: Low level of economic resilience
Delinquency history: At least one episode of delinquency recorded since 1983.
On January 29, 2014, a rating committee of Moody's was convened to discuss the rating of the Government of Paraguay. The main points of the discussion focused on: The issuer's institutional strength/framework have grown significantly. The issuer's fiscal or financial strength, including its debt profile, has grown significantly. The issuer has become more susceptible to event risks. One analyst of the issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. Other issues discussed include: The issuer's economic fundamentals, including its economic strength, have not changed significantly. The issuer's management and/or internal governance practices have not changed significantly. The systemic risk in which this issuer operates has not changed significantly.”
