This is a thrilling time for Latin America, whose enormous economic potential has for too long remained precisely that: potential. But increasingly that state of affairs belongs to the past, and the region is starting to come into its own economically, shedding its reputation for political instability, unreliability and for being something of a graveyard for foreign investment.
One Latin American country that is comparatively unknown in the west, but which is achieving particularly high rates of economic growth, is Paraguay. A landlocked country dwarfed by its two giant neighbours Brazil to the north and Argentina to the south, Paraguay today has a market economy particularly characterised by, on the one hand, growing agriculture and cattle farming sectors, and on another, a large re-export activity of imported consumer goods to neighbouring countries. A majority of the country’s economic activity is carried out by thousands of small and very small enterprises involving just one or a few people.
Paraguay’s government has been playing a vital role in spearheading the nation’s new success, but there is inevitably a limit on what Paraguay can do internally. It also needs foreign partners and investors who have faith in the future of this small but potentially economically exciting nation which, in 2010, achieved economic growth of 15.3 percent: the highest in Latin America for that year.
An advocacy agenda
Two men who are passionate advocates of the new Paraguay are German Rojas, Vice-President of the Board of Sudameris Bank, and Sebastien Lahaie, Managing Director of the investment organisation Abbeyfield Group, which owns Sudameris Bank.
Sudameris Bank is one of the leading financial institutions in Paraguay and is reputed for flying the country’s flag high, and for promoting its many assets and advantages to potential investors. The bank, which offers clients a wide range of commercial and retail banking and insurance services and products, is only too aware of the challenges the country has faced in attracting investors. But it believes Paraguay’s time has now come to shine.
According to German Rojas, a former president of the country’s central bank, Paraguay holds a strategic demographic and geographical location, hemmed in by Argentina, Bolivia and Brazil. “It offers a plethora of micro businesses and is most certainly on the path to being a budding agricultural star.”
Rojas opines that Paraguay can be particularly proud of having catapulted itself into the position of fourth-largest soy producer globally. This is further triggered by the rising demand for commodities, which has helped Paraguay’s impressive growth over the past few years. As Rojas sees things, Paraguay was certainly heading towards a runaway success when it was temporarily paused in 2009 by the global recession. It is now back on track and 2012 GDP growth is expected to reach between five and six percent.
Sebastien Lahaie believes that Paraguay’s success is due partly to the institutional, regulatory and fiscal changes implemented by the various governments over the past eight years. “Monetary and fiscal stimulus measures have been employed swiftly, especially around the time of the financial crisis in 2009/2010, which placed the country back on an expansion mode. And it worked; Paraguay has grown at the fastest pace of all South American countries in 2010.”
There are a number of key factors that the two men see as significant: Paraguay’s abundance of good quality agricultural land, extensive renewable energy (Paraguay is the world’s largest exporter of renewable energy), the fact that much of the potential arable land is still not used, its growing organic agriculture (Paraguay is the world’s largest exporter of organic sugar), its cattle industry (Paraguay has the potential to become a top-eight world exporter of meat), youthful and look-ahead population, geographical location, lack of restrictions on the movement of capital, and, last but not least, one of the world’s largest reserves of fresh water.
“Paraguay uses only about 15 to 20 percent of the energy it produces,” says Rojas. “The remainder is sold abroad (lighting up southern Brazil as far as Rio de Janeiro). Paraguay has enormous potential for growth as half of the country is good land for agriculture. 4.5 million hectares are currently used by mechanised agriculture for cereals and you could increase that number by up to 86 percent more.”
How do the two men see Paraguay’s economy as compared to that of other South American nations and where does it stand internationally? According to Rojas, the key is to look at macro-numbers: Paraguay has no net debt with a net cash-to-GDP ratio of 11.3 percent, “which in this day and age is something out of the ordinary.”
“Meanwhile,” says Sebastien Lahaie, “Paraguay draws in investors with its attractive tax environment. This includes no restrictions on capital investments and capital movements, VAT of 10 percent, corporation tax at the same level, and generally a friendly approach to foreign investments.”
Lahaie believes that public private partnerships have a great deal of potential in Paraguay and would help get the country better known while attracting more foreign investment. “A large number of foreign companies – especially in areas such as airport management, roads, bridges, public transportation, energy – and multilateral organisations are keen to develop their investment activities in Paraguay. They are ready to provide financing, and I believe it is just a matter of time until we see the first projects.”
But what needs to be done to raise awareness of the country? Lahaie says that over the past three years, Abbeyfield Group has sponsored video conferences, articles in international finance magazines and is heavily involved with a variety of activities to promote Paraguay. It is also talking to representatives from the public sector about the need to raise the country’s profile.
Lahaie explains that other issues plaguing the development of foreign investments in Paraguay include the perceived idea of widespread corruption and potential lack of respect for contractual obligations. He says that although these issues do exist to an extent, Paraguay is a safe place to do business. He says: “It is an environment where you can do business, find the right local partners and flourish.”
But Lahaie warns: “As for any other investments in Latin America, you need to take time to familiarise yourself with the local business environment. Chambers of commerce and industry associations are good ports of call and it’s worth getting to know them.” At some levels, as we might expect, investors in Paraguay face the same challenges as other countries. The key issue, says Lahaie, is to find the right partners. “I’ve worked in a variety of Asian and Latin American countries and believe that Paraguay offers incredible potential for foreign investors. In its second quarter of 2011 study, the Fundacion Getulio Vargas in Brazil ranked Paraguay second on its “Economic Climate Index” behind Chile out of 11 South American countries analysed. Paraguay is also ranked the eighth-safest country in Latin America out of 23 countries reviewed (2010 Global Peace index). “I would say that the bad publicity and image that Paraguay carries does not reflect the changes experienced over the past 10 years. That image has not improved mainly because nobody really knows about Paraguay. There is no real promotion of the country abroad and few investors know about its true potential. The reality is very different. Despite the numerous challenges the country faces – poor infrastructure, education, and health services to name but a few – you’ll find a young, positive, vibrant country that is looking to the future.”
Abbeyfield Group currently holds a 98.5 percent stake in Sudameris Bank. “We started investing in Paraguay in 2004,” Lahaie says. “Since then we’ve constantly re-invested: first, in the bank, to support its growth, but also in the agro-industrial sector. In March 2011, we acquired the fourth-largest manufacturer of organic sugar in Paraguay.
Altogether we believe Paraguay has tremendous potential for investments in a variety of sectors.”
Lahaie adds: “For Sudameris Bank, 2012 is a year of consolidation. Having grown exponentially over the past two and a half years, we are analysing what we can do better to constantly improve the business and services to our clients. The bank’s total assets have grown 31 percent in 2011 alone. Overall we’re happy, though never complacent, about the way the bank has performed. The vigorous growth experienced over the past three years has been well controlled, with an overall Non-Performing-Loan ratio of one percent while our provision coverage ratio is over 3.5 percent of our total loan book.”
Lahaie adds: “Having completed our three-year 2009 strategic plan one year ahead of schedule, we are now working on our next plan, developing our vision for the bank for the next three years.”
Sebastien Lahaie characterises the current financial system in Paraguay as being a plain vanilla one, with a straightforward and sound financial system, strong support and supervision from central bank and regulators. With regards to the role of the Central Bank and the regulator and the impact they have on the industry, Rojas points out that Paraguay’s Central Bank only applies cautious regulations: “Paraguay is learning from other Latin American countries’ mistakes, and to a certain extent, from the mistakes made by western economies as well. Paraguay suffered economic hardship in the 1990s at least partly because of inadequate regulation of the financial sector.
“Today, both the regulator and the Central Bank are monitoring very closely the development of the financial sector and imposing drastic measure to ensure proper levels. This includes a strict core Tier 1 capital ratio of 11 percent by the end of June 2012, and 12 percent for 2013. Rojas believes that lessons have been learned and that the financial sector is now more professional and more accurate in devising regulatory frameworks and enforcing them. Good regulation serves everybody, and benefits us all.”
With regards to Sudameris’s current major developments, Lahaie emphasises the commitment the bank has to electronic banking, staff training and its continual dedication to improving the quality of its customer service.
And the bank’s main strategy? Rojas points to “pursuing our targeted growth strategy, gaining market share in what we perceive as key growth segments of the Paraguayan economy, such as the cattle industry for example, while developing a modern electronic platform and new products for our retail clients.”
Lahaie adds: “Paraguay grew more than 20 percent in the past two years. We need to be able to constantly adapt our distribution platforms, our IT solutions, our client service processes to these levels of growth to continue being the right financial partner for individuals and corporations operating in this environment.”
Lahaie also says: “We maintain constant contact with our key clients, organising conferences and meetings to explain changes in the regulatory framework or macro economic developments that may impact their businesses. One of our key strengths is to keep the relationships with our clients as close and personal as possible through regular contacts. It allows us to follow the developments of the local economy and provide the right solutions to our partners. Finally, the bank relies on a board of directors composed of seasoned bankers from multiple backgrounds, providing the depth of experience needed to guide the bank with its management team.”
A culture of economic growth
Overcoming the challenges of the various financial crises that hit Paraguay in the last years of the 90s, and having developed and implemented a new regulatory framwork and environment for the financial sector, together with a new map for the Central Bank, the country experienced an interesting economic turnaround supported by a growing demand for food in the world, especially from Asia.
In that context, Paraguay experienced an average growth rate since 2003 of around 4.3 percent year-on-year, according to official data. In addition to this indicator, it is important to consider that aproximately 40 percent of the economy remains informal. To that extent, the recovery of the past 10 years can be best explained through these numbers:
– Sustained growth in international reserves, from $980m in 2003 to more than $4.9bn at the end of 2011;
– In the beginning of 2003, Paraguay faced the risk of selective default on some of its international obligations. At the end of 2011, debt-to-GDP was around 9.5 percent, with regular payments on its debt, almost all of it with multilateral organisations (BID, Banco Mundial). Equally, the ratio of reserves-to-GDP has reached 20.8 percent at the end of that same year;
– A particularity of Paraguay is that all foreign currency entries originate from the current account: transfers from nationals abroad, royalties for energy sales to Brazil and Argentina, exports. Paraguay still doesn’t count with a developed and active capital market, which in turn limits the risk of volatility in the entry and exit of currency;
– Income per capita has increased from $950 to $3,649 over that same 2003-2011 period;
– Paraguay enjoys relatively stable inflation levels when compared to other countries in the region and has maintained the same currency, the Guarani, in its current form for more than 40 years;
– The country has not experienced a budget deficit since 2003.
The various successive governments have managed to maintain and defend these indicators and are currently trying to build efficient mechanisms to pass on these macro-economic successes to a larger portion of the citizens, considering that Paraguay still experiences important level of inegualities in wealth distribution.
These indicators of growth are underpinned mainly by the primary sector (grain, meat and related products), increased exports by maquila, and the generation of new non-traditional exports of goods and services. Its primary exports (soybeans, meat, sesame and derivatives, organic sugar) placed Paraguay among the world’s leading producers/exporters in these segments.
These features explain how Paraguay has passed with little difficulty the various crisis events of 2008/2009. First, the Lehman Brothers bankruptcy and the world financial crisis, and then a pretty serious drought.
The challenges ahead for Paraguay are multiple: the ability to consolidate its position as a supplier of food to the world with a sustainable development approach, the implementation of best practices in protecting the environment, better quality education, (which currently prevents a large portion of the population from accessing better living conditions), better management and use of its wealth (in particular electricity), through increased investment in infrastructure. However, Paraguay, through its young population and vast resources, has the potential to continue on the path of fast and sustainable development, thus making it a true fontier market for investors.
The current population of Paraguay is about 6.5 million. A 2010 estimate of the labour force put it at around 3,033,000. Around 26.5 percent of the workforce is engaged in agriculture, about 18.5 percent in industry, and around 55 percent in services.
Unfortunately, about 19 percent of the population live below the poverty line. In 2008, the World Bank defined the common international poverty line as a daily income of $1.25 at 2005 purchasing-power parity (PPP).
Overcoming the crisis
Paraguay’s economy expanded rapidly from 2003 to 2008, spurred on by a growing world demand for commodities combined with high prices and favourable weather to support the country’s commodity-based export expansion. The major agricultural commodities produced there are soybeans (Paraguay is the sixth-largest soybean producer in the world), cotton, meat products, sugar, tung and other industrial oilseeds, essential oils (mainly petitgrain) and sawn timber.
In 2008 Paraguay was, as mentioned above, hit by drought. This dramatically reduced agricultural exports and slowing the economy even before the onset of the global recession. The Paraguayan economy fell 3.8 percent in 2009, as lower world demand and lower commodity prices caused growth to contract. The government reacted by bringing in fiscal and monetary stimulus packages that are regarded as having been successful, and have again set Paraguay on the path of growth.
Paraguay’s waterways are also a major plus point for its economy today and are likely to play an even bigger role economically in the future.
The national capital, Asuncion, is located on the east bank of the Paraguay River opposite the mouth of its primary western tributary, the Pilcomayo River. Rivers play a crucially important role in the nation’s economic life, providing Paraguay with navigable access to the distant Atlantic Ocean, and with sites for electric power plants. In fact, the very name ‘Paraguay’ is said to derive from a Guarani Indian word meaning “river that gives birth to the sea.”
Paraguay’s import and export figures over the past few years tell their own story. In 2007, Paraguay’s exports (in US dollars) were $2.7bn and its imports $5.8bn, while 2008 saw a significant increase in Paraguay’s exports to $4.3bn, and its imports to $8.9bn. The figures went down to $3.1bn for exports in 2009, while imports were $6.8bn. But in 2010 exports had returned to $4.5bn, above their 2008 levels, with imports at $9.9bn. The growth continued, with exports in 2011 reaching $5.5bn and imports $11.5bn.
It’s true that, in the west, not many people know a great deal about Paraguay, or even where it’s located. But while Argentina ultimately exploded into the western consciousness in the early 1980s for all the wrong reasons when it invaded the islands it calls the Malvinas, Paraguay may before long be coming to the attention of the west for all the right reasons. To the surprise of many analysts, Paraguay has emerged as a surprise entrant on various investment lists for western companies looking to invest directly or indirectly into Latin America. This is a landscape not many would have predicted even a few short years ago.
Finally, there may soon be another arrow in Paraguay’s economic quiver: perhaps even the most precious arrow of all. Legend has it that oil and gas used to bubble up to the surface around the villages in the west of Paraguay.
Years later, the Paraguayans are still looking for that treasure trove. But the search may be coming to an end. Russia’s Gazprom has expressed an interest in carrying out exploration work in Paraguay and, if oil and gas in commercial quantities are found, forming a joint venture with the state-run energy company, Petropar. In years to come, Paraguay’s new venture into oil and gas might even give its soya, sugar and meat industries a run for their money.
Paraguay’s return to growth
According to REDIEX, a division of the Paraguayan government’s Ministry for Industry, which works with other Paraguayan government departments to promote investment and exports, the reasons Paraguay has grown are that it has:
– Abundant natural resources
– Plenty of environmentally friendly and renewable energy, much of it hydroelectric
– A young population open to change and willing to learn new skills
– A new level of macro-economic stability and a low tax burden
– Extensive advantages and incentives for foreign and domestic investment
– Experienced rapid recovery of investment and economic growth following the drought of 2008 and subsequent additional problems caused by the world recession
– A track record as a leading global exporter of soybeans and meat products, with high productivity and a high level of capacity for expansion
– An excellent geographical location in the centre of South America, with free access to the MERCOSUR economic union of Argentina, Brazil, Paraguay and Uruguay
– Excellent communications via waterways
– A new reputation as a comparatively peaceful and stable country