Paraguay: An Investment Primer - 8

PARAGUAY Economy

a big social deficit," says Julio Mazzoleni,
Paraguay's health and social welfare minister. "Sometimes, the financial guidelines,
which are important, restrict investment
in health and other social programs," he
says. However, he adds that "the president
has set social priorities" and increased the
budget of the health ministry by 12.5%.
"At the end of the day, the reality is this:

the state needs more funds to work normally," López says. "A great part of these
resources that are needed will come from
better management of expenditures. But
another part will also come from a better
commitment to society."
Paraguay's low tax model, with 10%
corporate tax, 10% income tax and 10%
VAT, has been praised by investors, but it

may also come under fire as the government looks "The tax burden in Paraguay
amounted to 12.5% of GDP in 2016, one of
the lowest in the region. The tax structure, in
turn, mainly depends on indirect taxes (65%
of the total), which makes the system highly
regressive," the IDB said in its report. But
changing Paraguay's tax structure is not yet
on the agenda. LF

AGRIBUSINESS

Standing on its own
Agriculture has long been a key pillar of Paraguay's economy, but now agribusinesses are building local production plants to
lessen the impact of unstable commodity prices
Agribusinesses are susceptible to unpredictable weather patterns and commodity cycles, but they remain a cornerstone of the
Paraguayan economy. The primary sector accounts for roughly a quarter of GDP, led by agriculture with 19% and followed by livestock with 5% and forestry with 1%.
Paraguay is the world's fourth largest exporter of soybeans - which represent more than 40% of agricultural production in the country - and also exports beef to 40 nations.
"Soybean production has almost tripled since 2000 thanks to technology," says Raúl Vera Bogado, president of Banco Regional,
one of the largest financial institutions in the country and a major lender to the agricultural sector. "Paraguay has achieved a very
significant position in the global food market, but it still has a lot grow."
In some advanced markets, soybean yields are more than double the local average of 3,200 kilograms per hectare, illustrating the
need for increased investments, Vera says.
The sector has plenty of money on hand, according to Antonio Iati, CFO of Louis Dreyfus Company (LDC), which opened offices in
Paraguay in 2004.
"There is no lack of financing for farmers," he says. "Interest rates are quite competitive."
Unlike in Argentina, farmers in Paraguay tend to own their own machinery, which does away with one need for financing, but commercial banks still had to step in to provide liquidity after the plunge in global commodity prices from 2014 to 2016, Iati says.
"The expansion of the agricultural frontier [to the east] was 100% funded by private-sector banks," he says.
According to the ministry of agriculture, state-owned banks provide less than 5% of financing for agriculture and just 2% for livestock. But agribusinesses in Paraguay are not taking out many bank loans right now, says Itaú Paraguay CEO Viviana Varas.
"[Agribusinesses] are very liquid and they are not making new investments. They have become much more aware of the consequences of price volatility. They have become more conservative and avoid taking as much debt as in the past," she says.
Beyond the primary sector of crops and cattle, some companies have invested in food processing projects in Paraguay, looking
to limit the fallout from unstable commodity prices. LDC partnered with the US-based agribusiness Bunge and the local firm Copagra
four years ago to form Caiasa and build a $220 million soybean crushing facility, largely financed by the Inter-American Development
Bank (IDB) and the OPEC Fund for International Development (OFID).
Now other international food processing and commodities trading companies, such as Archer Daniels Midland (ADM) and Cargill,
have made similar investments in the country.
"Paraguay now processes more than 35% of its soybeans," says Caiasa CFO Gustavo Martínez.
The local tax rates, however, do not encourage such efforts to diversify, says Norberto Vuyk, the Caiasa plant manager.
Manufacturers pay a 10% value-added tax in Paraguay, but commodity producers pay 5%, although they used to be exempt.
"The proportion of soybean crushing could be greater," Vuyk says. "The government needs to make things easier and support our
activity instead of exporting just raw materials." LF

A Supplement to LatinFinance - September/October 2018

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