Country Report Paraguay October 2009

Outlook for 2010-11

• The historic renegotiation of the Itaipu treaty in July provided a boost for the president, Fernando Lugo, but there is a risk that approval by Brazil's Congress will be delayed by a Brazilian general election in October 2010.
• Political stability may be impaired by social conflict, particularly if the economy recovers more weakly than expected and Mr Lugo fails to advance reforms through an obstructive Congress.
• The Itaipu deal will help to quell instability on the Paraguay-Brazil border and improve relations between the two countries. This will, in turn, dampen the likelihood of Paraguay aligning itself more closely with Venezuela.
• Policymaking will be complicated by the double challenge of adopting the appropriate measures to limit the lingering negative impacts of the global downturn, and delivering on ambitious campaign promises.
• After moving into deficit in 2009-10, we expect the fiscal accounts to improve in 2011, buoyed also by the extra Itaipu revenue.
• After contracting by 3.5% in 2009, real GDP growth is forecast to rise by 3.4% in 2010 (revised up from 2.5% last month owing to countercyclical measures and stronger Brazilian GDP growth), and picking up to 4% in 2011.
• After a strong disinflationary trend, inflation is now picking up gradually and we expect the annual average rate to rise above 5% in the forecast period, assuming a moderate economic recovery.

Monthly review

• In a snub to the opposition, the president vetoed a Senate bill on September 22nd that would have extended the mandate of current authorities in the 232 municipalities, elected in 2006, from four to five years.
• In a U-turn, the president is set to yield to an informal party quota system to fill a vacancy at the Supreme Court, setting back his promises to reform Paraguay's deeply corrupt judicial system.
• Following a monitoring mission in September, the IMF praised the government's reaction to the global financial crisis for implementing appropriate anti-cyclical policies while maintaining macroeconomic stability.
• In late September the government submitted its draft 2010 budget proposal to Congress, which envisages a moderate countercyclical boost, to be partly financed by a planned US$200m international bond issue.
• On a quarter-on-quarter basis, GDP grew by 0.2% in the second quarter of 2009. However, as a result of the sharp fall in the first quarter, GDP in the first half of the year fell by 4.2% year on year.

Source: Country Report