Country Report Paraguay November 2008

Outlook for 2009-10

• The change of government, with the president, Fernando Lugo, assuming office in August, will help to consolidate Paraguays young democracy. However, his plans for land reform could fuel political and social instability.
• Although Mr Lugo has built an alliance that will give him a working majority in Congress, he will struggle to keep his heterogeneous governing coalition united.
• Events in recent weeks, including an escalation in land invasions and rural conflict, point to a growing risk that Mr Lugo will struggle to manage expectations of change from different sectors of society.
• The lack of a clear government plan, coupled with internal disagreements in the new administration and economic deceleration, will weigh on investors' confidence in the Paraguayan economy.
• In tandem with a trend of sharp deceleration in the global economy and in Brazil, Paraguay's real GDP growth is forecast to slow to 2.7% in 2009 and we now expect a more timid recovery in 2010 with GDP growth of 3.4%.
• Lower oil prices will ease inflationary pressures in 2009, but currency depreciation will hinder disinflation and the 12-month rate will end 2009 at 8.7%. An uptick in oil prices will keep the rate at 8.5% in 2010.
• We expect the guarani to depreciate in 2009-10 amid weaker commodity prices. The current-account surplus will decline gradually in 2009-10.

Monthly review

• Leaders of the peasants (or landless) movements have continued to press the government for progress on land reform, which was one of Mr Lugo's main campaign promises, fuelling social tensions.
• In the absence of progress in Mr Lugo's land reform programme, there has been an escalation of land invasions, mainly of properties owned by Brazilian soybean farmers who live in Paraguay, known as brasiguayos.
• Brazilian authorities have stated that if animosity against Brazilian nationals living in Paraguay continues to increase, the renegotiation process of the Itaipu Treaty might be suspended, stoking bilateral tensions.
• Plans for creating a tax on agricultural exports and increasing other taxes have been postponed owing to the global economic crisis, although a new personal income tax is still expected to go ahead in January 2009.
• GDP growth has remained strong in the second quarter, but is likely to decelerate sharply amid weaker global demand and lower commodity prices.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52