PARAGUAY Investment opportunities in a rising economy Carlos G. Fernรกndez Valdovinos Central Bank of Paraguay September, 2014
Roadmap
• • • •
Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary
Roadmap
• • • •
Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary
Challenges in the new global context • Six years after the beginning of the largest economic crisis in 80 years, some signs (green shoots) suggest that the worst may be over.
• The “new” world: – Widespread recovery on economic growth in 2014. – Higher growth projections than in 2013. – Still, recovery is uneven • The Federal Reserve started the normalization of monetary conditions in early 2014.
Challenges in the new global context • This is a positive event, but increased financial market and capital flow volatility is now a concern for emerging markets. • Warning: the rise in U.S. interest rates since May triggered large changes in exchange rates, sovereign spreads, stock markets, and gross portfolio inflows. • Nevertheless, the impact was not homogenous across countries: fundamentals matter.
Recovery is underway, but emerging markets face new challenges... GDP Growth (%)
6,0 4,0 2,0 0,0
Advanced Economies Emerging Economies and Developing 2013 2014 2015 Countries
Emerging Markets Bond s Index (EMBI)
May 21, 2013 Bernanke announces a possible reduction in the FED’s asset-purchase program
Dec 18, 13 Bernanke announces the withdrawal of the stimulus will begin in early 2014.
Source: IMF-WEO update July-2014. Bloomberg.
Basic Points
3,2 3,0 2,8 2,6 2,4 2,2 2,0 1,8 1,6
21-May-13 10-Jun-13 30-Jun-13 20-Jul-13 9-Aug-13 29-Aug-13 18-Sep-13 8-Oct-13 28-Oct-13 17-Nov-13 7-Dec-13 27-Dec-13 16-Jan-14 5-Feb-14 25-Feb-14 17-Mar-14 6-Apr-14 26-Apr-14 16-May-14 5-Jun-14 25-Jun-14 15-Jul-14 4-Aug-14
%
US Treasury bond yields 400 380 360 340 320 300 280 260 240 220
336,9 322,7
2-Jan-13 22-Jan-13 11-Feb-13 3-Mar-13 23-Mar-13 12-Apr-13 2-May-13 22-May-… 11-Jun-13 1-Jul-13 21-Jul-13 10-Aug-13 30-Aug-13 19-Sep-13 9-Oct-13 29-Oct-13 18-Nov-13 8-Dec-13 28-Dec-13 17-Jan-14 6-Feb-14 26-Feb-14 18-Mar-14 7-Apr-14 27-Apr-14 17-May-… 6-Jun-14 26-Jun-14 16-Jul-14 5-Aug-14
World
…still, fundamentals will matter Exchange Rate and Treasury Bond Yields IND BRA
15
IDN
10 5
CHL CHN
0 0,0 ROM
Exchange Rate Variation (%) (May 22, 2013 / Aug 30, 2013)
0,5
IND
CHL
ZAF RUS
PER
HUN KAZ
CHN
0
-2
TUR
PRY
COL
UKR
0
2 KOR
-5
Source: Bloomberg. .
POL 4 LTN
ROM BGR
2,0
2,5
3,0
Variation in Treasury Yields (%) (May 22, 2013 / Aug 30, 2013)
THA
5
1,5
BGR
MEX
MYS
HUN POL
1,0
LTN
IDN PHL
COL
UKR
KOR
BRA
10
PER
RUS
Exchange Rate Variation and Inflation
15
ZAF PRY
-5
20
TUR
MEX MYS THA
PHL
6
Inflation (%) (Dec 2012)
8
10
Exchange Rate Variation (%) (May 22, 2013 / Aug 30, 2013)
Exchange Rate Variation (%) (May 22, 2013 / Aug 30,2013)
20
12 -8
Current Account and Exchange Rate Variation 20
IND BRA IDN 15 TUR
MEX 10 PHL
ZAF
PRY CHL COL
UKR
-6
-4
-2
ROM
5 THA
0
POL
MYS
RUS PER
0 BGR
KAZ
HUN
CHN
2
KOR
4
-5 Current Account / GDP (%) (Dec 2012)
6
8
Roadmap
• • • •
Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary
Sound macro-foundations to face headwinds • Over the past decade, policy frameworks and economic fundamentals have been strengthened. • Macro-Policies: government finances are sound, inflation is low, banks are strong, buffers are large, and a flexible exchange rate regime is a useful tool to face external shocks. • Structural Reforms: tax reforms in 1993 and 2013, passage of a fiscal responsibility law and the approval of a PPP law. • The Fed exit from unconventional monetary policy will be a bumpy ride, but Paraguay is well prepared.
Strong economic growth, coupled with low and stable inflation 15 10 5
4,9 5,3
6,8 4,2
1,7
1,6
4,8 5,4
4,3 4,1
1,8
4,8
6,4
4,8
4,3
2,1
0,1
0 2014*
2013
2012
2011
-1,2 2010
2009
2008
2007
2006
2005
2004
-4,0 2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
-5
0,0 -1,4-2,3-0,8
GDP
Average 1992-2002
A history of stable prices 50 35
40
%
13,6
13,1
1992
Economic Growth (%)
Paraguay economic growth 1992-2014*
Inflation average 2009-2013
30 25
30 (%)
20
20
15 10
10
5
jul-89 jul-90 jul-91 jul-92 jul-93 jul-94 jul-95 jul-96 jul-97 jul-98 jul-99 jul-00 jul-01 jul-02 jul-03 jul-04 jul-05 jul-06 jul-07 jul-08 jul-09 jul-10 jul-11 jul-12 jul-13 jul-14
0
YoY inflation Source: CBP.
4,3
0 VEN ARG URY BRA BOL PRY ECU COL PER CHI
Large buffers to dampen excessive FX volatility
35% 30%
Guaraní (Paraguay)
230
Peso (Argentina) Real (Brasil)
180
Peso (Chile)
130
Nuevo sol (Perú) Peso (Colombia)
80 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14
USD exchange rate (Índex January 2008 = 100)
280
Peso (Uruguay)
Net External Creditor position
International Reserves Peru 31% Uruguay (% of GDP) 29%
2000
20% 15%
Paraguay 20% Brazil 16%
Chile 15% Colombia 11% Argentina 6% Venezuela 2%
10% 5%
-2000 -3000 -4000
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Source: CBP and IMF-IFS. Year 2013, last data available.
-1000
2001
2013
0
2000
0%
In USD Millions
1000 25%
A sound financial sector to support growth Increase in financial deepening 50%
Evolution of Non-performing loans 4,00% 3,50% 3,00% 2,50% 2,00% 1,50% 1,00% 0,50% 0,00%
44%
40% 30%
35%
20% 10%
2,28% 0,39% Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14
mar-94 mar-95 mar-96 mar-97 mar-98 mar-99 mar-00 mar-01 mar-02 mar-03 mar-04 mar-05 mar-06 mar-07 mar-08 mar-09 mar-10 mar-11 mar-12 mar-13 mar-14
0%
3,91%
Deposits/GDP
17%
NPL´s
17%
Solvency Ratio 16%
Source: CBP
PAR
BRA
ARG
15%
COL
NPL´s in L.C.
Average: 16%
14%
14%
14%
PER
URU
CHI
NPL´s in F.X.
Strong macro-policies led to steady improvements in credit rating 7
Moody`s
S&P
Fitch Ba2(+)
Ba2/BB6
BB- (+)
B+
B1/B+4
BB-(-)
B1
B
B2/B 3
B3(+) B-
2
B3 Caa1(+)
Source: Bloomberg
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Jun-05
1
Dec-05
Caa1
Caa1/CCC+
0
BB- Ba3 BB-
Ba3
Ba3/BB5
B3/B-
BB
In fact, Paraguay has better fundamentals compared to peers…
8,0 7,0
GDP growth (%) Average 2008-2013
6,0 5,0 4,0 3,0 2,0 1,0
6,9
6,6 5,5 5,3 5,2
5,1 4,4
4,0
3,6 3,3
2,9
Mediana=3,8 2,5 1,7 0,9
0,0
-1,0 -2,0
-0,6 -1,7
Nigeria Sri Lanka Angola Paraguay Lesotho Bolivia Surinam Gabon Georgia Costa Rica Guatemala Tunisia Armenia El Salvador Hungria Croacia
-3,0
Source: FMI-WEO Apr-2014 and CBP. Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch
…with relatively better external and fiscal positions GAB NGA BOL HUN AGO HRV LSO PRY Mediana GTM LKA SUR CRI SLV TUN ARM GEO
CA Balance (% of GDP) 2015f 2014f 2013f
-5
0
Paraguay experienced eight consecutive years of fiscal surpluses. This had allowed the country to decrease its public external debt from more than 50 percent of GDP to less than 10 percent, the lowest percentage among pears
5 100
Gen Gov Gross Debt (% of GDP)
-10
Despite strong growth expectations, Paraguay will maintain an solid external balance. This is crucial given tightening external financing conditions.
10 2013
80 60 40 20 -
Source: FMI-WEO Abr-2014 and CBP. Countries with BB credit rating by Standard and Poors, Ba2 by Moody’s y BB- by Fitch
2015f
As a result, recent bond placements were quite successful Sovereign Bonds Prices and Yields 106
8,5 104,31
8,0
104 7,5 7,0 6,5
100,13 6,09
100
6,0 5,80
98
5,5 5,0
96 4,5
Price 2013
Source: Bloomberg
Price 2014
Yield 2013
Yield 2014
08/14
08/14
08/14
07/14
07/14
07/14
07/14
07/14
06/14
06/14
06/14
06/14
06/14
05/14
05/14
05/14
05/14
05/14
4,0
05/14
94
Yield
Price
102
Roadmap
• • • •
Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary
A competitive business climate‌
Economic Climate Index 160 140
120 100 80 60 40 20
Source: Getulio Vargas Foundation. Bloomberg
Jul-14
Argentina
Brazil
Ecuador
Chile
Mexico Apr-14
Venezuela
Jan-14
Uruguay
Bolivia
Peru
Paraguay
Colombia
0
…with an extraordinary production capacity…
1st World Exporter
2nd World Producer
• Net electricity • Organic sugar
• Stevia (and exporter) • Tung
5th World Exporter
• Soybean meal
Source: MIC.
6th World Producer • Soybeans
3rd World Fleet of Barges
• 2200 units with 200 tugs
9th World Exporter
• Meat
4th World Exporter
• Soy • Charcoal • Cassava starch • Soybean Oil 10th World Exporter
• Wheat
‌located in a favorable geographic position
Paraguay
is located in the center of the Region, with the highest income in South America. South America (100%)
MERCOSUR (70%)
405
281
Nominal GDP* (US$ Billion)
4.539
3.311
Average per capita GDP (US$)
7.946
10.402
Population (Mill. people)
Source: 2012 Latin American Statistic Yearbook - ECLAC www.eclac.org *Projection Yr. 2013
**In current US$ (2011)
A country with low energy and labor costs… Residential Paraguay Costa Rica México Peru Chile Brasil Colombia El Salvador Guatemala Uruguay
Industrial
82
Paraguay Peru Chile México Uruguay Colombia Brasil El Salvador Costa Rica Guatemala
111 112 129 147 163
186 187 205 213 -
50
100 150 USD/MWh
200
250
57 72 105 135 139 156 183 192 204 213 -
Minimum Wage USD
50
100 150 USD/MWh
250
Social charges and other benefits incidence
700,0
120% 609,0
102%
600,0
100%
500,0 405,0 400,0
80%
395,0 339,0
70%
60%
48%
300,0
35%
40%
200,0
20%
100,0 -
Source: MIC
200
0% Argentina
Uruguay
Paraguay
Brasil
Brasil
Argentina
Uruguay
Paraguay
...which also offers important tax advantages… PGY
ARG
URU
BRA
CHI
Business Income Tax
≤10%
35%
25%
34%
17%
Personal Income Tax
10%
Taxes
Value Added Tax (VAT)
30%
≤10%
35%
21%
25%
23%
27,5%
25%
0%
• Imports of capital goods tariff (Machinery and Equipment)
0%
• Value Added Tax (VAT) on purchasese of capital goods (within or outside the country)
0%
• Remittances and foreign payments for principal, interest and fees taxes(applies to investments of over $ 5 million.)
0%
• Dividend payment taxes and sending profits abroad (applied to investments of over $ 5 million within a span of 10 years)
40%
19%
Comparative Tax Burden (% of GDP) 25,9%
25,5%
25%
24,5% 19,9%
20%
17,7% 15,6%
15%
13,5%
10% 5% 0%
Source: MIC,STP
…trough several legislations Laws and Other Tax Benefits Law Nº 60/90
System of Fiscal Incentives for capital investment of domestic and foreign origin
Law Nº 1064/97
Maquiladora Export Industry
Law Nº 4427/12
Incentives for production, development, packaging of high-tech goods
Law Nº 4903/13
Industrial parks
Law Nº 5102/13
Investment Promotion Act and public infrastructure expansion and improvement of goods and services by the state (PPP Law)
Decree 11771/00
For the import of raw materials and supplies
Law 4427/12
High-tech assembly
Law 2422/04
Special customs regimes
Source: CBP
Simplification of business processes
National automotive policy Source: MIC
National output and Employment
Law 60/90
Industries registratio Maquila regime n
Unified System for the Opening and Closure of Businesses
Roadmap
• • • •
Paraguay under the “new normal” Macro-advantages for investors Micro-advantages for investors Summary
Summary • A normalization on monetary conditions in the US is not necessarily a negative event: economic and financial effects will depend on robustness of economic policies. • In Paraguay, fundamentals have improved over the past decade and the economy is well prepared to face external shocks. • Paraguay improvements were reflected in recent and successful bond issuances: market demand was 4.9 times the initial offer and yields lower than in countries with the same credit rating (BB).
Summary • In sum, the country offers to the private sector a stable macroeconomic framework for the medium and long term. • This is crucial: it is a pre-requisite for individuals and companies to extend their planning horizon and, consequently, generate investments that will create employment, production and income.
THANK YOU