On July 26, 2024, Moody’s Investors Service upgraded Paraguay’s long-term issuer and senior unsecured bond ratings to Baa3 from Ba1, with a stable outlook. This significant upgrade highlights Paraguay’s robust economic growth, enhanced resilience to economic shocks, and progressive institutional reforms. The efforts of Paraguay’s government to diversify the economy and reinforce its finances played a crucial part in the upgrade. While this jump in rating places them just above the midpoint, this upgrade in Moody’s rating scale is significant because Baa3 is the first score in what is considered investment grade and, according to Moody’s definition, these issuers have an acceptable ability to repay short-term obligations. This can lead to increased confidence in loaning to Paraguay, which would allow Paraguay to more easily borrow for development and investment projects. Paraguay’s economy has been growing faster than the regional average over the past two decades and median income increased from $8.51 in 1999 to $13.34 2019 before the COVID-19 pandemic when progress regressed. Paraguay has rebounded well from the pandemic and is making great progress in reducing poverty in the country.1 The upgrade in credit ratings will allow more investment in the country to continue to develop as Paraguay practices responsible debt management. The following sections will delve deeper into the key factors driving this positive trajectory, including economic diversification, fiscal management, debt transparency, institutional reforms, and environmental and social considerations.
Economic Diversification and Infrastructure Investment
Over the past decade, Paraguay has demonstrated a commitment to economic diversification and infrastructure investment, key drivers behind the recent upgrade. Traditionally reliant on agriculture and hydropower, Paraguay has successfully expanded its economic activities into non-traditional sectors such as light manufacturing, forestry, and clean energy. This diversification has significantly reduced economic volatility and increased resilience to environmental, economic, or other types of shocks.
Public investment in infrastructure has played a crucial role in alleviating transportation bottlenecks, thereby supporting private investment. The government’s strategy of economic diversification is expected to maintain steady growth in non-agriculture sectors, contributing to an anticipated average GDP growth rate of around 3.5 percent over the coming years.
Fiscal Strength and Debt Management
Paraguay’s fiscal policies have been instrumental in maintaining economic stability. The government’s focus on fiscal consolidation has preserved fiscal strength, with the debt burden expected to remain around 40 percent of GDP, well below the median for Baa3-rated peers. Efforts to increase the share of local currency debt from 11 percent in July 2023 to 16 percent in April 2024 illustrate a strategic move to diversify funding sources and reduce exchange rate risks.
Moreover, about 45 percent of foreign currency-denominated debt is owed to multilateral development banks, which lowers refinancing risks despite the exposure to exchange rate fluctuations. The government’s proactive stance on reducing foreign currency debt and enhancing fiscal policies further bolsters economic resilience.
Increased Debt Transparency
According to the 2024 Debt Transparency Monitor (DTM), developed by DevTech under the USAID Fiscal Accountability and Sustainable Trade (FAST) contract, Paraguay has been increasingly open about its debt. Debt transparency benefits borrowers by revealing the real risks and benefits associated with borrowing. It also benefits citizens who can hold governments accountable, promoting better governance while dissuading corruption. According to the DTM, which tracks 14 indicators related to a country’s actions in reporting debt, Paraguay improved its debt transparency score from 71 percent (10 out of 14 indicators were transparent in debt) in 2020, to 100 percent in 2021 and 2022. Notable improvements in transparency for Paraguay include revealing its domestic and external debt maturity, which facilitates informed decision making by government authorities revealing the current cost and risk of the existing debt.2 The country also recently began reporting their medium-term debt management strategy (MTDS) and fiscal risk statement (FRS),3,4 both of which can be downloaded from the Paraguay Ministry of Economy and Finances’ website.
Institutional Reforms and Governance
Institutional reforms have been pivotal in strengthening Paraguay’s governance and public sector efficiency. Successive governments have implemented reforms to enhance fiscal policy effectiveness, improve public institutions, and control corruption. Notable reforms include the new public procurement law and the establishment of a unified revenue agency combining domestic revenue administration and customs, which has optimized revenue collection and management.
These reforms have not only improved the structure and efficiency of public administration but also addressed potential fiscal risks by enhancing the governance of public enterprises and pension fund management. Such measures are expected to yield significant improvements in institutional strength and governance, contributing positively to Paraguay’s credit profile.
Environmental and Social Considerations
Paraguay’s environmental and social risk profile has also been a factor in Moody’s assessment. The country’s reliance on agriculture and hydropower makes it vulnerable to climate shocks like droughts and floods. However, Paraguay’s status as a producer and exporter of clean energy, primarily through hydropower, provides a substantial environmental benefit. The government’s commitment to sustainable development and climate change mitigation, including efforts to develop alternative renewable energy sources and reduce deforestation, is commendable.
Social risks, particularly in education and labor productivity, remain areas for improvement. While Paraguay has expanded exports of agriculture, livestock, and hydropower as well as achieved rising income levels are over the previous 20 years, weak educational outcomes continue to affect economic competitiveness. The government’s ongoing efforts to address these social challenges are crucial for long-term sustainable development.
Future Prospects and Benefits
Moody’s stable outlook for Paraguay reflects confidence in the country’s continued economic diversification, robust infrastructure investment, and institutional reform efforts. These factors are expected to mitigate risks associated with commodity price volatility and climate-related shocks. The government’s proactive measures to enhance fiscal strength, attract foreign direct investment, and integrate into export-oriented supply chains are likely to yield significant economic benefits.
Continued implementation of structural reforms and modernization of the economy will further strengthen Paraguay’s institutional and governance framework. Successful efforts to increase private investment, particularly in infrastructure and renewable energy sectors, will more than likely enhance economic resilience and reduce vulnerability to external shocks.
Moody’s upgrade of Paraguay’s credit rating to Baa3 with a stable outlook is a testament to the country’s robust economic performance, strategic diversification, and progressive institutional reforms. By maintaining fiscal discipline, enhancing infrastructure, and committing to environmental sustainability, Paraguay is well-positioned to achieve steady economic growth and improved resilience to future shocks.
As Paraguay continues on this path of development, the international community and investors will closely monitor the country’s progress, confident in its potential for sustained economic success and institutional strength. DevTech congratulates Paraguay on this achievement, and it is looking forward to continuing to provide support the Government of Paraguay on its transformational reform agenda.
