This is the introduction to the LatAm INVESTOR Paraguay Report, published in our latest issue. To get more analysis and insight on Paraguay download the report for free by logging in here or signing up here
For a country with a young population and bright future, it’s striking how fixated Paraguay is with the past. The War of the Triple Alliance, an uneven battle that pitted Paraguay against Brazil, Argentina and Uruguay from 1864 to 1970, still shapes political discussions today. The war was notable for its incredible ferocity – judged by deaths per Paraguay’s population it was the most brutal in world history – and the courageous yet doomed defiance of the Paraguayans. But more importantly for investors, is the economic impact. It cut short Paraguay’s belle epoque, when the country led Latin America in railways, telegraphs and steelmaking. And by distorting demographics and reducing the territory by half – it forced Paraguay into almost a century of economic isolation.
Santiago Peña, Director of Banco Basa, Paraguay’s oldest local bank, and a former Finance Minister, believes the economic effects of the war can be felt until this day. “The biggest impact was that it shut us off from the wave of European immigration that was about to drive growth in Latin America. From the beginning of the 1900s we saw the biggest migration in the history of the world as hundreds of millions of Europeans fled war, hunger or privation at home to search for a better life in the Americas. This boost of population and ideas helped Argentina become the fifth-largest economy in the world by 1920 and kickstarted new industries, such as mining in Chile and cattle-raising in Uruguay. But they generally avoided Paraguay because we had been destroyed by war. So, we continued to suffer for decades. It also made us wary of making too much noise as we were surrounded by two much larger, aggressive nations. That kept us an isolated, backward nation and it’s only in the last 30 years that we’ve begun to emerge from that shadow.”
When a palace coup ended Alfredo Stroessner’s 35-year dictatorship – the longest in Latin American history – in 1989, it kickstarted a liberalisation of the Paraguayan economy. Suddenly everyone, from banks to rum-makers, found themselves free to trade with the world. It wasn’t smooth sailing. The 1990s were a chaotic decade of political instability and economic suffering that culminated in financial crises in 1997 and 2001. But beneath the chaos, important progress was being made. Export quotas were abandoned, state monopolies disbanded and the exchange rate allowed to float. As the new century progressed, Paraguay was ready to reap the benefits.
Between 2005 and 2018 the economy grew at an average annual rate of 4%. Under the steady supervision of the Central Bank, the country’s macroeconomic position improved with its ratings moving up from selective default, all the way up to just one notch below investment grade. Meat and grain were the pillars of the economy, with production of the latter growing exponentially. Today Paraguay is the fifth-largest soy exporter in the world. The tiny country of just seven million people produces enough food for 70 million.
“Omega Green will be the first time for more than 150 years that Paraguay leads Latin American industry…”
But Paraguay wants to be more than just a bread basket. Its shared ownership of three hydroelectric dams on its borders give it more electricity per person than any other country in the world. At present Paraguay uses just 20% of its power, meaning it has scope to offer abundant supplies of low-cost green energy to industrial users. It has also created a number of fiscal regimes, such as the maquila, to offer attractive tax structures to manufacturers. Finally, it has one of the youngest populations in Latin America, which ensures an expanding and competitively-priced workforce. These factors have already driven the development of a car-parts industry, that generates $600million in exports per year. Meanwhile an even more ambitious plan to turn Paraguay into a world-leader in renewable fuels is being spearheaded by the Brazilian ECB Group’s plans for an $800million 2nd-generation biofuel plant. It’s the first in the southern hemisphere and will be the first time for more than 150 years that Paraguay leads Latin American industry. As the Paraguayan economy becomes more sophisticated, with a great emphasis on services and industry, its needs will be more aligned with what UK plc can offer.
But while the macroeconomic improvement is impressive, Paraguay still retains many structural flaws. Its education system is poor, even by regional standards, its public health system is chronically underfunded, and its creaky infrastructure, especially in transport, water and electricity, isn’t fit for purpose. These basic flaws exacerbate inequality, as decent public education, health and infrastructure help to level the playing field. But they also limit economic growth. Without good health or education, Paraguay’s demographic boon will turn into a curse, while the poor infrastructure is already constraining the economy.
The state’s ability to fix these problems is impaired by the chronic disfunction of the state itself. Approximately 80% of income goes towards paying bureaucrats’ salaries, many of whom have been on the books since Stroessner’s time. This also damages the business environment. Anecdotally, and off-the-record, interviewees spoke of officials “that create problems to then sell you a solution”. Those stories are backed up by the data, with the World Bank’s Ease of Doing Business ranking currently placing Paraguay in lowly 125th position.
The problem isn’t always outright corruption. Guillermo Krauch, President of the British Paraguayan Chamber of Commerce, notes that bureaucracy is also a challenge. He says that the paperwork for setting up a new company can “take longer than expected”, while foreigners should expect “difficulty and delay” when setting up a new bank account. Most frustrating of all is that “regulations change many times” forcing investors to constantly adjust their business plans.
Paraguay has all the building blocks for economic growth but is being held back by several structural flaws. So, it is little wonder that current President, Mario Abdo Benítez, won the 2018 election on a platform of reform. Thus far there have been some significant, if unspectacular, successes. A modest fiscal reform managed to simplify the tax code and add 1% of GDP to the country’s tax take, without changing the headline figures of 10 plus 10 plus 10 (corporation, income and VAT) that international investors find so attractive. Then a raft of anti-money laundering legislation looks like it has done enough to ensure that Paraguay will be kept off the Financial Action Task Force Grey List. Now a pensions regulator is being created to improve oversight of the country’s different retirement reforms. The government has also progressed with infrastructure, continuing with the public private partnership law enacted by its predecessor. Until the coronavirus outbreak it appeared to be a government pursuing steady, incremental technical reforms that wouldn’t change the formula that had delivered economic growth.
But then coronavirus hit. The rapid spread of the pandemic left no time for steady, incremental actions and the government showed a new radical side. Paraguay was one of the first countries in Latin America to implement a lockdown and it unveiled the largest fiscal and monetary package in its history to mitigate the blow for its people. International investors have also given their support. Paraguay’s $1billion bond to raise funds to fight the impact of Covid-19 was seven times oversubscribed. So far, the measures seem to be working. Paraguay has some of the lowest coronavirus numbers in the region. Of course, that could change soon. But at the very least Paraguay’s well-managed lockdown bought the country time to improve its poor health system. As President Benítez explains in his exclusive interview in the LatAm INVESTOR Paraguay Report, the crisis demonstrates why the structural reforms are so important.
The country is now easing its lockdown and is aiming to restart economic growth. That will create opportunities for British businesses as key infrastructure, industrial and agricultural projects are fast-tracked. Of course, you have to be a brave investor to commit money to emerging markets in the midst of a pandemic. But with depressed asset prices and a pro-business government keen to attract international firms – this looks like a great time to invest in Paraguay.