Country Report Paraguay August 2008

Outlook for 2008-09

• The president, Fernando Lugo, took office on August 15th. His election will help to consolidate Paraguay’s young democracy. However, his plans for land reform could fuel political and social instability.
• Although Mr Lugo has built an alliance that will give him a working majority in Congress, he will struggle to keep his heterogeneous governing coalition united. His lack of experience in public office will compound difficulties.
• Although the stand-by agreement with the IMF, which expires in August, will not be renewed, the government is likely to remain committed to orthodox economic policies.
• Stronger than expected growth in the first quarter of 2008 and further evidence of economic vigour in the second and third quarters have prompted us to revise our growth forecast for 2008 up from 4.5% to 5.5%.
• Year-end inflation will rise to 13.3% in 2008 before slowing to 9.4% in 2009. Measures to halt currency appreciation will complicate monetary policy.
• After strengthening in real and nominal terms 2008, we expect the exchange rate to depreciate in nominal terms in 2009, albeit not in real terms.
• The Central Bank has made a sharp downward revision to its current account estimate for 2007 (from a surplus of nearly 5% of GDP to 1% of GDP). This has had a negative important impact on our external sector forecast.

Monthly review

• Lino Oviedo, a retired general and leader of the third-largest party in Congress, has announced that he will support Mr Lugo's coalition, giving the president the working majority he needs in Congress.
• A veiled conflict between Mr Lugo and his vice-president, Federico Franco (a member of the PLRA), has continued to unfold, highlighting the difficulties that the president will face in keeping his coalition united.
• The fiscal accounts have posted a strong surplus in the first half of 2008 of G1.5tn (US$336m), a 39% year-on-year increase. Fiscal adjustment has continued to rely partly on a squeeze in public investment.
• The Central Bank has sterilised record amounts of liquidity as part of its anti-inflationary policy, through the issuance of Central Bank bills.
• The Central Bank has started to publish a quarterly national accounts series, which revealed strong GDP growth of 7.6% in the first quarter of 2008. Growth was largely driven by private consumption and investment.

Source: Country Report