Paraguay seeks to wind down stimulus as economy bounces back

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 a Zoom call.

“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.

Paraguay’s fiscal deficit soared to 6.1 percent 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 three percent, down from an estimated four percent 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 percent. The Central Bank raised its 2021 growth forecast last month to 4.5 percent from 3.5 percent citing upward revisions to construction, manufacturing and trade.

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.

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 percent 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 percent.”

The government plans to finance the 2022 deficit with US$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 US$350 million, he said. Paraguay sold global bonds alone for US$826 million last year and US$1 billion in 2019.

Deputy Finance Minister Ivan Haas said the government also wants to refinance a portion of the more than $US400 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.

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