Country Report Paraguay December 2008

Summary

The recent escalation of the rural conflict indicates that there is a growing risk that the president, Fernando Lugo, will struggle to manage the high expectations among those who voted him into power.
Although our forecast is based on the assumption that Mr Lugo will serve out his term, political stability may be affected by increased social conflict, impairing governability.
Policymaking will be complicated by the double challenge of adopting the appropriate measures to limit the negative impact of the global financial crisis on the domestic economy and advancing Mr Lugo's reform agenda.
Expectations of an even sharper deceleration in private investment growth than previously forecast have prompted us to further reduce our forecast for real GDP growth to 2.2% (previously 2.7%) in 2009 and 3% (from 3.4%) in 2010.
Lower than expected consumer price inflation in recent months has led us to revise down our estimate for the 2008 year-end rate, as well as the forecast for 2009 and 2010, although currency depreciation remains a risk to inflation.
Sharp deceleration in export earnings growth in recent months has prompted us to revise our estimate for the current-account result in 2008 from surplus to deficit. We have also increased our projected deficits for 2009-10.

In response to escalating rural conflict, the government announced that it will buy land from Brazilian farmers and repossess plots of land that had been awarded illegally in the past. In both cases, the land will be redistributed.
Despite the government's efforts to address the land problem, social tensions have continued to increase, having resulted in protests, land invasions and aggressive confrontations.
Besides the escalation of social tensions, the government has had to face a stronger opposition in Congress, where it suffered some important defeats in recent weeks (such as the rejection of a proposal to accept a multilateral loan).
The global economic crisis has continued to dictate the pace of economic policy. The Central Bank has further reduced interest rates and also taken measures to try to hinder currency depreciation.
The Inter-American Development Bank (IDB) has issued guarantees for Interbanco, a local bank, to support around US$5m in import transactions of agroindustrial products and machinery from Brazil to Paraguay.
The pace of export earnings growth has slowed markedly in September, while expansion in the import bill remained strong.

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22