Paraguay cutting debt issuance to curb deficit

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<img data-perfmatters-preload="" decoding="async" width="410" height="363" data-attachment-id="73714" data-permalink="https://latinfinance.com/daily-brief/2023/09/24/exclusive-paraguays-president-sets-out-investment-agenda/attachment/2023-concordia-annual-summit-september-18-3/" data-orig-file="https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?fit=410%2C363&ssl=1" data-orig-size="410,363" data-comments-opened="0" data-image-meta="{"aperture":"8","credit":"Getty Images for Concordia Summi","camera":"ILCE-9M2","caption":"NEW YORK, NEW YORK - SEPTEMBER 18: Paraguayan President Santiago Peu00f1a speaks during the 2023 Concordia Annual Summit at Sheraton New York on September 18, 2023 in New York City. (Photo by Leigh Vogel/Getty Images for Concordia Summit)","created_timestamp":"1694995200","copyright":"2023 Leigh Vogel","focal_length":"218","iso":"2000","shutter_speed":"0.01","title":"2023 Concordia Annual Summit - September 18","orientation":"1"}" data-image-title="" data-image-description="" data-image-caption=" Paraguayan President Santiago Peña (Photo by Leigh Vogel/Getty Images )

" data-medium-file="https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?fit=300%2C266&ssl=1" data-large-file="https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?fit=410%2C363&ssl=1" tabindex="0" role="button" src="https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?resize=410%2C363&ssl=1" alt="" class="wp-image-73714" style="width:308px;height:auto" srcset="https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?w=410&ssl=1 410w, https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?resize=300%2C266&ssl=1 300w, https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?resize=400%2C354&ssl=1 400w, https://i0.wp.com/latinfinance.com/wp-content/uploads/2023/09/Pena-Getty-2.jpg?w=370&ssl=1 370w" sizes="(max-width: 410px) 100vw, 410px" data-recalc-dims="1"/>Photo by Leigh Vogel/Getty Images

Fiscal consolidation is a priority for the Paraguayan government and that means it will require less funding than in the past couple of years, President Santiago Peña tells LatinFinance in an exclusive interview on July 29. The country is also in no rush to issue its first sovereign sustainable bond, he says.

The interview has been edited for length and clarity.

LF: Paraguay is now investment grade according to Moody’s. What is the significance? When do you expect other ratings agencies to follow suit?

SP: This is a major achievement. This is something that we have been working for over many years, with changes and improvements and, of course, recognizing that there is no shortcut. It requires commitment, consistency, policy consistency. You need to maintain the same public policies government after government, minister after minister. The market acknowledges it.

For us this has been a journey, a very important one, engaging with the market participants since the first inaugural bond in January of 2013 — 11 years ago. Explaining where the Paraguyan economy was starting from, why you we were building this strong, institutional framework, why we were so vulnerable in the past to the external shocks — not only globally, but also regionally, shocks coming from Brazil, coming from Argentina — that we needed to strengthen our own institutions.

And we have achieved this, this level of institutional strength, the central bank, the minister of finance. And of course, we know, we recognize that we still have a long to way to get to where we think we should be.

We are very enthusiastic, but this is not the end for us. This mountain that we have reached is just the base of the next mountain that we need to continue to climb. We think the other agencies will follow and convince with facts and results. We are committed to maintaining very high standards. Of course having the minimum rating for investment grade is not our objective: Our objective is to continue improving.

My objective in the medium term is that Paraguay becomes a member, a full member of the OECD, the Organization of Economic Cooperation and Development. This is an objective that we thought about almost 15 years ago when we decided to join the development committee of the OECD with around 50 countries around the world…

So, we have been working in this direction and I am very happy that now Paraguay has an OECD country program. And hopefully in the near future, we can become a full member, and this will again be a testimony of our commitment of maintaining very high standards, and be a global player. When you think about our economic structure, Paraguay is after Mexico the most open economy in Latin America, when we think about export and import as a share of GDP. We are integrating very quickley to the world economy. We are diversifying our GDP. We are entering into more sophisticated areas, such as paper mills […].

LF: You said in a previous interview that you wanted to make sustainable investments a cornerstone of your economic program. Do you think that this upgrade is going to help Paraguay move, so to speak, to the green parts of the market? When will Paraguay go for a sovereign sustainable bond? Is investment grade going to help Paraguay access cheaper funding?

SP: Yes. Probably, yes. This is something that we have already been discussing. We have already benefited from ample sources of financing, and not only in the dollar market but also in the local market. I guess this is something that we feel very proud of, more than even achieving investment grade… We are in the process of consolidating our fiscal position, the fiscal deficit is coming down. We think that the main benefits will go to the private sector. The private sector already has already benefited from lower interest rates of green bonds. One issuer, Banco Continental, issued a green bond two years ago with reduced interest rates.

We think that the increase to the Paraguay’s rating will also benefit new issuers that come to the market. This is a whole new ballgame that is now available to Paraguayan corporates. The benefit for the government is very limited. And the reason is because the market was already assigning something that is very similar to an investment grade country. My take is the main benefit will go to the private sector. And this is something that fits very well with the strategy that we have which is developing the private sector. The private sector is a driver of growth, it is the driver of investment. A reduction in interest rate, access to credit funds… This will be a major, major, major change for them. So, we think this is the most important benefit.

LF: As you said, Paraguay issued its first sovereign bond in 2013. Can we expect a sovereign sustainable bond sooner rather than later?

SP: Yes, absolutely. I think Paraguay is already complying with ESG standards. This is something that, again, we feel very proud of. How we have adapted the legislation to convey the highest standards in terms of governance and sustainability. We think we are going to start targeting this on the side of the public sector. We have ample sources of financing coming from multilateral, international capital markets and also the domestic market, which is very attractive because of the low inflation rate.

This also benefits the development of the local market. So, on the side of the public sector, we are very committed, advancing with these type of bonds, then the ESG or the green market. But again, I think the driving force will be coming from the private sector, which is also very eager to get financing and very competitive prices.

LF: So there’s no rush to issue a sovereign sustainable bond?

SP: No rush. No rush in the sense that we already have a wide open market and the demand. If you look at the spread on Paraguay’s sovereign bond, it is already very tight. But again, we are very eager… We have a lot of important projects. That would be very well suited for the ESG or the green bond.

LF: What is your view of the international financial market right now? And, how does this influence your funding strategy?

SP: Well, we are in the process of consolidating our fiscal position after many years with large fiscal deficits. We have the lowest debt-to-GDP level in Latin America. But this is something that we have committed ourselves to reduce. We have ample sources of financing from multiple sources. And we will continue to exercise access to markets and try to find the most appropriate balance between multilateral, bilateral and the capital markets.

We have a great team at the Ministry of Economy and Finance with minister Fernandez Valdovinos. They are constantly looking at the best alternative. For sure we will be complying with our strategy of fiscal consolidation. This means we will be reducing the current level of fiscal deficit. This will make us to require less financing compared to what we were looking in the last couple of years. But we are still going to be regular issuers in the market, either to roll over outstanding foreign debt or to take on new debt.

LF: So fiscal discipline in a way is limiting your appetite to go to market because fiscal consolidation is more important?

SP: Absolutely. Absolutely. This is very important to us. Again, we think that the private sector is the main driver for growth. The public sector will continue to be an active player in infrastructure development. But increasingly we will give more room to the private sector. PPPs have proven to be a very important tool for Paraguay…

This is an equation that has been very successful for many years, and this is why we have been able to maintain a low tax rate to attract more FDI and generate more job opportunities.

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