Country Report Paraguay September 2008

Outlook for 2008-09

• The president, Fernando Lugo, took office on August 15th. His election will help to consolidate Paraguay’s 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. His lack of experience in public office will compound difficulties.
• Investors' confidence should be supported by the Lugo government commitment to macroeconomic orthodoxy and structural reform, although progress might be hampered by legislative difficulties.
• We expect real GDP growth to reach 5.5% in 2008, mainly driven by private consumption and investment, before it slows to 4% in 2009.
• A recent fall in soft commodities and oil prices have contributed to a decline in inflation. This has prompted us to revise our year-end inflation forecast for 2008 down from 13.3% to 12.4%, before slowing to 9.4% in 2009.
• We expect the exchange rate to remain broadly stable in the remainder of 2008, before depreciating by 9% in nominal terms in 2009. The current account's surplus is projected to average 1.1% of GDP in 2008-09.

Monthly review

• Hugo Chavez, Venezuela's president, maintained a high profile during and shortly after Mr Lugo's inauguration, and has signed a package of 12 aid projects to Paraguay.
• It has become clear that Mr Lugo will try to keep close ties with Mr Chavez, but this should be seen as a tactical move to counterbalance the influence of Brazil and Argentina in the Southern cone.
• The successful resolution of an alleged political conspiracy against the government has strengthened the president's position.
• The new economic team, headed by Dionisio Borda as finance minister, has declared its intention to raise taxes (the tax burden is very low in Paraguay) and pursue the long-delayed restructuring of public companies.
• Non-official economic indicators point to continued strong economic growth in the second and third quarters. Inflationary pressures have receded on the back of falling commodities prices.
• The trend of exchange rate appreciation seems to have come to a halt since mid-August, partly owing to slower growth in remittances.

Source: Country Report