Country Report Paraguay April 2009

Outlook for 2009-10

• Recent land tensions and an obstructive stance by the opposition in Congress illustrate the significant challenges facing Mr Lugo, which will be compounded by recession in 2009.
• Although our forecast is based on the assumption that Mr Lugo will serve out his term, political stability may be impaired by increased social conflict.
• Policymaking will be complicated by the double challenge of adopting the appropriate measures to limit the negative impact of the global downturn on the domestic economy, and delivering on ambitious campaign promises.
• On the back of our revised forecast for a sharper recession in Brazil (Paraguay's main trade partner), we now expect a contraction of real GDP of 3.5% in Paraguay in 2009 and a weaker recovery with growth of 2.1% in 2010.
• As a result of a strong disinflationary trend in course we expect year-end inflation of 5.7% in 2009. Despite our forecast for a sharp currency depreciation a contraction in domestic demand will contain the pass-through.
• In 2010, year-end inflation will reach 7.5% as a result of a mild recovery in domestic demand coupled with further nominal currency depreciation.
• We now expect wider current-account deficits of 2.3% and 2.1% of GDP in 2009 and 2010 respectively, due to our revised forecast for a sharper contraction in export volumes this year followed by a milder recovery in the next.

Monthly review

• The Lugo government has suffered a series of new setbacks in the past month, weakening its position.
• Mr Lugo had to practically abandon his plans for reforming the judiciary and backtrack on a couple of polemical measures that had been announced. Furthermore, Congress suspended the introduction of the personal income tax.
• In an attempt to increase liquidity and the availability of credit to agricultural producers (which have been hit by the global crisis and a severe drought) the Central Bank further eased reserve requirements and reduced interest rates.
• The telecommunications market, so far dominated by a state company, was partly opened to competition.
• Recent economic data have confirmed that a sharp economic downturn is under way in Paraguay, while a disinflationary trend gathered further steam in February, mainly on the back of lower food prices.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60;20
NAICS Code: 52;311