Paraguay will “probably” reach investment grade status this year following the recent sovereign bond sale, the country’s finance minister Santiago Peña told Global Markets in an interview. Last week, Paraguay took advantage of the supportive environment among emerging markets investors to raise $500m in sovereign bonds. The 10 year bonds were issued at 4.7%, which compares with an interest rate of 5% in last year’s $600m issue, with a spread of 229bp over US Treasuries. Last year’s spread was 313bp. Paraguay has raised $2.8bn since its 2013 debut in the international capital markets.
“The response we got last week proves that investors are looking very positively on Paraguay,” Peña said. “They meant: ‘I am not only willing to put money, but I am willing to put money at a price that is much higher to what a rating agency would tell me that is it worth’. When you see the interest rate that Paraguay is paying for this bond, investors mean: ‘Paraguay is an investment grade country’.
The small South American economy has been growing at a rate of about 4% for the past three years and is looking forward to achieving a similar performance this year, according to official and independent forecasts. It achieved this economic stability in the face of the recessions in neighbouring Brazil and Argentina.
It has been courting investors as it hosts the annual meetings of the Inter-American Development Bank this weekend. Yet, politics may spoil the show ahead of the 2018 presidential election. Supporters of president Horacio Cartes have started to manoeuvre in Congress to allow him to run for re-election next year. This has involved a controversial vote in the Senate this week to amend the constitution, which was condemned by some local business groups and left-wing groups.
“It is a shame. [Politicians] are not interested in resolving the problems in the country, but their personal and party issues,” said Adrian Vasquez, leader of the national peasant federation. “They are fighting to divvy up power, but not resolving the economic problems and citizen security that are the concerns of Paraguayans.”
Re-election debate
Such political volatility may fuel uncertainty among the investor community. “All this political confusion is the last hurdle before investment grade,” said Sébastien Lahaie, chief executive of the Abbeyfield group, an Irish investment fund that owns Sudameris, one of the leading banks in Paraguay.
“Paraguay is just one notch down investment grade [according to Moody’s rating]. But this will not happen this year nor in 2018,” he said.
Other agencies rate Paraguay two notches below investment grade, and the re-election debate may become an issue. “These things have an impact because it creates controversy and if it is not well managed, it could undermine confidence very quickly,” said Joydeep Mukherji, managing director at Standard & Poor’s sovereign ratings.
Government officials tend to minimise the current political turmoil. “It is an issue in the whole region. We are used to this type of volatility. Our ratings already reflect the political framework we have here,” said Carlos Fernandez, Paraguay’s central bank governor, in an interview with Global Markets.
“In spite of the political cycle, we will probably be investment grade this year or the other,” said Peña, who expects Moody’s to visit Paraguay during the second quarter of 2017.