Paraguay's fiscal deficit doubles legal limit as growth masks public finance deterioration

President Santiago Peña's administration acknowledged this week that the fiscal deficit will close 2025 at around 3.2% of GDP —more than double the 1.5% legal ceiling set by the Fiscal Responsibility Law— and that public debt has accumulated an increase of $1.498 billion in just six months, with interest payments rising between 12.9% and 16.8% year-on-year depending on the metric. The fact that the Ministry of Economy and Finance has publicly acknowledged these figures, and that Peña has convened a summit of former finance ministers to assess the situation, signals that the tension between Paraguay's macroeconomic dynamism and the deterioration of its public finances has reached an inflection point the government can no longer manage in silence.

The paradox is striking. The BCP reported GDP growth of 6.6% for 2025 under what some analysts have dubbed a "war economy" —an expansion the IMF also celebrated in projecting that Paraguay will grow at nearly twice the global average— and surveyed economic agents are lifting their optimism toward 5% growth for the full year. Itaipú increased its energy supply to ANDE by 19.4% between January and July, economic activity showed expansion across every sector according to the BCP, and social spending grew 5% to reach $3.741 billion through July. Yet beneath that gleaming surface, the Paraguayan state carries supplier arrears whose magnitude the MEF itself characterizes as a potentially structural problem, and the observed deficit comfortably doubles the fiscal anchor the country has relied on for two decades to sustain its investment-grade rating.

Economy Minister Óscar Lovera —a recent appointment that has already generated its own institutional turbulence, with a contested "salary recategorization" inside the ministry itself— was explicit: convergence to the 1.5% of GDP deficit will not occur before 2028. To finance the bridge to that horizon, the government plans to issue new debt via bonds, with the MEF having already opened a window to receive bids from creditors, and the stock of Treasury bonds in the local market reaching approximately $1.2 billion. The official promise is that total public debt will remain below 40% of GDP, a threshold the government uses as a sustainability signal for international markets, though former minister Dionisio Borda and other analysts warn that the accumulation of current debt and the growth of non-discretionary spending erode the credibility of that commitment unless current spending is simultaneously contained.

The reform of the public pension system (caja fiscal), which Chamber of Deputies president Raúl Alliana assures will be enacted with modifications this very week, is the most politically costly piece of the adjustment. The de-indexation of the minimum wage, whose formal submission to Congress could occur in September according to the Labor Minister, adds another front of social conflict in a year in which the executive has promised more than 500,000 new jobs by 2028 and is seeking to advance its Country Program before the OECD. The wage gap between public-sector executives and unskilled workers —3.83 times, according to ABC Color— complicates any narrative of shared austerity.

In the energy sector, the week brought a reshuffle at the top of ANDE and a 30-day deadline for the Energy Roundtable to establish clear rules for investors, while two commitments the agency has carried without resolution remain pending: the issuance of its own bonds and the sale of energy from the Acaray dam to Brazil. The state distributor's delinquency rate fell to 15.6% after reporting more than 25,000 clients to the credit bureau Informconf, and the entity signaled that a decision on a possible tariff adjustment is not imminent —a sign of political moderation in an inflationary context where private fuel brands have already accumulated their fourth price increase of the year, while Petropar has kept its prices unchanged.

On the trade and foreign investment front, Paraguay is making progress in diversifying its FDI, Paraguayan chia regained full access to the Japanese market after clearing sanitary controls, and Taiwan's foreign minister actively referenced efforts to increase imports of Paraguayan soybeans. The EU-Mercosur agreement keeps Paraguay in an active negotiating position, with Asunción demanding equity in the distribution of quotas. Spain's entertainment group CIRSA formalized its entry into the Paraguayan market, a sign that the perception of legal security persists among foreign investors. Remittances, which total $732 million annually, remain a quiet catalyst for domestic consumption and the real estate market.

The DNIT —the merger of the SET and Customs that stands as one of the most significant institutional reforms of the Peña era— signed a data-sharing agreement with the Banking Association to expedite tax controls and credit analysis, and starting in September will lower the interest rates applied to taxpayers who opt to pay taxes in installments, a measure aimed at improving voluntary collection without resorting to litigation. Director Óscar Orué maintains his pledge to raise the tax burden from 10% to 12% of GDP and collect an additional $400 million annually. The local stock market, for its part, aims to double its weight in the economy by 2030 through a regulatory modernization process still underway.

What investors will need to monitor in the coming weeks is whether Congress effectively approves the pension reform with a scope that delivers real fiscal savings, whether the bond issuance process to pay suppliers concludes on favorable market terms given the still-elevated global rate environment, and whether the Energy Roundtable produces a regulatory framework that unlocks private investment in the electricity sector before ANDE's tariff lag becomes another contingent liability of the state. Moody's recent reaffirmation of Paraguay's economic soundness provides some cushion, but that cushion narrows with each quarter the observed deficit exceeds the committed deficit.

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**Catedral and Farmacenter (privately held)** — The two Paraguayan pharmacy and perfumery chains announced their merger, creating the largest operator in the sector in the local market; the deal consolidates retail distribution in a segment that has shown sustained growth on the back of rising social spending and greater penetration of private health insurance. The transaction does not involve internationally listed assets, though its scale could attract interest from regional private equity funds active in Latin America's healthcare sector.

**CIRSA (private, controlled by Blackstone)** — The Spanish gaming and entertainment group, majority-owned by U.S. fund Blackstone, formalized its entry into the Paraguayan market with an investment whose exact amount was not disclosed, betting on the country's legal stability and low energy costs as competitive advantages relative to other markets in the region. The move fits within Blackstone's Latin American expansion strategy in leisure and entertainment assets.