Paraguay’s Distant Hoof Beat Dangle
Paraguay followed Bolivia in a $500 million Latin America Southern Cone sovereign bond appearance after a dozen-year absence, despite recession as an outbreak of cattle disease and drought hit beef and soy exports, and upcoming presidential elections which will decide a definitive successor to the previously impeached head of state. A BB-minus rating was secured in advance of the road show throughout the Western Hemisphere and Europe with Chilean and Peruvian pension funds set to participate alongside New York and London houses. The central bank aims for further placements as agricultural recovery and monetary easing are due to generate double-digit GDP growth in 2013. A liquidity push with banks flush and money pouring in for hydroelectric dam payment could raise inflation to 5 percent while boosting the currency. Credit expansion has halved from the former 40 percent annual rate, and the fiscal surplus fell slightly in 2012 on the low tax ratio under 15 percent of GDP although government debt is also at that modest figure. The current account gap is minimal as terms of trade improvement and FDI inflows increased reserves, which authorities have used for two-way foreign exchange intervention. In the banking sector capital adequacy meets Basel standards and NPLs are just 2 percent, but a new law that has been challenged on constitutional grounds will move official deposits from competitors to a state-owned lender. After a public worker wage increase looser spending is expected around the April elections which could return a candidate from the long-dominant Colorado party. The IMF’s latest Article IV checkup cited possible currency and maturity mismatches and real estate overconcentration in the absence of regulatory data. The current pay-as-you-go defined benefit pension regime is a drain and lacks oversight. On monetary policy inflation-targeting and more currency flexibility should be prepared in tandem with deeper capital and interbank markets, the Fund recommended. It also urged greater personal income and farm taxation to boost collection levels.
In neighboring Brazil, which sends the power project royalties, both energy and taxes have loomed large as investor deterrents into the new year, with the IPO pipeline likewise stalled. After the President ordered electricity price reductions, low reservoir supplies raised the specter of shortage or another blackout as World Cup and Olympics advance teams continue to criticize infrastructure readiness. Power tariffs will not soon return to profitable ranges as potential bidders for transport concessions approach auctions cautiously. To meet its 3 percent of GDP primary surplus goal the authorities resorted to bookkeeping maneuvers including transfers from the sovereign wealth fund, and to reach it next time a back tax call has gone out to major state and private companies listed on the stock exchange like MMX and Petrobras. Their shares are up marginally through January as growth, inflation and currency worries continue to delay fresh listings and stampede BRIC sentiment.
