Paraguay is now close to investment grade as Moody's Investors Service has upgraded Paraguay's sovereign bond rating to Ba1 from Ba2, changing its outlook from stable to positive.
According to the firm itself, “the decision to upgrade the rating is attributed to:
1. The implementation of the reform package enacted in 2013 that strengthens the fiscal framework and boosts infrastructure investment.
2. Efforts to diversify the economy that are producing positive results.
3. Improved governance and institutional strength.
BASIS FOR RATINGS
FIRST ELEMENT - Successful progress towards the implementation of the reforms
The government has made progress in implementing the reforms approved at the end of 2013, including: the fiscal responsibility law (FRL); income tax reforms; and the PPP framework to boost infrastructure investment. Despite the dissimilar application of the LRF, limits were observed in the containment of spending and salary increases in the 2015 budget, which is a significant improvement in contrast to the previous year's budget. Tax collection and tax revenues have improved substantially with the implementation of the new laws. While compliance with the limit on recurrent spending was significant, the actual budget deficit approved by Congress was well above the limit set by the LRF. At the same time, the fiscal target was partially met, through the exclusion of capital expenditures financed through the issuance of global bonds. While increased capital spending is desirable, this approach to meeting the fiscal target indicates that the transition to full compliance with the LRF is not yet complete. We expect continued and improved compliance with the LRF to contain recurrent spending and wage growth, creating fiscal space for growth-enhancing capital spending.
SECOND ELEMENT - Economic diversification is underway
Government and private sector-led initiatives are enhancing economic diversification by developing light manufacturing industries and raising the value added of agricultural exports. The government's strategy aims to improve Paraguay's integration into the regional supply chain by encouraging the establishment of maquilas, auto parts manufacturers, and other light manufacturing. We believe the expansion of light manufacturing industries is likely to continue due to Paraguay's competitive advantages relative to neighboring Brazil, which include low labor and energy costs and a more favorable fiscal environment. In addition, growth volatility typically has a limited impact on government revenues and banking sector performance.
THIRD ELEMENT - Improved governance and institutional strength
Government effectiveness has improved since the Cartes administration took office. The government was able to secure the approval of several key reforms, including; the LRF, the Law to Modernize the Financial Administration of the State, the APP Law, and a revision of the sovereign bond law, among others.
The stable outlook reflects our expectation that the government will continue to implement the various laws passed at the end of 2013 and maintain fiscal prudence, while at the same time expanding infrastructure investment in the medium term. We do not anticipate that Paraguay's rating could change in the short to medium term. Moreover, this upgrade would depend on a track record of improvement in the institutional framework, including compliance with the LRF, and sustained improvement in governance indicators compared to peers.
FACTORS THAT COULD RAISE/LOWER RATINGS
Upward rating pressure could result from: (i) track record of commitment to the fiscal responsibility law as a fiscal anchor; (2) successful implementation of growth-enhancing infrastructure investment; (3) continued economic diversification efforts; (4) improved institutional strength and governance indicators.
Downward pressure could result from: (1) the reversal of the government's prudent fiscal management (2) a significant and prolonged commodity shock driven by declining prices or adverse weather conditions; (3) recurring 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 Ba2 from Ba3, while the ceiling for short-term foreign currency deposits remains at Not Prime. The ceiling for long-term local currency bonds remains at Baa3, while the ceiling for short-term foreign currency bonds remains at P-3.
GDP per capita (PPP base, US$): 8,386 (2014 estimate) (also known as Income per Capita)
GDP growth (percentage change): 4.3% (2014 Estimate)
Inflation rate (percentage change dec/dec): 4.2% (2014 Estimate)
General Government Fiscal Balance/GDP: -–2.3% (2014 Estimate)
Current Account Balance/GDP-0.4% (2014 Estimated) (also known as External Balance Sheet)
External Debt/GDP: 52.7% (2014 Estimated)
Level of economic development: Low level of economic resilience
Delinquency history: At least one episode of delinquency recorded since 1983.
On March 29, 2015, a rating committee was convened to discuss the rating of the Government of Paraguay. The main points of the discussion centered on: the issuer's economic fundamentals, including its economic strength, have increased substantially. The issuer's institutional strength/framework has increased. The issuer's fiscal or financial strength, including its debt profile, has improved. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.”
