On 22 June, Congress and Senate voted almost unanimously to remove President Lugo from office on the charge that he mismanaged an event involving a land conflict clash between police and landless farmers, in which seventeen died. The removal comes in a context of high tensions within the government. Lugo was elected in 2008, ending sixty years of rule by the conservative Colorado party. He promised more emphasis on social issues but failed to implement his ambitious agenda as his government lacks legislative majority. For months now, the relation between Lugo and his former vice-president Franco, the leader of the Authentic Radical Liberal Party, which is the largest member of Lugo’s left Patriotic Alliance for  Change coalition, is damaged, which has a further impact on government functioning. The Land reform was a key electoral promise of Lugo in a country where agriculture is a key sector and land ownership is highly concentrated. However, Lugo failed to implement the agrarian reform, which led to growing unrest and widespread land occupations. Following the removal of Lugo, his former vice-president Federico Franco was sworn in as president until August 2013, when the government scheduled to be elected in April 2013 will take office. The main objective of his government will be to fight poverty by investing in projects related to infrastructure, education and health and, in the meantime, to maintain order. At the same moment, nation-wide protests against the new government are taking place.

Impact on country risk

The new government struggles to gain international recognition as the removal of Lugo is seen by some as a use of a democratic institution for anti-democratic means. As a consequence, regional trade block Mercosur suspended the country’s participation in meetings at least up to August 2013 – a move which could unlock the possibility for Venezuela to become a full Mercosur member and the prospect of a free trade agreement with China. Nevertheless, the Mercosur block didn’t impose any economic sanctions on Paraguay. Latin American leftist governments are unlikely to recognise the new government. Domestically, tensions are likely to remain high. In this context, recession is likely to be even worse than the - 1.7% projected due to the severe drought. Outlook for the country risk classifications is negative.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com