A strong focus on private investment, public spending cuts, and economic policy continuity are factors that have marked Paraguayan President Santiago Peña’s first year in office.
Peña assumed power on August 15 last year.
He aims to continue with an infrastructure push that is seen as key for the country’s economic prospects.
“Public investment has been reduced a lot during this first year because of fiscal convergence goals. Therefore, there’s a tendency to lean more towards PPP and turnkey projects,” Fernando Masi, head of local economic research center Cadep, told BNamericas.
During the first seven months, the public works ministry (MOPC) invested US$269 million in projects compared with US$515mn in the same period last year, documents show.
Peña’s main public focus is to reduce the fiscal deficit to 1.5% of GDP, to bring it in line with the country’s fiscal responsibility law.
The law was relaxed in the wake of the COVID-19 pandemic, which led to a strong hike in public infrastructure investments, with Masi saying it was likely the biggest increase since the return to democracy in 1990.
Moody’s decision last month to upgrade Paraguay’s credit rating to investment grade was partly due to continuous infrastructure improvements during past administrations.
When asked by BNamericas if the investment grade rating could also help Peña’s PPP plans, Moody’s analyst Vincent Detilleux said it could make upcoming tenders more attractive and more competitive.
“The counterparty risk from sovereign government is a key factor in credit risk evaluations for PPP operations. Many times, the sovereign rating acts like a ceiling for those operations,” he told BNamericas, adding that PPPs could benefit from investment grade status in terms of lower financing costs.
Because of the fiscal limits, Peña is planning to lean heavily on PPPs and turnkey contracts to fulfill the government’s infrastructure agenda, which involves US$5.5 billion in investments during his 2023-28 term.
One of the country’s biggest long-term infrastructure bets is the Bioceanic highway, which will link the ports of southern Brazil with those in northern Chile.
So far Paraguay has finished one section in its territory, while another is under construction and a third has been awarded, with works set to begin soon.
Detilleux said such projects are likely to benefit Paraguay as they facilitate trade with its neighbors.
Peña is also strongly focused on attracting foreign investment to the infrastructure sector and increased regional connectivity, which has seen the leader visit Chile and Brazil while courting investments from East Asia and the Middle East.
DOMESTIC ISSUES
On the fiscal front, Masi believes Peña is on the right track as he is expected to close the year with a 2.6% public deficit, down from 4.1% at the end of 2023.
However, Masi sees that the foreign debt could become an issue further down the line.
“While at first sight [external debt] is low in relation to GDP, at 38%, you have to keep in mind the Paraguayan state’s payment capacity, given that the tax burden is very low, at 10% [of GDP],” he said.
The Cadep director highlighted that low taxes do not necessarily lead to higher investments, pointing out that Uruguay, whose tax burden is double that of Paraguay, receives far more foreign investment.
“[In Uruguay] there’s legal certainty, there’s a qualified work force, the infrastructure is better, and it’s more stable politically speaking,” Masi said.
While Peña’s Colorado party has held the presidency since 2013 and enjoys majorities in both chambers of congress, Masi argues it has caused instability due to several developments.
The party has submitted a bill to increase surveillance of non-profits, which is seen by the opposition as an attempt by party head and former president Horacio Cartes to go after critics – and has drawn comparisons with Venezuela.
Organized crime is also growing stronger in Paraguay, with one Colorado legislator dying in a shootout with police last week during a drugs operation that was part of a money laundering probe.
Cartes himself, under whom Peña served as finance minister, was sanctioned last year by the US Treasury Department for “involvement in the rampant corruption that undermines democratic institutions in Paraguay.”
“President Peña doesn’t control his own party in congress, and certain decisions aren’t made by him but by Cartes,” Masi said, adding that this also includes issues related to economic policy.
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Publish date : 2024-08-26 11:22:00
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