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Pandemic Stimulus Ending in Paraguay as the Economy Bounces Back

Paraguay Seeks to Wind Down Stimulus as Economy Bounces Back

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Paraguay will continue to dial back pandemic stimulus next year as a fast growing economy cushions austerity measures that have proved unpopular in other South American countries.

The government has already reduced temporary pandemic cash transfers to people working in the country’s vast informal sector without triggering social unrest, Finance Minister Oscar Llamosas said in an interview.

“The task of adjusting fiscal accounts was largely done this year, and the idea is to continue that in next year’s budget,” Llamosas said. “The state will have to continue helping people and businesses that are most in need.”

Weaning voters off pandemic era stimulus is proving a challenge in the region with Brazil signaling it might breach its spending cap next year and Argentina continuing to print money even at the cost of double-digit inflation. Llamosas’ goal of narrowing the deficit could face political headwinds ahead of presidential primaries and general elections during the next two years.

Pandemic Stimulus Ending in Paraguay as the Economy Bounces Back

Paraguay’s fiscal deficit soared to 6.1% of gross domestic product last year amid an unprecedented increase in spending on public healthcare and social programs to fight the pandemic. The budget Llamosas sends to Congress next week will seek to cap the deficit at 3%, down from an estimated 4% this year, Llamosas said.

Fiscal and monetary largess helped Paraguay report one of the mildest recessions in the region last year, with the economy shrinking just 0.6%. The central bank raised its 2021 growth forecast last month to 4.5% from 3.5% citing advances in vaccination and upward revisions to construction, manufacturing and trade. About a third of Paraguay’s 7 million people have received at least one shot after significant supplies of vaccine began arriving in June.  

Rising vaccination rates and plans to dredge key stretches of the Paraguay River whose ports receive barge traffic from Argentina and Uruguay should help shield the economy from Covid-19 and droughts that have shriveled key waterways, he said.  

Pandemic Stimulus Ending in Paraguay as the Economy Bounces Back

Paraguay’s central bank joined its regional peers this week in tightening monetary policy as it pivots from aiding the economy to keeping inflation expectations anchored with consumer prices rising 5.2% in July. 

“We don’t think it will have an impact on any of our growth forecasts,” Llamosas said in reference to the rate hike. “For 2022, we are estimating growth of around 3.8%.” 

Closing the Gap

The government plans to finance the 2022 deficit with $250 million in multilateral loans that are “very attractive in terms of duration and rates,” while trimming the sale of new local and global bonds to $350 million, he said. Paraguay sold global bonds alone for $826 million last year and $1 billion in 2019.

Deputy Finance Minister Ivan Haas said the government also wants to refinance a portion of the more than $400 million outstanding on Paraguay’s 2023 bond at the same time it raises new money early next year.

“We’ll have to see what prices are when we go to market to decide whether we reopen a bond or issue a new one,” Haas said.

The land-locked country’s U.S. dollar bonds have returned -2.28% so far this year, compared to -1.34% for South and Central American sovereign debt, according to Bloomberg Indexes.  

Other key takeaways from the interview:

  • Paraguay plans to tender a dredging contract in second half of 2022
  • Llamosas expects the key port in Pilar will remain operational even under “extreme situations”
  • Paraguay could offer investors the first of about half a dozen public-private participation projects worth $900 million in mid-2022
  • The pandemic isn’t expected to cause further harm to the economy for the rest of 2021

©2021 Bloomberg L.P.