Country Report Paraguay May 2009

Outlook for 2009-10

• The political inexperience of the president, Fernando Lugo, who took office in August 2008, and the divisions within his coalition, will become increasingly exposed as he contends with growing social and political tensions.
• The emergence of three paternity claims against Mr Lugo, a former Catholic priest, will further weaken his public position.
• 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 expect the fiscal accounts to slip into deficit in the forecast period.
• Real GDP growth is projected to contract by 3.5% in 2009, before recovering modestly to 2.1% in 2010.
• A stronger than anticipated disinflationary trend has prompted us to revise our forecast for year-end inflation in 2009 from 5.7% to 4.2%.
• We now anticipate a narrower current-account deficit in the forecast period as a whole, and less marked currency depreciation in the remaining of 2009.

Monthly review

• The emergence in April of three paternity claims against Mr Lugo, a former bishop, has caused a decline in his popularity ratings and represents a risk to political stability. Mr Lugo admitted fathering one child.
• In an attempt to deflect attention from the scandals involving the president's personal life and to strengthen his position, Mr Lugo has carried out a ministerial reshuffle.
• There has been press speculation in Brazil that the Brazilian government may offer concessions to Paraguay on talks to renegotiate the Itaipu treaty.
• The Banco Central del Paraguay (the Central Bank) has intervened in the foreign exchange market in order to halt a recent trend of currency appreciation and preserve export competitiveness. Foreign reserves have largely recovered.
• Economic data for the first two months of 2009 indicated that household consumption has remained strong in spite of other signs of economic deceleration (mainly of a slowdown in private investment).
• The pace of export earnings contraction has slowed markedly in February-March, whereas that of the import bill remained strong, if also weaker.

• Highlights
• Outlook for 2009-10: Domestic politics
• Outlook for 2009-10: International relations
• Outlook for 2009-10: Policy trends
• Outlook for 2009-10: Fiscal policy
• Outlook for 2009-10: Monetary policy
• Outlook for 2009-10: International assumptions
• Outlook for 2009-10: Economic growth
• Outlook for 2009-10: Inflation
• Outlook for 2009-10: Exchange rates
• Outlook for 2009-10: External sector
• Outlook for 2009-10: Forecast summary
• The political scene: Paternity claims against Mr Lugo weaken his position
• The political scene: Recent poll shows sharp fall in Mr Lugo's popularity
• The political scene: Government announces ministerial changes
• The political scene: Brazil may make concessions to Mr Lugo on Itaipu talks
• Economic policy: Central Bank intervenes to avoid currency appreciation
• Economic performance: Private consumption remained strong in early 2009
• Economic performance: Remittances continue to support domestic demand
• Economic performance: Export performance improved in February
• Data and charts: Annual data and forecast
• Data and charts: Quarterly data
• Data and charts: Monthly data
• Data and charts: Annual trends charts
• Data and charts: Monthly trends charts
• Data and charts: Comparative economic indicators
• Basic data
• Political structure