Paraguay’s new president will seek strong economic growth in his term, a strategy that will include attracting more foreign investment and entering the sustainable financing market. With a strong track record, the country is in a good position to make a go of it.
Paraguay’s new president, Santiago Peña, has vowed to lead his country to “leapfrog” its historical growth rates through an ambitious economic agenda. This, 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.”
Peña, who took office August 15, says the country’s first incursion into sustainable finance is around the corner. “Paraguay has all the conditions,” he says. “We are a green economy.”
The interview was edited for length and clarity.
LatinFinance: You’ve received a strong mandate to govern following your election earlier this year. What are the main pillars of your economic agenda and how do they differ from your predecessor's? What should we expect that’s new from this administration?
Santiago Peña: Paraguay has been improving year after year, government to government, over the last 35 years. We see the Paraguay of the early ‘90s when democracy emerged in Paraguay after 35 years of dictatorship. Every administration has been doing better than the previous one. There has been a lot of economic and political improvement, consolidation of democratic institutions, improvement of social indicators. And we see over the last 20 years that extreme poverty has almost been eliminated, the poverty level has come down. The economy has grown. Life expectancy has improved, as has the level of education. So, there has been a steady process of improvement. GDP has grown by 4% every year over the last 30 years. There were only two or three episodes where there was no growth because of climate conditions, massive drought. Otherwise, the economy has only grown.
The trajectory of growth has been steady, but my objective now is to leapfrog, not to maintain the same pace. I think that we can capitalize on things that we have done over the last 10 years.
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. They had no clue that Paraguay has an inflation-targeting regime, that debt-to-GDP was the lowest, that growth was steady. They didn't know that Paraguay moved to the left of the Laffer Curve, reducing taxes, and that this was a boon for investment and the formalization of the economy compared to what has happened in other parts of Latin America where they keep adding new taxes, forcing people to the informal sector, which is not effective. The [tax] effective rate is coming down and down. So, everything that a lot of people say in Latin America – “If I come to government, I will reduce taxes because this is good for the private sector, for job creation. This is what we want.” Everybody says this, but this is what Paraguay has done already. But 10 years ago, nobody knew about it.
Ten years ago, we put a flag on the moon, and we said, “Here we are.” From then on, we started working. All the things we said we were going to do, we did over a period of time. We launched a fiscal responsibility law, we complied with the fiscal responsibility law. We launched a PPP [public-private partnership] law. We did the first PPP project. It was very successful. We modernized public administration. We launched a transparency law. We also formalized the management of the public sector, with some back and forth.
In 2018, we asked, “How can we advance this process?” I was a [presidential] candidate at the time. I resigned from the Ministry of Finance. We said, “We have done so many good things, now is the time to make the jump.” I lost the election. I went to the private sector. But I kept advocating about the importance of having a sound public policy. It’s not only about maintaining strong fundamentals, but also what we do with those strong fundamentals.
Then five years went by. The pandemic was very tough. But the pandemic was also proof that facing the toughest external shock that humankind has received in so many years. Latin America was the region of the world that was hit the hardest. Paraguay was the country that stood the firmest. It was a very good stress test for Paraguay. Without doing something very major, the economy was just holding the fort with the sound fundamentals that Paraguay has.
So, with me coming back now to public administration and winning the way I won – this is the largest [electoral margin] in the history of Paraguay – in history. In the last 35 years of democracy, no candidate won with the margin that I won. And before that, you had 35 years of dictatorship, so before that, elections were just not transparent at all. So, we can say that this is the biggest win in the history of Paraguay: a majority in both chambers, the Senate and the lower chamber. This has never happened in the history of the Colorado Party. And out of the 17 governors that are the regional managers that represent the government, 15 out of 17 were elected from the [ruling] party.
LF: And this political strength will clearly be central to realizing your vision and getting your agenda passed, right?
SP: The political strength that we have is something very powerful for the things that we are already doing. I sent to Congress a law to unify all tax agencies, customs and internal tax [administration]. Now they are working immediately: revenues are going up by 20% in nominal terms.
We modified the structure of the Ministry of Finance. We put more emphasis on the planning and design of economic policy. The Ministry of Finance was already very powerful. So, we gave more focus on the economic agenda of the government. We sent a law to Congress to eliminate consular taxes, something that Paraguay was still charging. If you were doing international trade, you had to go to the consular office to get a stamp – something from the past that made absolutely no sense. We sent this [bill] and it was approved [into law].
We're working on a green agenda. We brought together all the knowledge on carbon credit. It has already been approved by the Senate. All the projects that we are sending to Congress have been approved.
We have built a strong support base beyond our own party, which is, I think, very important: not only to rely on the majority, but also being able to bring together people from the minority [parties] on the projects that we think are good for the country.
I feel very optimistic on the domestic agenda, on the things that we need to do. We took care of macro stability. We built efficiency over macro stability. We improved the quality of public policy on health and education, the two pillars for the future that will allow us to have better human capital. When I was minister of finance, I launched the largest scholarship program in the history of Paraguay. By now we have sent 6,000 Paraguayans to do PhDs and master’s at the top 100 universities in the world.
LF: And on the international front?
SP: The international agenda will be the other focus. There is no other country that has the possibilities that Paraguay has today. When we think about the challenges that humankind has, the energy transition, how we move to a world where we use more sustainable sources of energy, Paraguay is the largest producer of clean and renewable energy in the world. We have the largest hydroelectric [project], together with Brazil. We use only 20% of our own electricity. So, the space for us to expand our consumption and bring in new industries that will rely on this is unique in the world.
We are a country that has the capability to continue to expand the production base for food, which is something that the world will need in the coming years. We are currently producing food to feed 100 million people, but we are doing it in a way that is sustainable for the environment. So, we only contribute 0.09% of all the carbon emissions in the world, feeding 100 million people. So, the carbon contribution of Paraguay is very, very small. But even with that small amount, we are reducing our own emissions. So, I think that this is something that will make Paraguay stand out.
“We are reducing our own emissions … that this is something that will make Paraguay stand out.”
We are developing legislation that will allow us to enter the official market for carbon credit bonds. I think that this is something also great for Paraguay, to have this seal of a green economy.
In the past, we thought that being landlocked was something bad. But now we think that Paraguay’s location is something like being in the middle of Fifth Avenue here in New York. We have a waterway that connects five countries, 3,000 kilometers. We have huge potential to grow. We are now mobilizing 20 million tons of cargo. So, when we think about the increase in production from Mato Grosso do Sul, of mineral production from Bolivia and Brazil, the only way for them to get to the sea is through the waterway.
Then we have the bio-oceanic highway, which is the shortest way to connect the Pacific to the Atlantic. We have already built half of it. We are now building the bridge that will connect with Porto Murtinho in Brazil and we are building the other part that will connect with Argentina to connect to the roads that go to the ports of Antofagasta in Chile. So, connectivity for Paraguay will be key.
LF: You mentioned the Itaipú dam, which is now celebrating its 50th anniversary. Critics have charged that Paraguay lost out over a bad deal with Brazil over these years. You've begun negotiating with Brazil on a new agreement for the next half century. How are these talks proceeding? What does a better deal look like for Paraguay? What is the administration aiming for?
SP: I met with President [Luiz Inácio Lula Da Silva] Lula three times before my inauguration. He came to my inauguration. I had a great meeting here [in New York] on the sidelines of the [United Nations General Assembly] UNGA. We have built a very strong alliance, and we share a common view. And the view is the following: 50 years ago, Paraguayans and Brazilians dreamt about building a dam because there was no technology, there was no experience of building such a big hydroelectric project in the world. So, Paraguayans and Brazilians dreamt of it. They dreamt of designing a treaty that was so perfect that it would last for decades. They designed a construction that after 50 years would continue to be the largest source of hydro-energy production in the world, larger than the Three Gorges Dam in China. I feel amazed. I really admire what they did 50 years ago.
[President] Lula and I are planning to do something that will be so great that in 50 years people will say: “What an amazing thing they did.” We both share that view. So, 50 years ago, the objective was to build, operate, and pay for the construction of a hydroelectric dam. The goals that were set then were achieved. Our objective today is that the project should be a source of development on top of being a source of clean, renewable energy. So, this is something that we are discussing: what will be the rate that will allow us to not only produce electricity, but also to produce development through investment in Brazil and Paraguay. For that, President Lula put his top cabinet members on the board of Itaipú, and I did the same with my chief of staff, the minister of foreign affairs and the minister of finance, the minister of energy and industry. We have put our most senior team to discuss these issues.
LF: What is Paraguay pushing for in terms of getting a better deal for your country from this bilateral agreement on Itaipú?
SP: The combination or 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.
LF: When will you reach a new deal?
SP: These talks are advancing very fast.
LF: How is the current El Niño weather cycle likely to affect output from Itaipú and from Paraguay's energy sales and exports this year and next?
SP: The cycle has changed. We already had three or four years of very low levels of rain. The drought was very severe last year. Now conditions are improving. Brazil and Paraguay had the most severe drought in 100 years, but that was not a problem for the production of electricity. That is one of the greatest things about Itaipú: how the basin was built. They flooded a big part of the territory of Paraguay. So, the idea of building this huge basin allows us to manage the course of the river, and this is amazing. So, in the most severe drought in 100 years, this was not a problem for Itaipú. Now conditions are improving there. Actually, the water is increasing, and electricity production is also increasing.
LF: On the topic of international relations, you were very clear in your address to the UNGA about your country's position vis-à-vis Taiwan. Paraguay is the only South American nation left with formal diplomatic ties with Taipei. Why is it so important to safeguard that relationship, given what some see as the opportunity cost – specifically a more buoyant commercial relationship with China?
SP: Paraguay has maintained relations with Taiwan for 66 years. We are good friends of Taiwan. We share common values with them, especially in democracy. Culturally, despite the differences between Asian societies and Western societies, we feel very aligned. But our focus and our incentive is not nostalgic. It is not just based on friendship. It’s about mutual interest. Taiwan has an interest in Paraguay. It’s not only diplomatic, but also Paraguay is a partner for food security. Paraguay is the number one exporter of beef to Taiwan. Also in pork, we are increasing [exports]. So, when we think about food security, Paraguay is a major producer of food.
“We need to move away from an economy that is concentrated on raw materials and move to an economy that is more heavily focused on [value-added] industries.”
On the side of Paraguay, if we think about our development model, currently the most dynamic sectors of the economy are energy production and agricultural production. We are good in both [these areas]. But these are not the sectors that are going to take us to increased GDP per capita. The way to get there is going to be through industrialization and technology and innovation. We need to move away from an economy that is concentrated on raw materials and move to an economy that is more heavily focused on [value-added] industries. And we think Taiwan is a better fit [than China] for what we need.
LF: And therefore, a better bet for Paraguay than China?
SP: Yes. Yes. Because if we think about the type of trade that we're going to do, and that we are currently doing. China is already our largest trading partner that feeds us with industrialized products and buys our raw materials. So, in losing our relations with Taiwan, we'd be doing more of what we’re already doing. That would mean [China] would flood us with industrialized goods and we’d just be selling raw materials. This is not the type of model of development that we want to pursue, right?
LF: But the international political reality nevertheless means that Paraguay is in effect isolated in this regard, right?
SP: Not really. Not really. Because if you think about it, what are the goods that [China] can buy? What can they buy from Brazil and Uruguay? Beef, right? I mean, we export to 30 markets. Relying on one single market for a commodity – because beef is a commodity, soybeans are a commodity – China buys via [state owned company] COFCO, which is the largest food company in the world. They are the largest buyer of grain, of soybeans in Paraguay. Why do they buy it? They buy it because the soybean in Paraguay is good, it’s high quality. So, they are not going to buy it or not buy it because of democratic [principles]. They don’t have interest in these relations. It’s just business.
LF: But it's not just about trade, it’s also about investment -- and the ability to court Chinese investment.
SP: We have a lot of Chinese investment in Paraguay. Now, if you're 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 very tough situations, which is not the case of Paraguay. So, when you think about China, Russia, Iran. They don't go to market economies. They go to countries that are suffering from severe economic conditions. That is not the case of Paraguay. So, if they want to invest in Paraguay, it’s not going to be because of pity, it’s going to be because they have an [economic] interest.
LF: So, you’re saying there's a clear logic to doubling down on this bet on Taiwan at this moment?
SP: Absolutely right – full speed.
LF: You've expressed misgivings about the EU-Mercosur trade agreement, especially given what you've described as unacceptable environmental demands by the EU. Is that still your position or has there been progress on this? What’s the likely outcome?
SP: I have all my trust and confidence that if there is someone that can close the deal it is President Lula. He’s now the President of Mercosur. If there is someone who can make the deal, it is him. So, I'm betting all my cards on him. He will finish his presidency on December 6, and I will take over from him as the new president of Mercosur. So, I hope that he can close it. But, if we don't close it by December 6, I suggest we move to other things after more than 25 years. I think that it is time to say, “We do it or we don't do it.” And this is a political decision.
LF: So, under Peña as president of Mercosur, if a deal hasn't been reached, there will be no EU-Mercosur trade deal.
SP: 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.
LF: Let me just ask you just about the international financial agenda. And you mentioned, of course, Paraguay planted the flag in 2013 with the issuance of the international bond. Paraguay was also the first South American country to adopt the guidelines of the United Nations Sustainable Development Goals for bond sales. When do you think would be the right time to pursue an international SDG or sustainable bond? When is the moment for that?
SP: One of the things that we are planning to do towards the end of the year, we're planning to make a couple of nice announcements at COP28 in Dubai. I think that maybe next year we could tap into the sustainable market. Paraguay has all the conditions. We are a green economy. Asunción, the capital of Paraguay, in 14 years’ time will be 500 years old. So, our idea is to make Asunción the greenest city in the world. We are planning to connect many parks in the middle of the city. So, this will be a major project and will call for a lot of work on reforestation.
LF: So, you would be looking to go to the international markets partly in support of that?
LF: That's a very ambitious plan.
SP: It is.
LF: So, what's the quantum we're talking about?
SP: We are [working] on the design now. We are working on that. We have an environment team that is working to identify, and we have a different set of parks and green land in Asunción. Now the idea is to connect all of them.
LF: And in terms of telling that story to international investors and drumming up interest in, say, a sustainable issuance from the sovereign, what more needs to be done to cement the credentials?
SP: First, we need to cement the credentials for Paraguay. People need to understand Paraguay better. We have been for a long time on the verge of becoming investment grade and I think that will happen.
SP: I don't know. I don't know. I think markets are already pricing Paraguay as investment grade.
LF: Would you say achieving an investment-grade credit rating is a top priority for the administration?
SP: I mean, this is like looking to become a member of the OECD. It’s a club that the members are invited to. It’s not that you pay a fee, and you enter. I think that Paraguay deserves to be investment grade and that it has met all the conditions and has complied with everything, but in the end, it is not our decision. It is the decision of the rating agencies. So, I think this is going to happen. Markets are already pricing that it will happen.
LF: Will it happen during your term?
SP: I think this is very well possible. I think it is going to be in the next two or three years.
I think that that will be a game changer. A lot of people will start raising their eyes towards Paraguay, looking more deeply, and that will be the right time where we can say, “OK, now we’ve consolidated on the traditional capital market, now we move into the green part of the market.”
LF: Can you give us a sense of how you see the international market right now at this moment in the global cycle and obviously with the global interest rate cycle in the expectation that we're in an era of ‘higher for longer,’ how does that impact the calculus for sovereigns in the in the marketplace and for issuers such as Paraguay?
SP: I think that the market is heavily influenced by the U.S. economy, which is not the reality for the rest of the world. There is a greater interest by the Saudis, the Emirates, to start looking at Latin America in a way that they haven't done for many, many years. They have been the largest investors in the US, but they are beginning now to look south of the US. They are trying to understand better how Latin America works and they think that [the region is] better aligned with their long-term objectives.
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 a different source of financing, different to what we find here in New York, as a complement, not as a replacement. So, I think that means that we can tap into financing at better conditions than what we find here.
LF: On the question of the interest rate cycle, central banks in Latin America were among the first to raise rates and now they're among the first to cut them, Paraguay included. How much more scope do you see for this easing policy and how do you see the balance of risks versus benefits of doing so at this stage?
SP: I think that there is a margin to reduce [interest rates]. I don’t want to get into the business of the central bank. We have a very independent central bank. But if I use my experience from the past, inflation expectations are well anchored. So, it makes a lot of sense that [the central bank] continues to lower the interest rate. And it will get to a point, the neutral rate monetary policy rate, which is 200 basis points above the inflation objective. We have an inflation objective of 4%, so [the neutral rate] is going to be 6%. I think now it’s a little bit over 7%, so they still have a margin and I'm sure they are very cautious on lowering gradually over the next couple of months. GDP will grow this year above 5%, it’s going to be the largest GDP growth in Latin America. The objective is to sustain this over the next five years.
“[Paraguay’s] GDP will grow this year above 5%, it’s going to be the largest GDP growth in Latin America. The objective is to sustain this over the next five years.”
If we are able to maintain the rate of investment, I think that will be key. This rate of investment will come from new sources of FDI coming mostly from Brazil and of course internal investment, from inside of Paraguay. There are a lot of large corporations that have not been investing in recent years because of the pandemic, the transition to a new government, the lack of security about the coordination of public policy. And now we're seeing a renewed enthusiasm to invest in Paraguay.LF