government of paraguay - ba1 stable€¦ · government of paraguay - ba1 stable annual credit...

SOVEREIGN AND SUPRANATIONAL

ISSUER IN-DEPTH26 June 2018

RATINGS

ParaguayForeign

CurrencyLocal

Currency

Gov. Bond Rating Ba1/STA Ba1/STA

Country Ceiling Baa3 Baa3

Bank Deposit Ceiling Ba2 Baa3

TABLE OF CONTENTSOVERVIEW AND OUTLOOK 1CREDIT PROFILE 2Economic strength: Low (+) 2Institutional strength: Low 6Fiscal strength: High (+) 9Susceptibility to event risk: Moderate(-) 13Rating range 16Comparatives 17DATA, CHARTS AND REFERENCES 18

Contacts

Samar Maziad +1.212.553.4534VP-Senior [email protected]

Gabriel Agostini +1.212.553.8882Associate [email protected]

Mauro Leos +1.212.553.1947Associate Managing [email protected]

Government of Paraguay - Ba1 StableAnnual credit analysis

OVERVIEW AND OUTLOOKThe credit profile of Paraguay (Ba1 stable) reflects a strong fiscal position, an improving fiscalpolicy framework, and limited external vulnerability. The government envisages higher capitalspending to improve infrastructure, competitiveness and economic growth. The country'sdebt metrics are favorable when compared with the median for Ba-rated sovereigns.Authorities continue to build a track record of adherence to the Fiscal Responsibility Law,with the fiscal deficit registering within the 1.5% of GDP limit for the second consecutiveyear in 2017. We expect continued compliance in 2018.

Paraguay's main credit challenges include the economy’s continued dependence onagriculture-related output and overall weak governance indicators relative to peers despite atrack record of prudent macroeconomic policy. Infrastructure continues to be a key weaknessof the country's competitiveness profile, though the government has focused the bulk ofnew spending on upgrading roads and access to coasts. The government has succeeded inimproving tax administration, boosting revenue collection in recent years, overall revenueintake as percentage of GDP is low at around 14% of GDP, well below the Ba and Baamedians.

The stable outlook is supported by our expectation that the authorities will maintain prudentmacroeconomic and fiscal policies to contain the rise in public debt, while borrowing tosupport investment in infrastructure.

Upward rating pressure could result from strict compliance with the fiscal responsibilitylaw, completion of growth-enhancing infrastructure investments, and improvement ininstitutional and governance indicators. Striking an effective balance between growth-enhancing investment and maintaining a low debt burden is key to preserving Paraguay'sfiscal strength. Downward rating pressure could result from a marked deterioration in fiscalindicators and an increase in government debt, and/or a deterioration in external accountsand an increase in external vulnerability.

This credit analysis elaborates on Paraguay’s credit profile in terms of economic strength,institutional strength, fiscal strength and susceptibility to event risk, which are the four mainanalytic factors in Moody’s Sovereign Bond Rating Methodology.

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1129610

https://www.moodys.com/credit-ratings/Paraguay-Government-of-credit-rating-600044126

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1044859

MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

CREDIT PROFILEOur determination of a sovereign’s government bond rating is based on the consideration of four rating factors: economic strength,institutional strength, fiscal strength and susceptibility to event risk. When a direct and imminent threat becomes a constraint, that canonly lower the preliminary rating range. For more information please see our Sovereign Bond Rating Methodology.

Economic strength: Low (+)

Scale VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-

+ Final -

Factor 1: Sub-scores

weight 50% weight 25% weight 25%

Score for Paraguay Median of countries with Ba1 rating

Factor 1: Overall score

Paraguay Low (+)

Economic strength evaluates the economic structure, primarily reflected in economic growth, the scale of the economy and wealth, as well as in

structural factors that point to a country’s long-term economic robustness and shock-absorption capacity. Economic strength is adjusted in case

excessive credit growth is present and the risks of a boom-bust cycle are building. This ‘credit boom’ adjustment factor can only lower the overall score of economic strength.

Note: In case the Indicative and Final scores are the same, only the Final score will appear in the table above.

SCALE OF THE ECONOMY NATIONAL INCOMEGROWTH DYNAMICS

Average real GDP (% change) Volatility in real GDP growth (ppts) Global Competitiveness index Nominal GDP (US$ bn) GDP per capita (PPP, US$)

VERY HIGH

HIGH

MODERATE

LOW

VERY LOW

GROWTH DYNAMICS

The score for economic strength is set at “Low (+)” reflecting the economy's small size, low national income level and lowcompetitiveness. These factors are partially offset by ongoing positive developments in economic diversification, particularly raisingthe value-added of agricultural exports and upgrading infrastructure through public investment. Paraguay’s nominal GDP of $40 billionin 2017 approximates the Ba median of $41 billion, and GDP per capital (PPP basis) of $9,826 about two-thirds the $15,000 medianof Ba-rated sovereigns, but in line the “Low (+)” median of $9,772. The economy has grown at an average annual rate of 5.0% duringthe last five years compared with 3.7% for Ba-rated peers. Because of climate-related shocks and agriculture's significant contributionto output, real GDP growth has been more volatile than its peers. Other sovereigns with a similar score for economic strength includeBolivia (Ba3 stable) and Fiji (Ba3 stable).

Paraguay L+ Median Azerbaijan Bolivia Georgia Croatia FijiCote d

IvoireBa1/STA Ba2/STA Ba3/STA Ba2/STA Ba2/STA Ba3/STA Ba3/STA

Final score L+ L+ L+ L+ L+ L+ L+

Indicative score L+ M- L- L M- M- L

Nominal GDP (US$ bn) 40.0 23.0 40.7 37.5 15.2 54.8 5.1 39.5

GDP per capita (PPP, US$) 9,825.9 9,777.2 17,492.4 7,536.1 10,747.1 24,423.5 9,777.2 3,882.9

Average real GDP (% change) 5.0 3.6 2.0 4.1 4.3 1.9 3.1 8.0

Volatility in real GDP growth (ppts) 5.5 2.4 4.3 1.0 3.1 3.1 2.2 4.6

Global Competitiveness Index 3.7 3.9 4.7 3.5 4.3 4.2 -- 3.9

Peer comparison table factor 1: Economic strength

2 26 June 2018 Government of Paraguay - Ba1 Stable: Annual credit analysis


https://www.moodys.com/credit-ratings/Bolivia-Government-of-credit-rating-108200

https://www.moodys.com/credit-ratings/Fiji-Government-of-credit-rating-600047198


Paraguay's strong, broad-based growth continued to outperform regional peers in 2017...

We estimate that real GDP growth increased to 4.3% last year from 4.0% in 2016 (using 1994 prices), the second highest growthrate in South America after Bolivia. Economic activity in 2017 was primarily driven by increased domestic demand and investment.While agriculture still plays an important role in the Paraguayan economy, accounting for about 18% of GDP over the last ten years,it has contributed less to economic activity in recent years as soy prices remain subdued and the government focuses investment anddiversification efforts into the light manufacturing and service-based industries. On the sectoral side, the industrial and services sectorsgrew by a robust 9.0% and 5.1%, respectively, contributing over two-thirds to the economy's overall growth (see Exhibit 1).

...while new national accounting standards revealed a larger and less volatile economy

In May, Paraguay's central bank published the results of its new national accounting system. The purpose of the new national accountsis to provide a more accurate portrayal of the economy's size and structure, which until now were calculated with 1994 prices and anolder standard of industrial classification. Under the new accounting standards, which use 2014 prices, nominal GDP was an estimated$36.3 billion in 2016, around 32% larger than under the old accounting framework. At the same time, primary sector activity (such asagriculture, livestock and mining) accounts for a smaller share of economic activity, about 12% of GDP, down from 19% under the 1994base year. Importantly, historical growth also appears to be less volatile under the 2014 base, as agriculture's importance in overalleconomic output diminished relative to its historical levels (see Exhibit 2).

Exhibit 1

Agriculture has contributed less to real GDP growth since 2014...Contribution to GDP growth by sector, % year-over-year

Exhibit 2

New national accounts reveal less volatile growth patternsReal GDP growth, % year-over-year

-6

-4

-2

0

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014 2015 2016 2017E

Agriculture Trade & services Industry & mining Other

Note: 2015-17 estimates are derived from 1994 GDP baseSources: Central Bank of Paraguay and Moody's Investors Service

-0.3

11.1

4.2

-0.5

8.4

4.9

3.1

4.3 4.4

-6

-4

-2

0

2

4

6

8

10

12

14

16

2009 2010 2011 2012 2013 2014 2015 2016 2017E

Growth (South America) Paraguay growth (1994 base)

Paraguay growth (2014 base)

Sources: Central Bank of Paraguay and Moody's Investors Service

The economy has shown resilience to regional slowdown and lower commodity prices

Paraguay is a small and highly open economy with total exports and imports representing around 80% of GDP. The country is alsothe third largest producer of soy in the world, with soy and derivate products accounting for a third of all exports. Paraguay’s mostimportant export trade partner is Brazil (Ba2 stable), which accounts for one-third of the country’s exports, followed by the EuropeanUnion (Aaa stable), Asia, and Argentina (B2 stable) (see Exhibit 3). However, even after its two largest regional trading partners(Argentina and Brazil) fell into recession and soy prices declined, Paraguay’s growth has remained resilient, averaging 4.2% annuallysince its major trade partners contracted in 2015. Unlike previous episodes of economic downturn, the Paraguayan economy did notmove in line with its largest neighbor, given supportive policies, a more diversified economic base (with faster growth in the non-agricultural sectors), and favorable supply shocks. We expect Paraguay to maintain its robust growth momentum going forward,expanding by around 4.2% in 2018-19. Economic activity is likely to be supported by higher value-added in the agricultural sector,and increased private consumption and public investment. Downside risk to growth could materialize as a result of continued weakgrowth in Brazil or slower execution of public investment. After falling by 24% in 2015, prices for soy, Paraguay's main export product,recovered last year, but are likely to remain below historical peaks (see Exhibit 4).


https://www.moodys.com/credit-ratings/Brazil-Government-of-credit-rating-114650

https://www.moodys.com/credit-ratings/European-Union-credit-rating-600049532

https://www.moodys.com/credit-ratings/European-Union-credit-rating-600049532

https://www.moodys.com/credit-ratings/Argentina-Government-of-credit-rating-61720


Exhibit 3

Despite recent diversification, Argentina and Brazil receive majorityof exportsShare of exports by country, 2017

Exhibit 4

Soy prices have recovered from 2016 trough but remain lower thanprevious yearsUSD/ton

Argentina14%

Brazil32%

Uruguay3%

Bolivia, Chile, Colombia, Cuba, Ecuador, Mexico, Panama, Peru11%

European Union13%

Asia11%

Russia6%

Rest of the world10%


400

500

600

700

800

900

1,000

200

250

300

350

400

450

500

550

600

Ja

n-1

4

Mar-

14

May-1

4

Ju

l-14

Sep

-14

No

v-1

4

Ja

n-1

5

Mar-

15

May-1

5

Ju

l-15

Se

p-1

5

Nov-1

5

Ja

n-1

6

Mar-

16

May-1

6

Jul-

16

Se

p-1

6

No

v-1

6

Ja

n-1

7

Mar-

17

May-1

7

Ju

l-17

Sep

-17

No

v-1

7

Ja

n-1

8

Mar-

18

May-1

8

Soy Soy flour Soy oil (right axis)


Initial signs of economic diversification

Paraguay’s economy has traditionally relied on agriculture production, particularly soy, meat, and hydroelectric energy generationfrom the Itaipú and Yacyretá dams owned jointly with Brazil and Argentina, respectively. In recent years, the economy witnessed adrive for diversification through government-led and private sector initiatives to raise the value-added of the agricultural sector. Theaim was to increase exports of processed agriculture instead of raw material, and to further develop light manufacturing. Since 2013,soy exports have steadily shifted from raw grains towards soy oil and flour, which currently constitute 36% of soy exports comparedto 21% five years ago. There are also efforts underway to develop agribusiness industries, including organic meats and poultry aimedat non-traditional export markets in Asia, North Africa, and the Middle East. Soy output is expected to improve in 2018 and lightmanufacturing (maquila) exports continue to grow, supporting economic diversification.

The government's strategy is centered on taking advantage of the country’s abundant hydroelectric energy, and encouragingdevelopment of export-oriented light manufacturing (maquilas) in autoparts, plastics, and textiles, which are primarily part of Brazil’ssupply chain. Between 2010-17, the mining and manufacturing sector grew at an average annual rate of 5.5%, well above the averageannual rate of 0.5% between 2000-09. This trend of expanding light manufacturing industries and integrating Paraguay into Brazil’ssupply chain is likely to continue due to Paraguay’s low labor and energy costs, and favorable tax environment. Paraguay has historicallymaintained the lowest tax burden in the region, with a 10% corporate tax rate and a 10% value-added tax (VAT) on most good andservices, compared with Brazil (34%; 17%), Argentina (35%; 21%), and Uruguay (25%; 22%).

Infrastructure investment key to raising Paraguay’s growth potential

The quality of basic infrastructure (roads, ports, utilities, etc.) is poor and the investment rate is low on a global comparative basis.The investment rate was 18% of GDP during the past five years. The World Economic Forum’s Global Competitiveness Index ranksParaguay’s infrastructure at 118 out of 137 countries, and health and primary education at 104. That said, competitiveness hasimproved in recent years (see Exhibit 5).

The government has made progress on the reform agenda presented in the 2014-30 National Development Plan. The growth strategyoutlined in the plan emphasizes infrastructure investment, particularly improving transportation and electricity distribution. Theauthorities have launched two vital road expansions ($527 million) using the new PPP framework. The work will duplicate the nationalhighway linking Asuncion with major cities, including Ciudad del Este on the border with Brazil, and connecting other local capitals.Around $1 billion has been approved to finance major road rehabilitation and the construction of a “bi-oceanic” corridor, which wouldhelp Paraguay overcome some of the drawbacks of its landlocked status in South America. In addition, proceeds from the issuanceof global bonds since 2013 are being used for infrastructure projects, namely roads, airports, electricity infrastructure, and a shipping



waterway. In 2016, the government issued $600 million in bonds in international markets, a large part of which will be used forinfrastructure financing.

Exhibit 5

Paraguay's competitiveness profile has witnessed improvement since 2008

0.0

1.0

2.0

3.0

4.0

5.0

6.0 Institutions

Infrastructure

Macroeconomic environment

Health and primary education

Higher education and training

Goods market efficiency

Labor market efficiency

Financial market development

Technological readiness

Market size

Business sophistication

Innovation

2007-2008 2017-2018

Source: World Economic Forum

Sustained economic growth and increased formalization make a dent in poverty rates

Sustained economic growth with strong reliance on natural resources has contributed to poverty reduction. The poverty rate1 hasdropped significantly to 29% in 2016 from 39% in 2010 – the drop in rural poverty was larger. Extreme poverty also fell significantlyand there is an improving trend in income per capita for the poorest quintile of the population. Still, Paraguay remains behind its peersin terms of GDP per capita.

Growth in light manufacturing and the emergence of the maquila sector in Paraguay have led to increased formalization of the laborforce and to improving employment quality. According to the UN Human Development Report 2016, around 47% of people ages 25and older have at least a secondary education, lower than the Latin American and Caribbean median of 58%. Paraguay has a youngpopulation with a median age of 24.9 years, and the secondary school (3 years between age 15-17) enrollment rate is 77%, well belowthe Latin American and Caribbean median of 95%, indicating that education levels have the potential to improve.



Institutional strength: Low


+ Final Indicative -


Low Median of countries with Ba1 ratingScore for Paraguay


weight 75% weight 25%

Institutional strength evaluates whether the country’s institutional features are conducive to supporting a country’s ability and willingness to repay its debt. A related aspect of institutional strength is the capacity of the government to conduct sound economic policies that foster economic growth and

prosperity. Institutional strength is adjusted for the track record of default. This adjustment can only lower the overall score of institutional strength.


Paraguay

POLICY CREDIBILITY AND EFFECTIVENESSINSTITUTIONAL FRAMEWORK AND EFFECTIVENESS

Worldwide GovernmentEffectiveness index Worldwide Rule of Law index

Worldwide Control of Corruptionindex Inflation level (%)

Inflation volatility (standarddeviation)

VERY HIGH

HIGH

MODERATE

LOW

VERY LOW

The score for institutional strength is set at “Low,” which is above the indicative score of “Very Low (+),” to reflect Paraguay's improvingfiscal framework and economic policy effectiveness. Our assessment reflects the Worldwide Governance Indicator (WGI) scores forParaguay (including government effectiveness, rule of law and control of corruption), which are consistently among the lowest 20% ofMoody’s-rated sovereigns and compare poorly with Ba-peers (see Exhibits 6 and 7). However, Paraguay’s institutional framework hasimproved with the passage of a number of new laws including the Fiscal Responsibility Law, the Law to Modernize the State’s FinancialAdministration, and the PPP Law.2 These reforms have contributed to improve the business environment, which is reflected in higherraking on the 2017 World Bank's “ease of doing business” indicator. Paraguay’s ranking has moved up to 108 in 2018 from 124 in 2010.3

Other sovereigns with a similar score for institutional strength include Azerbaijan (Ba2 stable) and Guatemala (Ba1 stable).

Paraguay L Median AzerbaijanDominican

RepublicGuatemala Ethiopia Kenya El Salvador

Ba1/STA Ba2/STA Ba3/STA Ba1/STA B1/STA B2/STA B3/STA

Final score L L- L- L- L- L- L-

Indicative score VL+ L L L- L- L- M-

Gov. Effectiveness, percentile [1] 8.2 21.0 37.5 30.8 18.7 16.5 28.5 29.3

Rule of Law, percentile [1] 18.0 26.3 21.0 36.8 8.2 28.5 22.5 15.7

Control of Corruption, percentile [1] 19.5 24.0 12.0 17.2 20.3 32.3 10.5 25.5

Average inflation (%) 3.9 2.2 6.0 3.4 3.9 9.0 4.6 1.4

Volatility in inflation (ppts) 2.5 3.6 6.5 3.2 2.7 13.0 3.6 2.4

[1] Moody's calculations. Percentiles based on our rated universe.

Peer comparison table factor 2: Institutional strength

Comparatively weak governance indicators somewhat offset by sound macroeconomic policy framework

The government’s track record of sound fiscal management signals a higher degree of government effectiveness than suggested by thecountry’s governance indicators. Efforts to improve transparency and corruption perceptions include public sector payroll disclosuresand access to information. The constitutional requirement (Article 104), which was enacted in 2013, requires public officials to declaretheir assets. The government improved accountability of the public sector by disclosing public officials' wages, and disclosing most ofthe government's assets and procurement data to the public. In addition, the government implemented internal scorecards to monitor


https://www.moodys.com/credit-ratings/Azerbaijan-Government-of-credit-rating-806356890

https://www.moodys.com/credit-ratings/Guatemala-Government-of-credit-rating-600011455


performances of government bodies and former President Horacio Cartes' administration escalated the importance of intellectualproperty enforcement. A few key improvements include: 1) The U.S. Trade Representative (USTR) signed an MoU4 on IntellectualProperty Rights with Paraguay; 2) The Financial Action Task Force (FATF) removed Paraguay from the FATF’s monitoring list under itson-going global Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) compliance process in 2012. After theFATF had identified deficiencies in February 2010, the country made significant progress in improving the framework and met theFAFT's requirements; and 3) The U.S. State Department’s 2015 Investment Climate Statement Report does not flag any concerns in theareas of attitude toward FDI, restrictions on foreign exchange or investment disputes in Paraguay.

Exhibit 6

Worldwide Governance Indicators, 2016Exhibit 7

Paraguay's WGI scores are weaker than peers'

0

20

40

60Political Stability

Government

Effectiveness

Rule of Law

Control of Corruption

Voice and

Accountability

Regulatory Quality

Paraguay Mean - Ba Median - LatAM

Sources: Worldwide Governance Indicators, Moody’s Investors Service

Paraguay

Paraguay

Paraguay Mean - BaMedian -LatAM

Mean - BaMedian -LatAM

Mean - BaMedian -LatAM

0 10 20 30 40 50Percentile rank (Moody's rated sovereigns)

Control ofCorruption

Rule of Law

GovernmentEffectiveness

Source: Worldwide Governance Indicators

An effective inflation-targeting monetary policy framework

The central bank of Paraguay (BCP) adopted an inflation targeting regime in 2011. In December 2014, it reduced its target from 5%to 4.5% +/- 2 percentage points, narrowing the pervious 5% +/- 2.5 percentage point range. In February 2017, the target was revisedagain to 4% +/- 2 percentage points. Inflation has mostly remained within the target range, and inflation volatility has declined sincethe establishment of the regime (see Exhibit 8). We expect inflation to remain anchored around the central bank's target of 4% as thebank reduces its monetary stimulus through 2018.

Exhibit 8

Inflation volatility has diminished and remains with target rangeAnnual inflation metrics, % year-over-year

Exhibit 9

Guarani has exhibited stability since January 2016Guarani/USD

0

2

4

6

8

10

12

Headline inflation Core inflation Target range


3,500

4,000

4,500

5,000

5,500

6,000

6,500

Sources: Central Bank of Paraguay and Haver Analytics

The central bank's monetary policy rate has stood at 5.25% since July 2017, when it reduced the overnight rate for the first time ina year. In the minutes of the May 2018 monetary policy meeting, the central bank noted moderated growth dynamics in the first



quarter of 2018 with respect to the same time last year as well as a favorable inflation trajectory that remains within the target rangeas reasons for maintaining the current policy rate. The committee emphasized that inflation projections remain in line with the targetin the medium term, but that the regional context has become more complex, mainly due to recent downward revisions to growthprojections in Brazil and Argentina following ongoing political uncertainty in the former and emerging market outflows in the latter.Notably, the Guarani remained relatively resilient to the currency outflows that roiled many emerging markets inside and outside ofthe region since the beginning of 2018, with the currency depreciating just 1.2% since January (see Exhibit 9). Under a benign domesticeconomic environment and a mixed external scenario, the committee considered the most prudent strategy was to maintain thecurrent monetary policy rate.

The BCP expects inflation to remain around the target of 4% by the end of 2018. In the context of an improved monetary framework,financial dollarization has been declining from elevated levels, and hovers below 50% of deposits and loans, with some increase inforeign currency credit since 2011. Risks stemming from financial sector dollarization appear contained, as foreign-currency credit islimited to naturally hedged borrowers, typically soy exporters. The authorities have also approved a new banking sector law, one thatwould allow the central bank to introduce macro-prudential tools to manage banking sector risk, which would support the country'sinstitutional strength.



Fiscal strength: High (+)


+ Final -


weight 50%

Fiscal strength captures the overall health of government finances, incorporating the assessment of relative debt burdens and debt affordability as

well as the structure of government debt. Some governments have a greater ability to carry a higher debt burden at affordable rates than others.

Fiscal strength is adjusted for the debt trend, the share of foreign currency debt in government debt, other public sector debt and for cases in which

public sector financial assets or sovereign wealth funds are present. Depending on the adjustment factor the overall score of fiscal strength can be

lowered or increased.



Paraguay

weight 50%

High (+) Score for Paraguay Median of countries with Ba1 rating

General government debt (% of GDP) General government debt (% of revenues)General government interest payments (%

of revenue)General government interest payments (%

of GDP)

VERY HIGH

HIGH

MODERATE

LOW

VERY LOW

DEBT AFFORDABILITYDEBT BURDENDEBT BURDEN

Our “High (+)” fiscal strength assessment reflects the country’s favorable debt metrics compared to the median of Ba-rated countries.Paraguay’s government debt-to-GDP ratio is below the Ba median of 46%. Paraguay’s debt affordability, as measured by the ratioof interest payments to revenues, is high, but has declined over the past five years as interest payments to revenues will reach anestimated 4.7% of revenue in 2018, up from 1.2% in 2012. Paraguay’s debt is expected to remain below 25% of GDP over the next fiveyears. Other sovereigns with a similar score for fiscal strength include Malta (A3 positive) and Panama (Ba2 positive).

Paraguay H+ Median Austria Malta PanamaSolomon

IslandsAzerbaijan France

Ba1/STA Aa1/STA A3/POS Baa2/POS B3/STA Ba2/STA Aa2/POS

Final score H+ H+ H+ H+ H+ H H

Indicative score H+ H+ VH- VH- H+ H- VH

Gen. gov. debt/GDP 15.5 38.2 78.3 50.8 38.2 8.7 53.9 97.0

Gen. gov. debt/revenue 112.2 125.5 162.1 125.5 189.8 21.0 157.8 180.0

Gen. gov. interest payments/GDP 0.6 1.7 1.8 1.9 1.7 0.1 0.6 1.8

Gen. gov. int. payments/revenue 4.1 4.1 3.7 4.6 8.7 0.3 1.8 3.3

Peer comparison table factor 3: Fiscal strength

Fiscal performance stronger than peers

The fiscal deficit reached 1.1% of GDP in 2017 (using newly revised GDP), in line with the deficit target for the year primarily due tostable salary expenditures and robust revenue performance. Paraguay’s fiscal position has consistently outperformed the medians forboth Ba- and Baa-rated peers over the past decade (see Exhibit 10). The government fiscal deficit target for 2018 is set at 1.5% of GDP(under the 1994 base) in line with the Fiscal Responsibility Law (FRL) and we expect the deficit to remain around 1.5% (under the 1994base) through 2019. However, the government aims to increase capital spending over the next years, with the objective of reaching $1billion in 2018. The government aims to finance higher infrastructure spending by containing current expenditure, in line with the FRL,and improving tax collection through enhanced anti-evasion and labor formalization measures.


https://www.moodys.com/credit-ratings/Malta-Government-of-credit-rating-600012947

https://www.moodys.com/credit-ratings/Panama-Government-of-credit-rating-591640


Paraguay’s tax revenue collection has improved since 2014 after the passage of a tax reform package and improved tax collectionefforts. The tax reform package included gradual implementation of a personal income tax (IRP); a transformation of the agriculturalincome tax (IRAGRO) from a progressive rate to a simple rate of 10% for all producers; and introduction of a new 5% agriculturalsector value-added tax (VAT). In 2017, tax revenue increased by 11.6% year-over-year from 7.7% the year before, but the increasein non-tax revenue (transfers and royalties from Itaipú) slowed to 3.9% from 5.4% the previous year. At 13.8% of GDP in 2017 (seeExhibit 11), government revenue remains below the Ba median of 28.7%. The tax reforms added about 1% of GDP to total revenue in2014, and contributed to stable government revenue after a drop in import duties in 2015-16. Still, there is room to increase revenuecollection through economic formalization to bring it in line with peers.

Exhibit 10

Paraguay’s fiscal position outperforms Ba- and Baa-rated peers% of GDP

Exhibit 11

Revenue sustained at higher levels due to tax increases andimproved enforcement% of GDP

-5

-4

-3

-2

-1

0

1

2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F

Paraguay Ba median Baa median


8.3 8.8 9.3 9.4 8.99.7 9.5 9.4 9.7

4.23.7

4.14.6

4.0

4.0 4.4 4.3 4.1

12.5 12.6

13.414.0

12.9

13.7 13.9 13.8 13.8

0

4

8

12

16

2009 2010 2011 2012 2013 2014 2015 2016 2017

Tax revenue Non-tax revenue Total revenue


Compliance with the Fiscal Responsibility Law is improving, but tension with lawmakers over its implementation persists

The government passed the Fiscal Responsibility Law (FRL) in 2013 and its implementation started with the 2015 Budget Law (see Box1 for more detail on the FRL). According to the FRL, the central government deficit should not exceed 1.5% of GDP except in yearsof crisis, and current expenditure growth should be capped at 4% plus inflation. The FRL also restricts salary increases and electionyear-related spending, and aims to curtail Congress’s ability to increase expenditures, while simultaneously increasing the line itemfor “other revenue” without actually identifying the source of that revenue. Successive governments in Paraguay have had a trackrecord of conservative fiscal management. The passage of the FRL entrenched fiscal prudence and should create room to increasecapital expenditures over time. Adherence to the FRL, which sets limits on current spending, will open financial space to increase publicinvestment, more so as the government steps up its efforts to increase revenue collection. However, political confrontation betweenthe government and Congress emerged during the budget approval process in both 2017 and 2018 over disagreements about wageincreases and borrowing authorization to finance investment spending, leading the President to veto the 2017 budget and partially vetothe 2018 budget. Though Congress overrode the president’s partial veto as it pertained to cuts to healthcare and education spending,the political wrangling over the budget illustrates how the budgetary approval process may jeopardize consistent compliance with theFRL, particularly when it comes to enhancing capital spending and containing current expenditure.



Box 1: Fiscal Responsibility Law

In late October 2013, Congress approved Law 5098, the Fiscal Responsibility Law (FRL). The law includes the following stipulations:

» The central government’s fiscal deficit should not to exceed 1.5% of GDP beginning in 2015, or 1% of GDP in the medium term(i.e., two years from now). There is an exception to this rule to account for any economic shocks or crisis, but the deficit maynot exceed 3% of GDP even during those exceptions.

» The annual increase in public sector current primary spending cannot exceed the inflation rate plus 4%.

» Salaries will not be raised except when there is an increase in the minimum wage. The minimum wage can be increased whenthe inflation rate exceeds 10% year-over-year. When there is an increase is salaries, the maximum raise should be equivalent tothe increase in the minimum wage and be incorporated into the budget for the following year.

» Congress may no longer adjust revenue projections in the budget that are submitted by the Executive branch.

» During years when there are general elections, the central government's current primary spending from January to July may notexceed 60% of the budget for that year.

» The government will create a multi-year (three-year) budget as a reference to determine the adequate provisioning of revenueand expenditures over the medium term.

The law is aimed at strengthening fiscal institutions, and containing the increase in current spending so that the government can enhance itscapital expenditure.

As mentioned earlier, the government complied with the FRL last year by reaching a fiscal deficit of 1.5% of GDP (1994 base), andfor 2018, we expect a similar result. Even though capital expenditures continued to increase in 2017, reaching 2.4% of GDP, currentexpenditures remained contained. More specifically, as a percentage of GDP, personal services declined to 6.2% in 2017 from 6.4% in2016 while social benefits and discretionary spending were relatively flat at 2.1% and 2.6%, respectively (see Exhibit 12). We expect thisspending pattern – of contained current spending and more infrastructure spending – to continue in 2018.

In our view, enhancing investment spending, while maintaining overall low deficits and government debt is a credit positivedevelopment. Striking an effective balance between growth-enhancing investment, financed through external borrowing, whilemaintaining a low debt burden is key to preserving Paraguay's fiscal strength, which anchors the sovereign credit profile.

The government has decided to shelf FRL reform for the time being, instead choosing to focus on enhancing the current framework.Specifically, the government is working on improving debt management in an effort to add flexibility to liability managementoperations. They are also adopting the OECD standard for revenue administration and imposing fines and increased penalties for taxevasion in an effort to improve overall revenue intake.



Exhibit 12

Containment of current expenditures creates fiscal space for public investment% of GDP

11.612.7

15.214.1

14.615.2 14.8 14.9

1.81.7

2.01.8 1.8

2.02.2 2.4

0

4

8

12

16

20

2010 2011 2012 2013 2014 2015 2016 2017E

Personal services Goods and services Interest Social benefits Other Capital Expenditure Total Expenditure (Incl. CAPEX)

Note: Our estimates for the newly revised GDP are utilized from 2015 and onSource: Banco Central del Paraguay and Moody's Investors Service

Government debt metrics are favorable relative to peers

Paraguay’s key fiscal and government debt metrics compare favorably to the medians for Ba- and (investment grade) Baa-ratedcountries with Paraguay's debt-to-GDP of some 15% (using newly revised GDP), placed well below Ba and Baa medians of 46% and44%, respectively.

The government has accessed global capital markets multiple times since its first issuance in 2013, issuing four bonds totaling around$2.8 billion. The bonds shifted the composition of the government’s debt and reduced the share of multilateral and bilateral debt. One-third of Paraguay’s debt (34.7% of total debt) is still owed to multilateral development banks (MDBs) and bilateral creditors comparedto 53.6% in 2012 (see Exhibits 13 and 14). Paraguay's global bonds have long maturities (10 and 30 year maturities) and favorableinterest rates (4%-6% yields). Due to the still high portion of financing from MDBs, debt affordability is very high. Interest paymentsamounted to 4.1% of government revenue in 2017, up from 2.1% in 2014, but will remain well below the 8.3% median for Ba-ratedcountries over the next two to three years.

Paraguay has a relatively high share of foreign currency government debt (80% of total debt), which is a source of externalvulnerability. However, there are important mitigating factors, including a large portion of multilateral and bilateral loans with longmaturities, and a steady stream of foreign exchange revenue from electricity exports to Brazil and Argentina, generated by the Itaipúand Yacyretá dams, which creates a natural hedge on the sovereign's balance sheet.

Exhibit 13

Paraguay's debt level is favorable to its peersParaguay's debt-to-GDP vs. Ba peers

Exhibit 14

Increased presence in international capital marketsCentral government debt composition (% of year total)

5.7 6.1 8.2 9.8 11.9 12.23.8 3.6

3.83.4

3.2 3.0

34.335.9

38.0

41.3

46.0 45.6

0

10

20

30

40

50

2012 2013 2014 2015 2016 2017

External Debt (% of GDP) Internal Debt (% of GDP) Ba Median

Sources: Ministerio de Hacienda, Banco Central del Paraguay

US$ 1.7 bn

54%

US$ 0.2 bn

6%

US$ 0.9 bn

40%

US$ 1.9 bn35%

US$ 0.1 bn1%

US$ 2.4 bn43%

US$ 0.7 bn21%

Multilateral / Bilateral Debt

Bonds (China Trust)

Bonds (International)

Internal Debt

External Debt

Sources: Ministerio de Hacienda, Banco Central del Paraguay



Susceptibility to event risk: Moderate (-)

Scale VL- VL VL+ L- L L+ M- M M+ H- H H+ VH- VH VH+

+ Final -


Median of countries with Ba1 ratingScore for ParaguayParaguay Low (+)

Susceptibility to event risk evaluates a country’s vulnerability to the risk that sudden events may severely strain public finances, thus increasing the

country’s probability of default. Such risks include political, government liquidity, banking sector and external vulnerability risks. Susceptibility of event

risk is a constraint which can only lower the preliminary rating range as given by combining the first three factors.



DEBT BURDENPOLITICAL RISK

GOVERNMENT LIQUIDITY RISK BANKING SECTOR RISK EXTERNAL VULNERABILITY RISK

Political riskGross borrowing

requirements/GDPNon-resident share

of gen. gov. debt (%)Market-implied rating

Average baselinecredit assessment

(BCA)Total domestic bank

assets/GDPBanking system

loan-to-deposit ratio

(Current accountbalance + FDIinflows)/GDP

External vulnerabilityindicator (EVI)

Net internationalinvestment

position/GDP

VERY HIGH

HIGH

MODERATE

LOW

VERY LOW

The score for susceptibility to event risk is set at “Low (+)” and reflects “Low” political risk, “Very Low (+)” government liquidity risk,“Low (+)” banking sector risk and “Low (+)” external vulnerability risk. Other sovereigns with a similar score for susceptibility to eventrisk include Costa Rica (Ba2 negative) and Peru (A3 stable).

Political risk: Low

Paraguay Belize BotswanaDominican

RepublicIndia Montenegro Senegal

Ba1/STA B3/STA A2/STA Ba3/STA Baa2/STA B1/STA Ba3/STA

Final score L L L L L L L

Geopolitical risk VL -- VL VL VL L VL VL

Domestic political risk L -- L L L L L L

Peer comparison table factor 4a: Political risk

Paraguay’s political risk is low because we do not expect political events to materially affect credit metrics, lead to significant changesin economic policies, or impair the government’s willingness or ability to service debt. However, political wrangling between theadministration and Congress over the approval of the 2017 and 2018 budgets and the legislative body's challenging the issuanceof international bonds are examples of political dynamics that could stall investment plans. Weaker-than-expected infrastructureinvestment and lower private investment could decelerate efforts to diversify the economy, which would affect the economy's growthprospects and its resilience to shocks.

On 22 April, former senator from the ruling Colorado Party, Mario Abdo Benitez, won a relatively narrow victory against his opponentfor the presidency, garnering 46% of the vote, just four percentage points more than his rival. Given the Colorado Party's dominancein local politics during and after the former Stroessner dictatorship - the party has held control of government in all but four of the last70 years - we expect Mr. Benitez's administration to deviate little from the party's historically business-friendly policy framework. TheBenitez administration will begin its five year term in August 2018.


https://www.moodys.com/credit-ratings/Costa-Rica-Government-of-credit-rating-600023791

https://www.moodys.com/credit-ratings/Peru-Government-of-credit-rating-601500


Government liquidity risk: Very Low (+)

Paraguay VL+ Median Bangladesh Belgium Brazil Guatemala India Mexico

Ba1/STA Ba3/STA Aa3/STA Ba2/STA Ba1/STA Baa2/STA A3/STA

Final score VL+ VL+ VL+ VL+ VL+ VL+ VL+

Indicative score VL+ VL VL+ VL+ L- VL+ VL-

Gross borrowing req./GDP 2.0 4.6 5.2 18.9 21.0 3.3 10.6 9.0

Gen. gov. ext. debt/gen. gov. debt 81.0 44.7 49.9 53.9 4.9 44.7 6.6 27.4

Market funding stress indicator Ba1 Baa3 -- Aaa Ba1 Ba2 Baa3 Aa2

Peer comparison table factor 4b: Government liquidity risk

Government liquidity risk is limited given historically low fiscal deficits and low borrowing requirements. Although the governmenthas a high external debt burden relative to total, much of is from multilateral lenders at concessional rates, limiting external risks. Thesovereign has improved its access to global international capital markets since its first external bond issuance in 2013.

Banking sector risk: Low (+)

Paraguay L+ Median Bahamas Bolivia France Ghana Malta Oman

Ba1/STA Baa3/NEG Ba3/STA Aa2/POS B3/STA A3/POS Baa3/NEG

Final score L+ L+ L+ L+ L+ L+ L+

Indicative score VL+ L+ M- L+ VL VL M-

Baseline credit assessment ba2 baa3 -- b1 baa3 b3 -- ba1

Total dom. bank assets/GDP 51.9 79.8 83.7 79.0 369.5 46.0 432.4 99.5

Loan-to-deposit ratio 72.9 91.8 95.4 -- 113.2 65.8 50.4 110.3

Peer comparison table factor 4c: Banking sector risk

Banking sector risk is set at “Low (+)” above the indicative score of “Very Low (+)” to reflect the high dollarization of the bankingsystem and its vulnerability to exchange rate shocks.

The Paraguayan banking sector comprises 16 commercial banks, one government-owned development bank, and numerous non-banking institutions (finance companies). Banks’ lending portfolios are concentrated in the country's large agribusiness sector, whilenon-bank lenders dominate the market for consumer and small business loans. The four largest banks in the system, including twoforeign-owned lenders and two domestic firms, hold 55% of deposits and 67% of loans as of April 2018. The government-owneddevelopment bank has a small market share, with 8% of the system’s deposits.

Banks remain heavily exposed to the performance of the agribusiness sector, though growth in new industries should diminishconcentration risks. Loan growth in 2018 will likely be lower than historical averages at around 9%, following contraction in 2016 as thebanking system absorbed the effect of commodity price falls and exchange rate depreciation in 2015. Nevertheless, regulatory changescontinue to increase financial inclusion, which is positive for consumer lending, and legislation passed in recent years is helping to fosterincreased corporate lending through public-private partnerships. Household debt remains low.

We expect asset risk to remain stable, with collateral securing half of the loan portfolio. Although financial dollarization remainshigh, foreign currency lending is largely concentrated in corporate loans to exporters that generate dollar revenues, which helpsmitigate foreign currency mismatches. Paraguayan banks also maintain high liquidity ratios, report high loan-loss reserves and highcapitalization ratios.



External vulnerability risk: Low (+)

Paraguay L+ Median ChileDominican

RepublicGeorgia Jordan Malaysia Maldives

Ba1/STA Aa3/NEG Ba3/STA Ba2/STA B1/STA A3/STA B2/STA

Final score L+ M- M- M- M- M- M-

Indicative score L+ M- L+ M M L+ L+

(Curr. acc. bal. + FDI inflows)/GDP 0.2 -0.3 0.8 4.6 3.2 -6.2 5.9 -11.5

External vulnerability indicator (EVI) 174.6 83.4 241.1 129.8 168.6 100.1 157.9 75.7

Peer comparison table factor 4d: External vulnerability risk

Compared to both Ba and Baa peers, Paraguay has maintained a more favorable current account position over the past decade (seeExhibit 15). Last year, the current account ended in a deficit of 1.2% of GDP, after a surplus of 1.7% of GDP in 2016. The result wasprimarily due to a larger trade deficit, as exports of goods increased by 2.4% year-on-year while imports spiked by 17%, driven byongoing growth and investment. Foreign direct investment remained stable compared to 2016, while international reserves increasedby $960 million. However, income payments increased to $1.5 billion because of the higher interest burden related to debt placementsin international capital markets. For this year, we anticipate a current account deficit of 1.5% of GDP.

Export dependence on regional trade partners has been declining. The largest trade partners are MERCOSUR members – mostly Brazil,then Argentina, and Uruguay (Baa2 stable) – which together accounted for 49% of Paraguay’s exports in 2017, down from 56% in2009, followed by the EU (13%), Asia (11%), and Russia (Ba1 positive) (6%). Since 2011, exports to Asia and Russia have increasedsteadily, while exports to the EU have decreased.

While we estimate Paraguay's External Vulnerability Indicator (EVI), which relates total upcoming external debt payments to the levelof reserves, at 161% this year, vulnerability to external shocks is moderate given the country's low external debt burden, adequatereserve buffer, and flexible exchange rate. Gross international reserves have grown more than eight-fold over the past decade to $8.7billion in May 2018, about 24% of GDP, from $1.0 billion in January 2006 (see Exhibit 16).

We expect PPP law to support FDI

While Paraguay attracts significant foreign capital (gross inflows were around 7% of 2017 GDP), only a small share remains reinvestedin the country, with net foreign direct investment averaging around 1.1% of GDP over the past five years, below the Ba median of 2.7%.FDI growth in the recent past has been concentrated in the construction and maquila sectors, which benefit from Paraguay’s low laborand energy costs, and a competitive tax system – Paraguay guarantees equal treatment of foreign investors under law 117/91 andpermits full repatriation of capital and profits under law 60/90. Ongoing improvements in the business environment and developmentof the maquila industry have kept FDI flows relatively steady. Approval of the PPP law and the government strategy to attract foreigninvestors to support infrastructure investments should provide an additional boost to FDI flows. According to IMF projections, FDI flowsare expected to increase by around 50% by 2022.5

Exhibit 15

Stronger current account position compared to peersCurrentaccount balance, % of GDP

Exhibit 16

Reserve position has grown eight-fold over the past decadeGross international reserves, USD millions

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F

Paraguay Ba median Baa median


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Gold Dollar Other Currencies



https://www.moodys.com/credit-ratings/Uruguay-Government-of-credit-rating-15210

https://www.moodys.com/credit-ratings/Russia-Government-of-credit-rating-600018921


Rating rangeCombining the scores for individual factors provides an indicative rating range. While the information used to determine the grid mapping is mainly historical, our ratings incorporateexpectations around future metrics and risk developments that may differ from the ones implied by the rating range. Thus, the rating process is deliberative and not mechanical,meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside the indicativerating range. For more information please see our Sovereign Bond Rating Methodology.

Exhibit 17

Sovereign rating metrics: Paraguay

VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-

+ -


+ -


+ - VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-

+ -


+ -

VL- VL VL+ L- L L+ M- M M+ H- H H+ VH- VH VH+

+ -

Baa2 - Ba1

Ba1

Economic strength

How strong is the economic structure?

How robust are the institutions and how predictable are the policies?

Sub-factors: institutional framework and effectiveness,

policy credibility and effectiveness

How does the debt burden compare with the government's resource mobilization capacity?

Assigned rating:

Institutional strength

Fiscal strength

Susceptibility to event risk

What is the risk of a direct and sudden threat to debt repayment?

Economic resiliency

Government financial strength

Sub-factors: growth dynamics, scale of the economy, wealth

Sub-factors: debt burden, debt affordability

Sub-factors: political risk, government liquidity risk, banking sector risk, external vulnerability risk

Rating range:

Source: Moody's Investors Service




ComparativesThis section compares credit relevant information regarding Paraguay with other sovereigns that we rate. It focuses on a comparison with sovereigns within the same rating range andshows the relevant credit metrics and factor scores.

Paraguay's $40 billion economy is in line with Baa-rated median, but relatively smaller than its Ba1 and Baa3 peers. On the other hand, average annual real GDP growth is morerobust, averaging 5.0% in the ten years ended 2022, more than twice the Latin America and Caribbean median over the same period. It's institutional strength is a key creditweakness, however, with World Governance Indicators trailing all of its selected peers, particularly those of Morocco (Ba1 positive) and Romania (Baa3 stable). At the same time,it's fiscal strength is a clear credit strength, with a debt burden below the Ba1 median and all selected peers. Paraguay's low interest burden is only rivaled by that of Azerbaijan (Ba2stable) and Russia.

Exhibit 18

Paraguy key peers

YearParaguay Azerbaijan Russia Romania Guatemala Morocco Ba1 Median

Latin America and

Caribbean Median

Rating/Outlook Ba1/STA Ba2/STA Ba1/POS Baa3/STA Ba1/STA Ba1/POS Ba1 Ba3

Rating Range Baa2 - Ba1 Ba1 - Ba3 Baa2 - Ba1 Baa1 - Baa3 Ba1 - Ba3 Baa2 - Ba1 Baa2 - Ba1 Ba1 - Ba3

Factor 1 L+ L+ M+ M+ M M M L+

Nominal GDP (US$ bn) 2017 40.0 40.7 1577.5 211.8 75.6 109.5 75.6 49.1

GDP per capita (PPP, US$) 2017 9825.9 17492.4 27832.8 24508.4 8144.8 8485.5 11311.7 14485.3

Avg. real GDP (% change) 2013-2022 5.0 2.0 0.9 4.1 3.6 3.6 3.2 2.3

Volatility in real GDP growth (ppts) 2008-2017 5.5 4.3 4.0 4.3 1.1 1.3 2.7 2.4

Global Competitiveness index 2017 3.7 4.7 4.6 4.3 4.1 4.2 4.1 4.1

Factor 2 L L- L+ M+ L- M+ L+ L

Government Effectiveness, percentile [1] 2016 8.2 37.5 31.5 36.0 18.7 40.6 40.6 39.0

Rule of Law, percentile [1] 2016 18.0 21.0 12.7 57.8 8.2 42.8 41.3 33.8

Control of Corruption, percentile [1] 2016 19.5 12.0 13.5 54.1 20.3 49.6 43.6 38.3

Average inflation (% change) 2013-2022 3.9 6.0 6.1 2.2 3.9 1.6 3.9 3.2

Volatility in inflation (ppts) 2008-2017 2.5 6.5 3.9 3.1 2.7 1.0 2.5 2.5

Factor 3 H+ H VH M+ M+ M M M-

Gen. gov. debt/GDP 2017 15.5 53.9 17.4 35.0 24.0 65.2 43.4 45.1

Gen. gov. debt/revenue 2017 112.2 157.8 52.4 115.0 222.5 249.0 222.5 220.5

Gen. gov. interest payments/revenue 2017 4.1 1.8 2.7 4.4 13.3 9.9 9.0 10.5

Gen. gov. interest payments/GDP 2017 0.6 0.6 0.9 1.3 1.4 2.6 2.6 2.3

Gen. gov. financial balance/GDP 2017 -1.1 -1.5 -1.5 -2.9 -1.3 -3.6 -3.0 -2.8

Factor 4 L+ M H L+ M- M M M-

Current account balance/GDP 2017 -0.9 4.1 2.2 -3.4 1.5 -3.5 -0.9 -2.3

Gen. gov. external debt/gen. gov. debt 2017 81.0 43.3 20.4 46.0 44.7 22.2 34.7 56.0

External vulnerability indicator (EVI) 2019F 174.6 100.3 19.7 124.6 26.0 81.4 53.7 53.3

[1] Moody's calculations. Percentiles based on our rated universe.

Note: Figures expressed in terms of GDP are based on our estimates for 2017 GDP using the newly revised baseSource: Moody's Investors Service


https://www.moodys.com/credit-ratings/Morocco-Government-of-credit-rating-600020405

https://www.moodys.com/credit-ratings/Romania-Government-of-credit-rating-651437




DATA, CHARTS AND REFERENCESChart pack: ParaguayEconomic growth Investment and saving

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Real GDP volatility, t-9 to t (ppts) (RHS)

Real GDP (% change) (LHS)

Sources: Banco Central del Paraguay, Moody's Investors Service

0

5

10

15

20

25

30

35

40

45

50

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Gross investment/GDP Gross domestic saving/GDP


National income Population

0

2000

4000

6000

8000

10000

12000

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

GDP per capita (US$) GDP per capita (PPP basis, US$)

Sources: Haver Analytics, Moody's Investors Service

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Population (Mil.) (LHS) Population growth (% change) (RHS)

Sources: Haver Analytics, Moody's Investors Service

Global Competitiveness IndexRank 112 out of 137 countries

Inflation and inflation volatility

0 20 40 60 80 100 120

Paraguay (Ba1/STA)

Guatemala (Ba1/STA)

Morocco (Ba1/POS)

Romania (Baa3/STA)

Russia (Ba1/POS)

Azerbaijan (Ba2/STA)

Source: World Economic Forum

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Inflation rate volatility, t-9 to t (ppts) (RHS)

Inflation rate (CPI, % change Dec/Dec) (LHS)




Institutional Framework and Effectiveness Debt burden

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Government Effectiveness[1] Rule of Law[1] Control of Corruption[1]

Notes: [1] Composite index with values from about -2.50 to 2.50: higher values suggestgreater maturity and responsiveness of government institutions.Source: Worldwide Governance Indicators

0

20

40

60

80

100

120

0

2

4

6

8

10

12

14

16

18

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Gen. gov. debt/GDP (%) (LHS)

Gen. gov. debt/gen. gov. revenue (%) (RHS)

Sources: Ministerio de Hacienda, Moody's Investors Service

Debt affordability Financial balance

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Gen. gov. interest payment/GDP (%) (LHS)

Gen. gov. interest payment/gen. gov. revenue (%) (RHS)


-2

-1

-1

0

1

1

2

2

3

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Gen. gov. financial balance/GDP (%)

Gen. gov. primary balance/GDP (%)


Government liquidity risk External vulnerability risk

0

2

4

6

8

10

12

14

16

18

0

10

20

30

40

50

60

70

80

90

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

Gen. gov. debt/GDP (%) (RHS)

Gen. gov. external debt/total gen. gov. debt (%) (LHS)

Source: Ministerio de Hacienda, Haver Analytics, Moody's Investors Service

0

50

100

150

200

250

300

0

20

40

60

80

100

120

140

160

180

200

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

F

20

19

F

External debt/CA receipts (%)(LHS)

External vulnerability indicator (%)(RHS)

Source: Haver Analytics, Moody's Investors Service



Rating history

Paraguay[1]

Foreign Currency Local Currency Outlook Long-term Short-term Long-term Short-term Date

Rating Raised Ba1 Ba1 Stable Baa3 -- Ba2 -- Mar-15

Rating Raised Ba2 Ba2 Positive -- -- Ba3 -- Feb-14

Rating Raised Ba3 Ba3 Stable Ba1 -- B1 -- Jan-13

Rating Raised B1 B1 Stable Ba3 -- B2 -- Dec-10

Review for Upgrade B3 B3 RUR+ -- -- -- -- Jun-10

Rating Raised B3 B3 Stable B2 -- B3 -- Apr-08

Review for Upgrade Caa1 Caa1 RUR+ -- -- -- -- Nov-07

Rating Raised -- -- -- B3 -- -- -- May-06

Rating Lowered Caa1 Caa1 Stable Caa1 -- Caa2 -- Apr-03

Rating Assigned B2 B1 Stable B2 NP B3 NP Jul-98

Bonds & Notes Bank Deposit

Government Bonds Foreign Currency Ceilings

Notes: [1] Table excludes rating affirmations. Please visit the issuer page for Paraguay for the full rating history.Source: Moody's Investors Service


https://www.moodys.com/credit-ratings/Paraguay-Government-of-credit-rating-600044126


Annual statistics

Exhibit 34

Paraguay2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018F 2019F

Economic structure and performance

Nominal GDP (US$ bil.) 24.6 22.3 27.2 33.7 33.3 38.6 40.3 36.7 36.4 40.0 43.0 46.6

Population (Mil.) 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2

GDP per capita (US$) 4,048 3,622 4,347 5,299 5,151 5,883 6,050 5,430 5,315 5,753 6,103 6,514

GDP per capita (PPP basis, US$) 6,594 6,281 7,078 7,423 7,353 8,393 8,815 9,041 9,387 9,826 -- --

Nominal GDP (% change, local currency) -- 3.5 16.2 9.6 4.2 13.2 7.8 6.2 8.2 8.8 8.1 8.0

Real GDP (% change) 6.4 -4.0 13.1 4.3 -1.2 14.0 4.7 3.0 4.0 4.3 4.4 4.0

Inflation (CPI, % change Dec/Dec) 7.4 1.9 7.2 4.9 4.0 3.8 4.2 3.1 3.9 4.5 3.7 4.0

Gross investment/GDP 12.4 9.8 11.9 12.7 11.1 11.6 12.5 12.5 13.5 21.1 21.1 21.1

Gross domestic saving/GDP 40.5 43.4 41.0 39.9 38.1 40.1 37.6 38.7 39.9 20.0 19.0 18.5

Nominal exports of G & S (% change, US$ basis) 27.8 -17.8 34.5 19.4 -6.9 16.9 -2.8 -17.3 -0.8 9.3 15.1 12.5

Nominal imports of G & S (% change, US$ basis) 41.8 -22.2 44.7 22.3 -5.1 8.4 2.0 -14.5 -4.2 19.3 16.9 11.6

Openness of the economy[1] 78.0 68.7 78.4 76.5 72.9 70.9 67.5 62.3 61.2 63.6 68.5 70.9

Government Effectiveness[2] -0.9 -0.9 -0.9 -0.8 -0.9 -0.9 -0.9 -0.9 -0.8 -- -- --

Government finance

Gen. gov. revenue/GDP[3] 11.9 12.5 12.6 13.4 14.0 12.9 13.7 13.9 13.8 13.8 13.9 14.0

Gen. gov. expenditures/GDP[3] 10.2 12.4 11.6 12.7 15.2 14.1 14.6 15.2 14.8 14.9 15.0 15.1

Gen. gov. financial balance/GDP[3] 1.7 0.1 1.0 0.7 -1.2 -1.3 -0.9 -1.3 -1.1 -1.1 -1.1 -1.1

Gen. gov. primary balance/GDP[3] 2.1 0.5 1.2 0.9 -1.1 -1.0 -0.6 -0.9 -0.5 -0.5 -0.4 -0.3

Gen. gov. debt (US$ bil.)[3] 2.2 2.4 2.5 2.3 3.2 3.8 4.8 4.8 5.5 6.2 6.8 7.5

Gen. gov. debt/GDP[3] 10.2 9.8 8.7 7.3 9.3 10.2 12.4 14.6 15.3 15.5 15.6 15.8

Gen. gov. debt/gen. gov. revenue[3] 85.8 78.1 69.4 54.6 66.0 79.1 90.5 105.2 111.5 112.2 112.2 113.2

Gen. gov. interest payments/gen. gov. revenue[3] 3.5 3.1 2.1 1.5 1.3 1.9 2.1 3.4 4.0 4.1 4.7 5.4

Gen. gov. FC & FC-indexed debt/gen. gov. debt[3] 83.7 80.1 80.5 83.2 59.7 62.9 68.6 74.6 79.1 81.0 79.6 79.0

Note: Nominal GDP is estimated using 2014 prices starting in 2015. Real GDP growth is estimated using 2014 prices starting in 2017Source: Moody's Investors Service



Exhibit 35

ParaguayExternal payments and debt

Nominal exchange rate (local currency per US$, Dec) 4945.0 4610.0 4573.8 4439.9 4288.8 4524.0 4626.3 5806.9 5766.9 5590.5 5535.0 5562.7

Real eff. exchange rate (% change) 15.1 -8.5 1.9 11.8 -1.6 5.2 3.2 -1.8 -2.1 0.3 -- --

Current account balance (US$ bil.) 0.2 0.6 0.0 0.2 -0.3 0.7 -0.1 -0.3 0.4 -0.4 -0.6 -0.7

Current account balance/GDP 0.9 2.5 0.2 0.6 -0.8 1.7 -0.1 -0.9 1.2 -0.9 -1.5 -1.5

External debt (US$ bil.) 16.2 15.7 16.0 15.8 16.1 15.8 16.2 16.1 15.8 16.1 18.4 20.8

Public external debt/total external debt 17.1 18.0 18.2 17.6 18.1 21.4 26.7 28.6 34.3 38.6 39.1 39.6

Short-term external debt/total external debt 25.1 25.8 27.4 27.8 29.0 29.9 29.8 29.7 29.7 33.8 33.3 32.9

External debt/GDP 65.9 70.4 58.6 46.8 48.4 41.0 40.3 43.9 43.4 40.2 42.8 44.7

External debt/CA receipts[4] 133.8 188.7 140.5 105.8 125.5 99.4 107.1 116.3 120.7 115.7 125.5 135.2

Interest paid on external debt (US$ bil.) 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.6 0.4 0.4 0.5 0.4

Amortization paid on external debt (US$ bil.) 0.3 0.3 0.3 0.7 1.7 1.4 2.8 1.6 0.9 0.9 1.0 1.1

Net foreign direct investment/GDP 1.1 0.3 1.7 1.7 2.1 0.6 1.0 0.8 0.9 0.9 1.4 1.5

Net international investment position/GDP -51.9 -47.1 -36.8 -29.4 -33.3 -26.3 -27.1 -25.9 -23.3 -19.8 -- --

Official forex reserves (US$ bil.) 2.8 3.6 3.9 4.7 4.4 5.4 6.5 5.5 6.4 7.3 7.8 8.1

Net foreign assets of domestic banks (US$ bil.) 0.3 0.3 0.2 -0.1 -0.4 -0.8 -1.2 -1.0 -0.8 -0.8 -- --

Monetary, external vulnerability and liquidity indicators

M2 (% change Dec/Dec) 42.7 25.8 16.5 17.4 12.6 18.0 9.4 5.8 10.7 -- -- --

Monetary policy rate (% per annum, Dec 31)[5] -- -- -- 7.3 5.5 6.0 6.8 5.8 5.5 5.5 -- --

Domestic credit (% change Dec/Dec) 53.5 16.4 31.7 22.6 20.9 14.5 17.4 23.8 0.9 3.5 -- --

Domestic credit/GDP 17.2 19.3 21.9 24.5 28.4 28.7 31.3 36.4 34.0 32.3 -- --

M2/official forex reserves (X) 1.2 1.3 1.4 1.4 1.8 1.6 1.4 1.4 1.3 -- -- --

Total external debt/official forex reserves 585.4 432.9 405.7 332.1 369.8 295.3 250.7 293.8 247.6 219.2 236.9 256.1

Debt service ratio[6] 3.8 5.8 4.4 6.2 15.5 10.4 20.2 15.8 10.0 9.8 10.3 9.6

External vulnerability indicator (EVI)[7] 245.8 247.9 207.2 217.2 211.4 247.0 248.2 191.1 215.4 187.8 175.3 174.6

Liquidity ratio[8] 68.9 45.6 57.5 100.9 91.9 111.4 138.7 105.6 89.9 66.5 -- --

Total liabilities due BIS banks/total assets held in BIS banks 63.9 45.3 63.6 87.2 81.4 99.1 123.5 99.1 81.7 86.6 -- --

"Dollarization" ratio[9] 43.9 39.8 42.1 39.1 38.5 40.4 43.7 48.4 46.6 43.5 -- --

"Dollarization" vulnerability indicator[10] 57.4 56.7 65.2 62.1 74.1 76.0 78.1 89.6 82.1 74.8 -- --

[1] Sum of Exports and Imports of Goods and Services/GDP

[2] Composite index with values from about -2.50 to 2.50: higher values suggest greater maturity and responsiveness of government institutions

[3] Central Government

[4] Current Account Receipts

[5] Deposit rate

[6] (Interest + Current-Year Repayment of Principal)/Current Account Receipts

[7] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves

[8] Liabilities to BIS Banks Falling Due Within One Year/Total Assets Held in BIS Banks

[9] Total Foreign Currency Deposits in the Domestic Banking System/Total Deposits in the Domestic Banking System

[10] Total Foreign Currency Deposits in the Domestic Banking System/(Official Foreign Exchange Reserves + Foreign Assets of Domestic Banks)

Source: Moody's Investors Service



Moody’s related publications

» Rating Action: Moody's affirms Paraguay's Ba1 rating; maintains stable outlook, 21 June 2018

» Credit Opinion: Update following rating affirmation, outlook unchanged, 22 June 2018

» Country Statistics: Paraguay, Government of, 30 May 2018

» Outlook: Sovereigns – Latin America & Caribbean: 2018 outlook stable as growth momentum offsets rising debt and policyuncertainty, 9 January 2018

» Rating Methodology: Sovereign Bond Ratings, 22 December 2016

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. Allresearch may not be available to all clients.

Related websites and information sources

» Sovereign risk group web page

» Sovereign ratings list

» Central Bank of Paraguay

» Ministry of Finance

MOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for your convenience in locating related information and services.The websites reached through these Links or References have not necessarily been reviewed by MOODY’S, and are maintained by a third party over which MOODY’S exercises no control.Accordingly, MOODY’S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised onany third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services providedby any third party.

AuthorsSamar MaziadVice President - Senior Analyst

Gabriel AgostiniAssociate Analyst

Endnotes1 World Bank definition: Poverty headcount ratio at national poverty lines (% of population)

2 See “Paraguay's New Legislation Set to Bolster Country's Fiscal and Institutional Framework,” 6 March, 2014

3 According to the 2016 Methodology, the survey (11 indicators) are administered to more than 10,700 local experts, including lawyers, businessconsultants, accountants, freight forwarders, government officials and other professionals routinely administering or advising on legal and regulatoryrequirements.

4 See USTR's Press Release, June 2015

5 IMF (2017) Paraguay Article IV Consultation, Country report


https://www.moodys.com/research/Moodys-affirms-Paraguays-Ba1-rating-maintains-stable-outlook--PR_384806


https://www.moodys.com/research/Paraguay-Government-of--CTS_600044126




https://www.moodys.com/researchandratings/market-segment/sovereign-supranational/-/005005/005005/-/-1/0/-/0/-/-/en/global/rr

https://www.moodys.com/research/Sovereign-Supranational-Rating-List--PBC_186519

https://www.bcp.gov.py/

http://www.hacienda.gov.py/sseaf/index.php?c=157


https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/june/united-states-signs-memorandum

https://www.imf.org/~/media/Files/Publications/CR/2017/cr17233.ashx


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