Paraguay’s new president, Santiago Peña, has vowed his country will “leapfrog” its historical growth rates through an ambitious economic agenda he says will earn the sovereign an investment grade credit rating during his tenure, aided by a new green investment push and underpinned by fresh international alliances – including with Gulf states and Singapore – that will also allow the South American nation access to “cheaper funding”.
In an exclusive interview with LatinFinance, Peña, who took office August 15, said: “The trajectory of growth has been steady, but my objective now is to leapfrog, not to maintain the same pace.”
Peña cited sustainable investment as a cornerstone of his economic program, noting that the country of 7 million — the first in Latin America to adopt the UN’s Sustainable Development Goals in domestic regulations — could issue its inaugural sustainable bond in international markets as soon as next year.
“We are working on a green agenda,” he said in a wide-ranging interview in New York. “I think that maybe next year we could tap into the sustainable market. Paraguay has all the conditions. We are a green economy,” Peña said, pointing out that the country is already “the largest producer of clean and renewable energy in the world” thanks to the 14 gigawatt Itaipu hydroelectric dam, a binational project on the border of Paraguay and Brazil.
Raising green funds would support his goal of making Asunción, the nation’s capital, “the greenest city in the world” by 2037, the quincentenary of its founding, through an ambitious program of reforestation that would connect green parks throughout the metropolitan area.
Peña, a former finance minister, said that tight international financial conditions wrought by an aggressive global campaign by central banks to stem inflation augured in favor of alternate sources of capital.
“I have been working with the Saudis, with the Emiratis in showing the potential of Latin America and Paraguay. And so that could mean that we could tap into different sources of financing, different to what we find here in in New York — as a complement, not as a replacement,” Peña said. “So, I think that means that we can tap financing on better conditions than what we find [in cross border capital markets].”
Peña nevertheless said he saw educating portfolio investors on Paraguay’s credit fundamentals as a top priority. “In 2013, when we worked on the first [sovereign] bond issuance, it was a major milestone. It forced markets to understand what Paraguay is about. Before that, they had no clue,” he said. “We need to cement the credentials for Paraguay. People need to understand Paraguay better.”
Paraguay last issued sovereign bonds in June, when it sold $500 million in 10-year notes.
Peña said the economy had been transformed during the past decade of sound macroeconomic management. He insisted that “Paraguay deserves to be investment grade, and that it has met all the conditions and has complied with everything.” He added: “I think this is going to happen. Markets are already pricing that it will happen.” Such an upgrade would be a “game changer,” he said.
Paraguay’s foreign debt is rated BB+ by Fitch, one notch below investment grade, while S&P and Moody’s rate it BB and Ba1, respectively.
The yield on Paraguay’s US dollar bond due in January 2033 was 6.34% on Monday, according to data from Refinitiv. That compares with the 6.39% yield on Mexico’s dollar notes maturing in April 2033. Fitch rates Mexico’s debt at BBB-, the lowest investment grade.
Paraguay’s GDP is expected to grow by 4.5% in 2023 before moderating slightly in 2024, according to the IMF.
Peña said that his election in April — in which the 44-year old former IMF economist trounced his opponent by an unprecedented margin, keeping his long-ruling Colorado Party in power for five more years with a majority in both chambers of congress — represented “the biggest win in the history of Paraguay” and granted him a strong mandate to push through bold reforms and to cut new deals regionally and internationally. “The political strength we have is something very powerful,” he said.
Itaipu Dam negotiations
Peña said high-level negotiations on the Itaipu project over a new energy-sharing agreement between Paraguay and Brazil, replacing a 50-year old pact that expired this year, are “advancing very fast.” He acknowledged that Paraguay would now seek a better deal that would also allow for the reinvestment of revenues in the country’s economic development, a feature lacking under the prior arrangement.
Paraguay would seek a “combination of what is the ideal rate on the price that will allow us to continue to produce energy at a very efficient and competitive price but at the same time that will generate a cash flow that will allow us to do investment.” Under current rules, each country is entitled to 50% of Itaipu’s energy.
Critics charge that the lapsed arrangement had locked Paraguay into an unfair deal with its larger neighbor, with the latter able to purchase energy at below-market rates while Paraguay uses on average just 20% of the dam’s hydropower output.
“The space for us to expand our consumption and bring in new industry that will rely on this is unique in the world,” Peña said, adding that his talks with Brazilian President Luis Inácio Lula da Silva focus on the dam “as a source of development on top of being a source of clean, renewable energy.”
His comments came in the wake of his inaugural address last week to world leaders at the UN General Assembly, where he launched a staunch defense of Taiwan’s bid to join the UN system.
In his interview with LatinFinance, the president doubled down on his country’s longstanding support for the Asian nation, which China claims as its own territory but which Peña said represents “a better fit” than China for his goal of industrializing Paraguay’s economy and diversifying away from beef and grain exports. Selling raw materials to China “is not the type of model of development that we want to pursue,” he said.
He insisted he did not see an opportunity cost from his country’s fervent backing of Taiwan and that Paraguay has already benefited from “a lot of Chinese investment.” However, he drew a contrast with other South American countries that have seen spikes in direct investment from Beijing in what he saw as fire sales of strategic assets.
“If you are telling me [China is] doing a huge investment in Bolivia or Argentina, yes, they are buying assets at a penny value and they are going there because [those countries] are in a very tough situation, which is not the case of Paraguay,” he said.
Paraguay is the last South American country to maintain diplomatic relations with Taiwan, and one of only 13 worldwide to do so. Panama, El Salvador and the Dominican Republic have all shifted allegiances to Beijing in recent years, with Honduras following suit earlier this year.
EU-Mercosur trade deal
Underscoring his willingness to upend convention, Peña said there would be no EU-Mercosur trade deal concluded under Paraguay’s presidency of the South American trade bloc, which begins December 7.
He said that if an agreement is not reached with Brussels under Mercosur’s current Brazilian leadership, then “I suggest we move on to other things.” He stressed, however, that “if there is someone that can close the deal, it is President Lula.”
The long-awaited trade accord, launched to much fanfare in 2019, has stumbled following additional EU environmental demands that leaders of Mercosur countries — Brazil, Argentina, Paraguay and Uruguay — have deemed unacceptable.
If the EU trade pact fails, “I will spend all my energy in trying to close the deals with the Emirates and Singapore, which are also in the pipeline for Mercosur,” Peña said.
Read the full interview with Paraguayan President Santiago Peña in the Q4 edition of LatinFinance Magazine, available in October.