Paraguay sees fiscal continuity after elections

Paraguay sees fiscal continuity after elections

Corporate & Sovereign Strategy Fixed Income Economy & Policy Bonds Debt Capital Markets Project & Infrastructure Finance Structured Finance Politics Paraguay

Voters in Paraguay go to polls on Sunday to pick the successor to President Horacio Cartes, the center-right leader who took the country to the cross-border bond market and jumpstarted an infrastructure project pipeline.

Mario Abdo from the ruling Colorado Party squares off against Efraín Alegre from the left-leaning Alianza Ganar, but neither candidate is expected to change Paraguay's traditionally conservative monetary and fiscal policies. Abdo holds a 25-point lead over Alegre in recent polls, but the Colorado Party is expected to lose seats in Congress.

"Anyone that comes into power is going to respect the fiscal and monetary policy... History really shows that," Central Bank President Carlos Fernández told LatinFinance in an interview at the World Bank-IMF spring meetings in Washington DC.

Alegre has criticized Paraguay's increased external debt during the campaign, and Fernández said the government may issue fewer cross-border bonds if the opposition coalition wins.

Cartes introduced Paraguay to the international capital markets in 2013. The sovereign issuer has tapped bond buyers at least five times since then, but nothing suggests that Paraguay's external debt load in unsustainable, Fernández said.

"I do believe a lot of it is campaigning," he said. "Most of [the bonds] are 10- or 30-year instruments, and you really have to badly manage your country for 30 years to feel the impact."

Paraguay’s budget deficit stands at 1.5% of GDP, while capital spending equals 3%, and Fernández remains unconcerned about the country’s financial situation. "Not only is the number low, but the quality of the fiscal deficit is good," he said. "No matter who wins, we will continue to be the market darling because the policies will continue."

Paraguay raised $530 million in the cross-border bond market in March. The order books were five times oversubscribed, which allowed the sovereign issuer to increase the offering by $30 million and set the yield at 5.6%.

Building a sovereign wealth fund
With an eye on the future, Paraguay has started the preliminary discussions to create a sovereign wealth fund. The talks come as Paraguay prepares to renegotiate the Itaipú dam treaty with Brazil and push for more money from the agreement, Fernández said.

Signed in 1973, the 50-year treaty expires in 2023. By that time, the debt contracted to build the dam will be paid off, putting Itaipú’s finances on a sounder footing.

"We have to renegotiate the treaty with the expectation that we are going to be receiving a lot more money than we are at this point," Fernández said. The sovereign wealth fund "is an idea we are pushing because we are credible."

Knowing the Cartes administration will not renegotiate the treaty, Fernández maintains cautiousness over how Paraguay should spend the expected windfall of cash. "It is a preliminary agenda," he said of the sovereign wealth fund. "But it is something we need to discuss and put on the table."

While the incoming government will renegotiate the treaty, the administration after that will be responsible for managing the money. "But we have to be careful, prepare now and not wait until 2023. Because that is when we will have more money, and everyone will want to start spending," Fernández said.

Paraguay and Brazil each own half of the Itaipú hydroelectric dam on the Paraná River. The dam generated 103 MWh of electricity in 2016. Brazil consumes 93% of the electricity generated by Itaipú, leaving Paraguay to sell most of its 50% share to its neighbor. LF