LatinFinance - July/August 2014 - Paraguay Supplement - 7

Macro-economy | PARAGUAY
A new investor-friendly legal framework and efforts to improve infrastructure are key to
Paraguay's efforts to diversify its economy

Boom and bust
F

eeding the world might not seem a
bad strategy for a country at a time
when global demand for food is
set to increase for years to come. But for
Paraguay, being an agricultural producer
is not enough.
Rollercoaster economic growth
reflects lack of diversification - and
overdependence on agriculture and its
star products, soya beans and meat. It
has exposed the economy to sharp ups
and downs.
Paraguay has taken advantage of the
commodity boom of the past decade to
accumulate international reserves. But
lousy weather conditions also plunged
it into recession in 2009 (- 4%) and 2012
(-1.2%).
The economy bounced back strongly
last year on the back of a bumper
harvest. But that does not fool anyone at
home.
"Last year was not a normal year.
We grew at more than 13%," says Carlos
Fernández, Paraguay's central bank
governor. "This year we are still growing,
but growing at a more normal rate,
around our potential growth rate of the
economy, which is around 5%.
"Is this a bad figure? Not at all. This
is the average growth of Paraguay for the
past 10 years. And this is the double the
average growth of all the other countries
in the region."
In spite of a slowdown in the first half
of the year, the IMF recently increased
this year's growth forecast from 4.5%
to 4.8% even while it was cutting
projections for the rest of region, he says.
Now, the government has rolled
out plans to attract and protect private
investment in infrastructure. Some
major reforms, including curbing public
expenditure, were undertaken at the

beginning of the administration of
President Horacio Cartes.
"Thanks to foreign direct investment
and public-private partnerships, we
will easily achieve 7% to 8% growth
[in the medium term]," says Eduardo
Felippo, president of the local business
confederation, the UIP.
Paraguay, says Felippo, has finally
entered a period of political pluralism
and stability. It emerged in 1989 from
35 years of dictatorship under Alfredo
Stroessner only to face a period of
political turmoil, which led, among other
things, to the assassination of a vice
president, Luis Maria Argaña, in 1999,
and to the impeachment of the left-wing
president Fernando Lugo in 2013.

Legal stability

Despite a history of political turmoil,
Paraguay has nevertheless enjoyed
legal stability, according to Felippo. "No
company has ever been nationalized,"
he says.
Yet the reverse is also true: no state
company has ever been privatized, and
the current government has carefully
avoided including this item in its reform
agenda. This may be an example of
president Cartes' pragmatism.
Gustavo Leite, the Paraguayan
industry and commerce minister,
said earlier this year that "there is no
intention to privatize anything".
"Paraguayan citizens would not want
to sell what are being seen as the crown
jewels. Moreover, state-run companies
used to be badly run and their market
value is low," he said. "We aim to hand
over profit-making public companies to
the new government in 2018. But this
current government is not interested in
selling anything".

The challenge of diversifying is
already being met head on by the
agribusiness sector. Instead of exporting
soya beans, producers have been
encouraged to process them locally.
"We are adding value by crushing
beans before they reach global markets,"
says César Ros, president of Capex, the
Paraguayan exporters association.
Commodity firms Louis Dreyfus
and Bunge have invested $200 million
in a joint venture, Caiasa, to crush soya
beans in Villeta, in central Paraguay,
to feed chicken and pigs. Caiasa also
operates two ports and barges on the
Paraguay River, and has plans for further
industrialization, according to Diego
Puente, Caiasa's chief administrative and
financial officer.
"The first step is going well. Let us
see how far we will go," he says.
Some 60% of the soya crop is
processed locally. That is a start. But it is
far from enough. Some tax increases in
agriculture have proved controversial.
"We made the first step when we
introduced a tax for this sector at the
beginning of the year," says Germán
Rojas, Paraguay's finance minister.
"We expect to have 100,000 new
contributors. The tax rate is very low
(5%), other sectors contribute with 10%.
This is a good initiative not only in terms
of taxation but also in taking a huge step
in the formalization or our economy."
Congress even went further and
voted to introduce an export tax. But
Cartes later vetoed the initiative.
"This initiative took place a while
ago, but the government chose to adopt
the hardest way by opting for more
formalization of the economy, instead of
simply putting a tax on grain exports,"
says Rojas.

July/August 2014 - L ATINFINA NCE.COM 7
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