Country Report Paraguay June 2008

Outlook for 2008-09

• The president-elect, Fernando Lugo, will take office on August 15th 2008. His election will contribute to a consolidation of Paraguay's young democracy. But there is the risk that plans for land reform 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 announced that the stand-by agreement with the IMF, which expires in August, will not be renewed. But the government is likely to remain committed to orthodox economic policies.
• We expect GDP growth to decelerate to 4.5% and 4% in 2009. Year-end inflation will rise to 12% in 2008 before slowing to 8.5% in 2009.
• The exchange rate will post a strong real appreciation in the outlook period.
• We now anticipate a higher current-account surplus in 2008 on the back of robust export earnings, which have prompted us also to change our trade forecast for 2008 from a small deficit to a small surplus, the first in 15 years.

Monthly review

• Mr Lugo has tried to impose his authority over the heterogeneous coalition that supports him, which includes the conservative Partido Liberal Radical Autentico (PLRA) and small left-wing parties.
• In the past month, Mr Lugo has had a disagreement with Federico Franco (his elected vice-president and the leader of the PLRA) over a recent upsurge of land invasions. Mr Lugo defends the need of a far-reaching land reform.
• Both the APC and the PC have tried to attract the support of the Partido Union Nacional de Ciudadanos Eticos (UNACE), Lino Oviedo's party, in an attempt to build a working majority in Congress.
• The body set up in December 2006 under pressure from the IMF to monitor the performance of five state-owned companies has found out that all of them have had a poor performance.
• A new round of changes to the tax system was recently announced by the government. Among other measures, the government has authorised new tax incentives to promote the use of bio-fuels.
• Bank credit figures indicate that domestic economic activity has continued to grow apace.
• Headline consumer price inflation declined slightly in May owing to seasonal factors, but the underlying rate of inflation has continued to rise.

Source: Country Report