Country Report Paraguay February 2009

Outlook for 2009-10

• Recent land tensions and an obstructive stance by the opposition in Congress indicate the significant challenges faced by the president, Fernando Lugo, which will be compounded by a forecast recession in 2009.
• Although the Economist Intelligence Unit's forecast is based on the assumption that Mr Lugo will serve out his term, political stability may be affected 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 financial crisis on the domestic economy, and advancing Mr Lugo's reform agenda.
• Following five consecutive years of surpluses, we expect that the central government fiscal accounts will slip back into deficit in 2009-10, which will compound the government's difficulties in advancing with its social agenda.
• We have further revised down our forecasts for economic performance in the outlook period. We now forecast a recession in 2009, with real GDP contraction of 0.8%, followed by a modest recovery in 2010 with 2.4% growth.
• On the assumption that lower oil prices and a contraction in private consumption will offset the inflationary impact of currency depreciation, we forecast year-end inflation of 6.7% in 2009, before it picks up to 7.2% in 2010.
• The current account slipped back into deficit in 2008 following six consecutive years of surpluses and is forecast to remain in the red in 2009-10.

Monthly review

• The political scene has been dominated by the repercussions of an attack of a small military outpost on the New Year's Eve by a left-wing militant group.
• Despite this event's relatively small scale, it prompted landowners and sectors of the local media to allege that "communist subversion" represents a growing threat to stability, which was strongly denied by the government.
• Mr Lugo has sanctioned the 2009 budget which had been inflated by Congress. In response, the Ministry of Finance announced that it will cut spending, including on infrastructure and social projects.
• The long-delayed personal income tax was finally introduced in January.
• Real GDP growth reached 5.8% in 2008, mainly driven by a strong agricultural performance, but the relatively robust figure masks a sharp economic deceleration in the last quarter of last year.
• The annual inflation rate reached 7.5% in 2008, up from 5.9% in 2007. Lower oil prices have continued to contribute to contain inflationary pressures.

Source: Country Report