Paraguay’s ‘strong’ public finances lead to upgrade

9 Jan 13
Paraguay’s ability to maintain strong public finances despite volatile growth yesterday prompted Moody’s to raise its credit rating.

By Nick Mann | 9 January 2013

Paraguay’s ability to maintain strong public finances despite volatile growth yesterday prompted Moody’s to raise its credit rating.

The South American country was upgraded one notch, from B1 to Ba3, as the ratings agency also cited a sustained build-up in its international reserves and improved medium-term growth prospects.

Despite the improved rating, Paraguay’s bonds still sit comfortably within ‘junk’ status, which should mean that it has to pay a relatively high interest rate to service its government debt.

Moody’s explained that Paraguay’s government finances had remained strong despite volatility in its large agricultural sector, which is not a significant contributor to government revenues as much of it involves subsistence farming.

Consecutive budget surpluses between 2004 and 2011 had also improved the country’s ratio of debt to gross domestic product to a level ‘significantly lower’ than for other countries with a ‘Ba’ rating.

‘Even though we expect the government to post a deficit in 2012 and to do so again in 2013, both are on the order of 1% of GDP and, in our view, should be easily financed,’ the agency explained.

It also highlighted the ‘strong’ affordability of Paraguay’s debt, with annual interest payments equivalent to only 3% of government revenues and the average government bond not requiring full payment for 21 years.

Paraguay’s international reserves have grown ten-fold over the past decade – from $500m in 2002 to $5bn last year – leaving them roughly double the average for peers with a similar rating.

Moody’s also noted the country’s high potential for foreign direct investment in aluminium and titanium projects. This should enable it to diversify its economy in the medium term, providing a buffer against shocks affecting its agriculture sector.

‘The government is making concerted efforts to enhance the long-term growth outlook by investing in infrastructure,’ it added. Under a recent law change, the government must use invest more than 80% of its income from energy sales to Brazil in infrastructure and education. Paraguay exports most of its significant hydroelectric power.

While maintaining a stable outlook on Paraguay’s rating, Moody’s noted that downward pressure could come from a ‘significant or prolonged’ commodity shock. Recurrent political stability or a significant downturn in its fiscal situation could also lead to a downgrade, it said.

However, the agency noted that the rating could be pushed upward by investments in an aluminium smelter, titanium mining or other new sectors, by the creation of a ‘fiscal stabilisation’ fund or by an increase in the revenue base, potentially accompanied by a reduction in spending.  A steady decline in the country’s use of the dollar could also improve its rating, it added.

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