RIO DE JANEIRO, BRAZIL – To maintain its sovereign rating (BB+), Paraguay must improve its financing capabilities or allow the creation and growth of a sovereign wealth fund and deepen its capital market as a source of financing.
Without these measures, the country is too exposed to the ups and downs of international financial markets, according to Todd Martinez, senior director for Latin America at Fitch Ratings.
Read also: Check out our coverage on Paraguay
Yesterday’s virtual presentation was titled “Prospects for Paraguay,” in which the analyst also argued for savings that would represent countercyclical action to have sources of financing in times of need.
“To date, there are no signs that Paraguay is making progress in accumulating significant amounts or creating a sovereign wealth fund. It is certainly difficult to save money rather than spend it in a country with many needs and a lack of human capital and infrastructure,” he acknowledged.
However, he clarified that if the country followed his recommendations, GDP growth could be significant, thanks to local comparative advantages in terms of low labor prices, energy, and taxes, which achieved sufficient growth rates and are above the average for the region.
However, some reforms will be needed to get to 4% to 6% annual growth, like other countries with an investment grade.
The Fitch Rating specialist also pointed out that Paraguay has little ability to finance its deficit in the domestic market, as almost 90% of its debt is in foreign currency.
“The reliance on foreign currency debt means that it is still an emerging market, similar to Brazil in the 1990s, so it could fall into the ‘original sin’ of calculating this debt in local currency. It would be exposed to exchange rate fluctuations and external financing shocks,” he said.
Regarding Itaipú Binacional power plant after 2023, he said it would be an opportunity for the country to obtain better prices for its mandatory sales to Brazil.
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