Country Report Paraguay July 2008

Outlook for 2008-09

• The president-elect, Fernando Lugo, will take office on August 15th. His election will help to consolidate Paraguay’s young democracy. However, plans for land reform could fuel political and social instability.
• Governability will remain relatively weak as Mr Lugo’s coalition, the Alianza Patriotica para el Cambio (APC), is a heterogeneous alliance that will lack a working majority in Congress.
• Dionisio Borda, the incoming finance minister, has said that 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.
• The Economist Intelligence Unit expects GDP growth to slow to 4.5% in 2008 and 4% in 2009.
• Year-end inflation will rise to 13.4% in 2008 before slowing to 9.6% in 2009. Measures to halt currency appreciation will complicate monetary policy.
• The exchange rate will post a strong real appreciation in the outlook period, although we now expect it to depreciate by 9.4% in nominal terms in 2009.
• High prices for Paraguay’s export commodities are boosting export earnings. As a result, we expect the trade balance to register a small surplus in 2008, before falling into a small deficit again in 2009.
• The current-account surplus will fall to 4.4% of GDP in 2008 and 3.9% in 2009.

Monthly review

• Mr Lugo announced the composition of his cabinet and stated that ministers will be held accountable for achieving economic policy targets.
• The new cabinet represents a delicate balance, reflecting Mr Lugo’s efforts to please new and conservative allies and long-standing left-wing supporters.
• The outgoing Congress has refused to approve the resignation request of the outgoing president, Nicanor Duarte Frutos, who was elected as a senator and aims to assume his new post when the new legislature starts in July.
• The new government’s key policy goals, such as land reform, increased productive investment, and universal education and health coverage, were announced, although measures to achieve them remain unspecified.
• The outgoing Congress has not yet voted on important foreign loans, which will be needed to kick start the new government’s investment programme.
• The guarani has continued to strengthen, going below G4,000:US$1 for the first time since 2001, which has prompted the Banco Central del Paraguay (the Central Bank) to increase its interventions in the foreign-exchange market.

Source: Country Report