Paraguay Wants Investors to Know It's More Stable Than Neighbors

(Bloomberg) -- After a volatile year for Latin America and developing nations overall, Paraguay’s new central bank chairman Jose Cantero wants to remind global investors about a few things.

The small, land-locked and agriculture-dependent country has inflation under control and the economy growing at around 4 percent. Its guarani currency weakened only 5.7 percent this year -- compared with more than 50 percent for Argentina’s peso and 15 percent for Brazil’s real. The benchmark interest rate has been steady at 5.25 percent for more than a year.

Yet Cantero is looking at possible weak flanks as he prepares for possible global and regional headwinds. After watching Argentina struggle to clarify its policies this year, he was reminded of just how important communication is for a central bank. He is now preparing to roll out a new strategy for the bank that may include less reliance on economic jargon and even holding policy meetings in the provinces to facilitate discussion with local leaders, he said.

“Taking into account Argentina’s recent experience, we view communication as key to anchoring” inflation expectations, Cantero said in an interview in Montevideo, where he attended a summit of the regional Mercosur trade bloc.

Argentina’s reform drive and bid to stabilize economic imbalances were upended this year as demand for emerging-market assets fell, the U.S. raised interest rates and investors soured on the nation’s current account and trade deficits. The economic crisis drove President Mauricio Macri’s government to turn to the International Monetary Fund for a record $56 billion credit line.

Investors cited a haphazard communication strategy as one of the triggers for the volatility in Argentina where, for example, Macri appeared to announce a revised deal with the IMF before the fund had agreed to entertain a new round of talks. The Argentine central bank had to raise interest rates above 60 percent this year to try to show it was committed to fighting inflation.

‘Paraguay’s Different’

Cantero attributed some of the Guarani’s weakness this year to local subsidiaries of multinationals buying dollars amid economic woes in neighboring Argentina and Brazil.

“Our communication strategy probably has to be more prompt in the sense of helping these big multinationals understand that Paraguay is different,” he said.

President Mario Abdo Benitez tapped Cantero, an economist, to run the central bank shortly before starting his five-year term in August. The 47-year-old president has promised to increase spending on public works, health care and education while respecting rules that cap the fiscal deficit at 1.5 percent of gross domestic product.

Paraguay boasts one of the fastest growing economies in South America thanks to beef, soy and manufactured goods exports and steady consumer demand. The central bank earlier this month forecast inflation at about 4 percent this year and in 2019.

The central bank’s benchmark rate -- which has been kept at 5.25 percent since it was cut by 25 basis points in August 2017 -- is close to neutral, Cantero said.

Investment Grade

Cantero thinks Paraguay can reach investment grade during the current administration if it can offer investors “institutional certainty” through reforms in the areas of government spending and education. The South American nation is rated BB by S&P, two steps below investment grade while Fitch and Moody’s rates the country one notch below.

“Our bonds for some time have traded like we are investment grade,” Cantero said.

Investors demand an extra 2.46 percentage points over U.S. Treasuries to hold Paraguayan bonds, according to JPMorgan’s EMBI Diversified index. That’s below Mexico and in line with Russia, both which have investment grade ratings from S&P.

To contact the reporter on this story: Ken Parks in Montevideo at kparks8@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Daniel Cancel, Walter Brandimarte

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