Country Report Paraguay March 2009

Outlook for 2009-10

• Recent land tensions and an obstructive stance by the opposition in Congress illustrate 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 impaired 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 downturn on the domestic economy, and delivering on ambitious campaign promises.
• We now expect a sharper real GDP contraction of 3.1% in 2009 (previously a contraction of 0.8%), which will be driven by falling domestic and external demands. We maintain our forecast for modest growth of 2.4% in 2010.
• Our revised forecast for a sharper recession in 2009 has led us to revise up our projection for the fiscal deficit this year from 1.2% of GDP to 1.9% of GDP, declining to 1% of GDP in 2010, assuming a pick-up of GDP growth.
• The downgrade to domestic demand projections coupled with lower oil prices has prompted us to revise down our projection for year-end inflation in 2009 to 5.2%, rising to 6.7% as the economy recovers mildly in 2010.
• As Brazil and Argentina (Paraguay's partners in its bi-national hydroelectricity projects) fall into recession, inflows of royalties to Paraguay will decline, contributing to a wider current-account deficit of 2% of GDP in 2009.

Monthly review

• Mr Lugo's popularity has fallen significantly, according to a recent opinion poll, amid rising popular frustration with the governments failure to make major inroads in addressing his main campaign promises.
• Mr Lugo has faced a major defeat in the Senate which fuelled growing questions about the prospects for far-reaching reform of the judiciary.
• Amid the deterioration of international and domestic economic indicators, the Lugo government has announced a plan to confront the global financial crisis, which envisages investments of US$350m in 2009.
• Recent data indicate a sharp recent deterioration in the labour market. According to money transfer companies, the value of remittances from workers living abroad fell by over 20% year on year in January.
• Both export and import values have started to experience year-on-year contractions recently.

Source: Country Report

This report covers the following industry codes:
SIC Code: 10
NAICS Code: 212