Growth masks fiscal time bomb as Paraguay wins investment grade seal

Moody's reaffirmation of Paraguay's investment grade rating this week comes at a moment when the country faces a contradiction that defines its current economic cycle: the economy is growing robustly, but public finances show cracks that growth alone cannot mend.

The Banco Central del Paraguay raised its GDP growth projection to 4.5% for this year, a figure that aligns with the International Monetary Fund's estimate, though the IMF trimmed its number slightly to 4.4% and flagged external risks. Private economists go further: some estimate the economy could exceed 5%, underpinned by dynamism in services, agriculture, and consumer credit. Economic activity had already grown 5.6% through May, driven by the soy complex — which generated USD 2.492 billion in exports through that month — and by broad-based expansion across non-agricultural sectors. The first quarter closed with 5.8% growth according to the BCP, providing the second half with a solid base, though uncertainty factors persist, including low river levels and volatility in commodity prices.

It is precisely against this backdrop of apparent macroeconomic strength that Moody's reaffirmed the country's investment grade rating with a stable outlook — a decision that the Ministry of Economy and Finance highlighted as recognition of fiscal management and the institutional framework. The reaffirmation has concrete implications: Paraguay is currently processing external credits worth more than USD 1.6 billion, and the government is seeking to place new debt via bond issuance in international markets, an operation for which Moody's seal is operationally decisive. The MEF has already opened the bid reception period for creditors and, in the week just ended, disbursed more than USD 27 million to state suppliers. Even so, public debt grew by USD 1.343 billion in just five months, and interest payments rose 12.9% year-on-year, meaning that keeping current on obligations consumes a growing share of available resources.

The tension between robust growth and fiscal revenues that are barely advancing is the theme defining debate among economists today. The MEF highlighted the 4.5% GDP growth but acknowledged that revenue collection is not keeping pace. The Caja Fiscal has accumulated a deficit of G. 1.31 trillion following pension reform, and analysts are warning of structural problems that no expansionary cycle will resolve without additional reforms. The quality of public spending — flagged as inefficient by several economists consulted this week — compounds the picture. The Unión Industrial Paraguaya (UIP), for its part, noted that President Peña's management report contained "certain omissions" relevant to the productive sector, among them a reference to a rail transport system that does not yet exist being cited as a government achievement.

The external front offers mixed signals. Spain, through its Secretary of Commerce, this week urged that the Mercosur-European Union agreement be translated into concrete opportunities for Paraguay, highlighting the potential to expand bilateral trade and investment flows. The visit coincides with progress in negotiations to ratify the pact, which would open European markets to Paraguayan beef and soy under preferential terms. In parallel, Paraguayan beef is advancing toward new markets: sanitary negotiations with Mexico and Turkey are underway, though no date has yet been set for formal export authorization. Remittance flows — USD 732 million annually, coming primarily from Spain, Argentina, and the United States — continue to serve as a relevant macroeconomic buffer, with a cumulative historical total of USD 11.907 billion since 2008 that has fueled both consumption and real estate development.

The devaluation of the Argentine peso, which has hit cross-border commerce in cities such as Alberdi, is a reminder that Paraguayan exchange rate stability carries a relative cost that can erode if the neighbor continues to depreciate its currency. Meanwhile, Petropar ruled out a reduction in fuel prices in July, and the biodiesel blending mandate that takes effect this Sunday drew resistance from both agricultural associations — the UGP voiced concern over the abrupt implementation — and the industrial sector, which unsuccessfully requested a postponement from the Ministry of Industry and Commerce.

In the local debt market, Treasury Bonds outstanding total G. 9.473 trillion, equivalent to 2.36% of GDP, with over 90% concentrated in the financial system and the Deposit Guarantee Fund. Securities in the local secondary market reach approximately USD 1.2 billion. The government is also pushing for approval of a package of seven economic laws, while the Entidad Binacional Yacyretá acknowledged budgetary limitations and proposed tapping external financing for coastal defense works — adding another item to the growing inventory of spending demands that the Paraguayan state will have to address in coming fiscal years.

What to watch in the coming weeks: whether the new bond issuance secures favorable conditions in international markets — and to what extent Moody's endorsement translates into competitive rates — whether reform of the Caja Fiscal advances along the lines announced by the Senate president, and whether the momentum in consumer credit, which several analysts flag as one of the main risks to domestic financial stability, begins to show signs of deceleration or, on the contrary, accelerates in the second half of the year.

**CIRSA (not listed on international exchanges; owned by Blackstone)** — The Spanish gaming and casino group CIRSA formalized its entry into the Paraguayan market with an investment of global scope, according to La Nación. The government reads the transaction as a signal of the strength of the country's legal framework and its macroeconomic stability.

**Petropar (state-owned enterprise, unlisted)** — Paraguay's state oil company ruled out a fuel price reduction for July, holding current tariffs despite the drop in international crude prices. The move implies an implicit consumer subsidy but also sustained revenue for state coffers amid fiscal pressure.