Event

Mario Abdo, senator from the ruling Partido Colorado, beated the centre-left alliance headed by another senator, Efraín Alegre, at the presidential elections. Mr Abdo´s win does not come as a surprise as he was leading the opinion polls by more than two dozen points. Moreover, the Colorados have ruled the small landlocked country for 66 of the last 71 years. Mr Abdo also keeps a strong presence in the Senate, losing fewer seats than polls had projected. Mr Abdo, taking office in August, is likely to maintain the business friendly policies introduced by incumbent president Cartes. Additionnaly, he is expected to ensure strict fiscal policies while promoting low taxation and foreign investment.

Impact on country risk

Mr Cartes will leave Mr Abdo a government with sound public finances: fiscal deficits are rather small (estimated at roughly -1% of GDP in 2018) while the government debt is relatively low and relatively stable (slighlty above 25% of GDP in 2017). The overall economy is also doing well with a robust GDP growth of about 4%, relatively moderate inflation and a current account balance which records a modest deficit (1.8% of GDP in 2017). On the top of that, Paraguay´s moderate external debt – standing at about 55% of GDP at the end of 2017 –  is forecast to continue to decline gradually.

Nevertheless, there are some weaknesses Mr Abdo should tackle. Firstly, Paraguay is very reliant on weather-dependent sectors as reflected by its main export products: electricity (generated by hydroelectric power) and soy. Together they even account for almost 40% of current account receipts. In consequence, economic performance is vulnerable to bad weather conditions, whereas the country is occasionally hit by droughts. Secondly, the Paraguayan economy is to a large extent determined by its geographical position, that is between two regional superpowers: Argentina and Brazil. Indeed, economic developments in its neighbours – especially Brazil which accounts for about a third of its exports and whose economic recovery is rather weak – have an impact on Paraguay´s economy. Thirdly, the Paraguayan financial system is highly dollarised. Hence, as the exchange rate regime is floating, a huge depreciation of the guaraní vis-à-vis the USD could impact banks and borrowers´ balance sheets.

The short-term political risk is in category 3/7, with a negative outlook. The country enjoys a comfortable level of foreign exchange reserves (covering around 7 months of imports in February). However, the moderate external short-term debt is on the rise, explaining the negative outlook. The medium/long-term political risk is in category 5/7. Paraguay´s elevated rating reflects its eminent external debt, robust growth, high dollarisation, vulnerability to weather conditions and sound public finances. The declining external debt brings however some positive outlook.

Analyst: Jolyn Debuysscher - J.Debuysscher@credendo.com