Latin America is becoming a battleground of government spending extremes, drawing calls from smaller nations to tighten the belt before the consequences spill across borders.
In Argentina, President Javier Milei’s chainsaw of spending cuts likely achieved the serial defaulter’s first fiscal surplus in more than a decade, resulting in a yearlong bond rally that outperformed most peers in emerging markets. Next door in Brazil, investors sold off bonds, stocks and the currency last month as doubts swelled about Luiz Inácio Lula da Silva’s willingness to narrow a ballooning fiscal hole.
Paraguay Finance Minister Carlos Fernández stands between those two extremes, where his country depends on trade with Argentina and Brazil. In an interview, Fernández outlined why sustainable fiscal policy matters in a region exposed to international crisis.
“I applaud it because it goes straight to the root of the problem, which is fiscal,” Fernández said in reference to Milei’s austerity programme. Brazil’s deficit “doesn’t leave it with much fiscal space in the event of an external shock that merits a macroeconomic policy response.”
Fernández isn’t quite moving at Milei’s historic pace of austerity, but cutting payroll spending while increasing government revenue through better tax collection methods. That helped Paraguay narrow last year’s fiscal deficit to 2.6 percent of gross domestic product and seeks to cap future deficits at 1.5 percent by 2026, which would be a fraction of the 10 percent hole Brazil is struggling to dig out of.
Across Latin America, “if fiscal policy doesn’t get adjusted, monetary policy ends up tightening due to the fears central banks have about inflation,” said Fernández.
Paraguay, a land-locked country of 6.1 million people, had one of the lowest tax-to-GDP ratios in the region at 14.7 percent in 2022, compared to 33 percent for Brazil, according to an Inter-American Development Bank report.
The 2025 budget authorises the sale of as much as 9.72 trillion guarani (US$1.2 billion) in global bonds to finance the deficit. The government will look to repeat last year’s issuance of both US dollar-denominated and global bonds in local currency during the first quarter to raise money and retire bonds maturing in 2026 and 2027, Fernández said.
Sound public finances and a growing economy helped Paraguay win its first investment grade credit rating last year when Moody’s raised the country to Baa3 from Ba1 with a positive outlook. Winning investment grade from S&P Global Ratings and Fitch Ratings — which have flagged weak institutions and the rule of law as impediments to a higher rating — could be more challenging after the ruling Colorado Party passed a controversial bill that increases government oversight of non-governmental organisations. Fitch warned in a note the measure might weaken protections for freedom of association and expression.
Paraguay’s next rating upgrade doesn’t hinge on any one factor rather advancing on multiple fronts such as lowering corruption and the deficit, Fernández said, downplaying the agencies’ concerns about the bill. The Finance Ministry plans to publish regulations enacting the NGO law during the first half of 2025, he said.
“When this is implemented, people are going to realize it’s only about the need for information and nothing more,” Fernández said.
‘Friend-shoring’
President-elect Donald Trump has named people with extensive experience in Latin America policy —Marco Rubio, Chris Landau and Mauricio Claver-Carone—to high level positions in an early signal the incoming administration may focus on the region more than previous US governments.
While Mexico and other nations are bracing for Trump tariffs, Fernandez sees an opportunity for Paraguay to win investments in “friend-shoring” —US policies that encourage companies to shift manufacturing away from authoritarian states to allies—under the Trump administration.
Paraguay has a small yet growing manufacturing sector whose exports topped US$1 billion last year and is one of just a handful of countries that has eschewed diplomatic ties with mainland China in favour of US ally Taiwan.
“It’s up to us to show the US why Paraguay matters and from there build a relationship,” he said. Paraguay has to show the United States “we can be part of the friend shoring they are promoting.”
by Ken Parks, Bloomberg
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