ANDBANK RESEARCH Global Economics & Markets
Alex FustĂŠ Chief Economist alex.fuste@andbank.com +376 881 248
Working paper - 81 Interesting markets to invest. Paraguay – A preliminary assessment October 2 , 2014
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1. Impressive GDP growth during 2013, although the country has lost momentum • The Gross Domestic Product (GDP) in Paraguay has been expanding in each quarter at an impressive 14.4% average pace (over the same period of the previous year) during 2013. • GDP Annual Growth Rate in Paraguay averaged 3.24 Percent from 1995 until 2013, reaching an all time high of 16.40 Percent in the first quarter of 2013 and a record low of -7.40 Percent in the second quarter of 2009. • Outlook: The country has not escaped the slowdown dynamics throughout the region -something reflected in the sharp loss of momentum in GDP pace (from 12.1% y/y in 4Q13 to 4.1% in 1Q13).- although, admittedly, activity in Paraguay still remains among the highest in the continent. In our opinion this loss of momentum will persist (being highly unlikely to get back to 2013 pace), although will continue being the most dynamic within its peers.
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2. Paraguay is converging with the rest of the world in terms of per capita GDP although … it is still well below the global average. • Astonishingly, the Gross Domestic Product per capita in Paraguay, when adjusted by purchasing power parity (PPP), has risen a 26% during the 2007-2013 “Great depression” period. Averaging 6378 USD from 1990 until 2013, this magnitude has just reached an all time high of 7786 USD in 2013. • Outlook: Despite the fact that the recent slowdown in GDP pace will likely persist, we strongly believe that Paraguay will continue on its converge path with the rest of the world in PPP GDP per capita. Nevertheless, the GDP per Capita in Paraguay is still low under international standards, equivalent to just 35% of the world's average, what still places Paraguay in the group of countries still considered “vulnerable”.
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3. Current level in Gross Fixed Capital formation is 100% above the last 20 years average but is still the lowest in the Latam world. • Gross Fixed Capital Formation in Paraguay was 4.361.215 Million PYG in the first quarter of 2014 (well above the 2.174.936.46 Million PYG average from 1994 until 2014). • Outlook: Standard & Poors credit rating for Paraguay stands at BB (after the agency increased the rating by two notches this year). Moodys keeps rating at Ba2. Positive dynamics in the economy are essential if we are to witness continued momentum in investment but, this, in it self, will not be enough if the country wants to see further improvement in its ratings. In our opinion it will be necessary to overcome some deficits in legal and institutional security. In our opinion, if the macro factors continue displaying like recently (providing a floor for investment) and the authorities continue taking steps in the institutional arena (as it seems they are doing), we could witness another jump in Gross Fixed Capital Formation. Nevertheless, it is worth to mention that the current level of investment is dangerously low when compared with its peers. 30
GROSS FIXED CAPITAL FORMATION (% OF GDP)
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4. Debt-to-GDP level is clearly very low (15.16% of GDP)
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5. ‌ with a reasonable execution in Government Budget, what makes highly unlikely that the debt-to-GDP experiences significant deterioration
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6. Labor market is not at its healthiest level • Unemployment Rate in Paraguay stands at a 7.90%. • Outlook: Although this 7.90% may sound somehow healthy, in fact it is NOT if we consider the strong GDP expansion seen in 2013, and if we consider that unemployment still stands above the average 7.77% seen in the period 2010-2014.
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7. Maybe the most important magnitude: A very balanced external situation makes Paraguay less vulnerable if global monetary conditions start to tighten (as it seems it may happen) • Paraguay recorded a Current Account surplus of +0.80% of the country's Gross Domestic Product in 2013. Admittedly, a much better position when compared with the -1.71% average seen in the 1980-2013 period. • Paraguay’s external position is much better than the rest of countries in the region. The Latam big five shows an average Current Account Deficit of -3.5% of GDP. • This means a more stable currency, fixed income markets and financial conditions.
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8. Reserves are improving steadily as a result of a positive external situation. This makes the country less vulnerable against external shocks.
Reserves (Gold included)
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9. Inflation is certainly setting a very encouraging picture. • The inflation rate in Paraguay was recorded at 4.40 percent in August of 2014, well below the 6.25% average in the 2005-2014 period, reaching an all time high of 13.40 Percent in June of 2008.
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10. The currency has appreciated considerable in the last 10 years. It seems to have stabilized from 2011, being now in the upper band of the 2011-2014 range and could appreciate towards the 4.000 (+12% potential) PYG/USD – Last 10 years
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11. The danger still lies in the high level of corruption • Venezuela and Paraguay are still perceived as the most corrupt countries on the continent, according to the report released in 2013 by Transparency International. • Table of transparency gives 20 points and Paraguay Venezuela 24 to zero being highly corrupt countries and 100 for more transparent. Among the 177 countries analyzed, Paraguay is located at No. 150, while Venezuela is ranked 160.
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Paraguay – Conclusions 1. Debt to GDP is very low according to the international standards. 2. The broad economic policy (fiscal and monetary) seems highly responsible, with a reasonable execution in Government Budget, what makes highly unlikely that the debtto-GDP experiences significant deterioration 3. Impressive GDP growth during 2013, although the country has lost momentum. In our opinion this loss of momentum will persist (being highly unlikely to get back to 2013 pace), although will continue being the most dynamic within its peers. 4. Inflation is setting a very encouraging picture, which, if to be continued, will smooth the path for continued improvements in the general economic environment. 5. A very balanced external situation that makes Paraguay less vulnerable if global monetary conditions start to tighten (as it seems it may happen). This means a more stable currency, fixed income markets and financial conditions. 6. Nevertheless, the danger still lies in the high level of corruption. Certainly an aspect that must necessarily be solved for the country to become a stable investment center. Until there is a change in the international perception, it is difficult to justify a representative presence of these assets in the portfolio of an investor.
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