Nearshore Americas

Attracting FDI is Centerpiece of Paraguay’s Red Hot Economic Rebound

The Paraguayan economy has been on a tear of late, it’s GDP up about 13% in 2013. Much of that growth came from agriculture — especially strong beef and soybean exports — and the industry will continue to drive the economy. The government projects Paraguay will become one of the world’s five largest exporters of beef over the next few years, while further bolstering its status as a leading exporter of soybeans.

If anything, a recent decision by Monsanto to stop charging royalties on soybean technology to make the soybean, will make the soybean forecast come true a better sooner as farmers, more certain of their costs, eye investment in additional land.

Yet, even as the IMF praised Paraguay’s “excellent” agricultural yields, President Horacio Cartes has worked to diversify the economy. Shortly after taking office last August, he imposed a tax on soybeans, corn and wheat; the levy is expected to generate $250 million in revenue for the government by 2015. In turn, much of that money will go to education and infrastructure.

So, too, will 80% of the proceeds from a 2012 deal in which Paraguay agreed to sell hydroelectric energy from the Itaipu dam to Brazil, which brought $550 million to government coffers last year. However the biggest benefit, a more educated workforce and better roads, will start to pay dividends gradually.

Gushing Foreign Investment

Building on his country’s momentum, Cartes is aiming to draw in $2.5 billion annually in foreign investment. A new public-private partnership law that seeks to lure in foreign investment for infrastructure projects will help toward this goal. BNAmericas notes that “PPP” may bring the country’s infrastructure in line with that of Peru and Chile.

In January, in acknowledgement of the country’s growth trajectory, credit rating agency Fitch revised its outlook on Paraguay from “stable” to “positive.”The decision echoed Moody’s, which raised its outlook on Paraguay earlier in the year.

For sure, Paraguay remains a relative backwater of the global economy, and its credit rating—BB- (Fitch) or Ba3 (Moody’s)—is on par with the likes of Nigeria, so pensioners and other safety investors are unlikely to be aggressive buyers of Paraguayan bonds anytime soon.

Yet the improved credit outlook attests not just to a growth spurt, but also to a greater openness, not to mention political stability. In order to fully capitalize on the country’s positive vibes, the Inter-American Development Bank (IDB) recommended that Cartes work to improve the country’s image, noting a substantial gap between “image and reality.”

A violent Past

For sure, Paraguay has a poor image on the world stage, a product of two centuries of isolationist policy, belligerence, and the influence of extremist ideology. After independence it was “Supremo” Jose Rodriguez Francia, who, professing adherence to French revolutionary ideals, set about isolating Paraguay by cutting it off from trade and unleashing a police state to round up and kill his opponents. In the late nineteenth century it was Bernard Forster, brother-in-law to Friedrich Neitzsche, who tried to start an Aryan colony thirty miles east of the capital, Asuncion.

Nueva Germania failed and Forster poisoned himself, but the country remained an outpost for anti-Semites well into the twentieth century. It hosted the first Nazi Party outside of Germany, and a number of Third Reich henchmen, most notably Mengele, fled to Paraguay after 1945. In this vein, the Senate’s 2012 “soft coup” against President Fernando Lugo, an acolyte of Hugo Chavez, seemed hardly surprising.

Recognizing this, Cartes appears bent on proving that Paraguay’s politicians have gotten their act together of late. Where geography once ensured isolation, now it means centrality. Paraguay, he insists, will become a hub to the swift-growing market of middle-class consumers in South America.

From Nazis to Israelis  

To this end, the Cartes administration has been especially attentive to Israeli investment. Shortly after Cartes entered office, Paraguay re-opened its embassy in Israel. Then, three months ago, Israel expressed interest in Paraguay as a hub for growing Israeli tech investment in Latin America. The statement did not fall on deaf ears. Paraguayan Trade and Investment Minister Gustavo Leite told the Jerusalem Post that he hoped to “transform Israeli ingenuity to products produced in Paraguay.”

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Paraguay’s economy is expected to grow by 5% this year, less than half the rate of 2013, but still robust when compared to ailing neighbors like Argentina and Brazil. Going forward, Cartes’s ambition is to split the difference between the growth rates of the last two years. “We prefer to have a target of 7-8% growth, on a permanent basis,” he said in September.

In this endeavor, 2013 may have been an important inflection point. Before, Paraguay had a long history of volatile politics and moderate economic growth. Now the president has set the stage for moderate politics and, at least until it catches up to the other countries in the region, extreme growth.

Sean Goforth

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