Investment-grade Paraguay masks fiscal crisis with bond sales, not cuts

As Santiago Peña's administration marks its third year, Paraguay's economic conversation has coalesced around a contradiction that is hard to ignore: the country holds investment grade, grows at roughly 5%, and draws praise from the IMF, the World Bank, and rating agencies such as Fitch, which maintains its BB+ rating. Yet in parallel it is running a fiscal deficit of 2.6% of GDP — equivalent to roughly $1.7 billion — while the public wage bill has expanded between 7.7% and 9.9% and now absorbs 53% of tax revenues, and public debt has climbed by $1.498 billion in just six months. A former Deputy Minister of Economy did not hesitate to call it the "worst fiscal management since 2003," casting doubt on the official goal of returning to a 1.5% of GDP deficit by 2028.

The Ministry of Economy and Finance (MEF) has ruled out new taxes and has instead opened a bid reception period for a new bond issuance, seeking to finance its obligations through debt while promising to bring the fiscal accounts back in line only by 2028. Minister Óscar Lovera has confirmed that the MEF is weighing a "comprehensive review" of the Fiscal Responsibility Law, a signal that markets will inevitably read as a loosening of budget discipline rules. What the government frames as pragmatism in the face of an inherited spending cycle — including $280 million in debt that did not appear in MEF records, as former minister César Barreto pointed out — critics interpret as structural inertia, with salaries, pensions, benefits, and debt interest accounting for nearly 70% of budget rigidity, leaving scant room for productive investment. Interest payments on public debt have already grown 12.9% year-to-date.

Amid this tension, the government is pushing to accelerate deeper reforms that would redefine the institutional architecture of the state. The proposal to create a Ministry of Mines, Energy and Hydrocarbons, alongside an independent regulator for the electricity sector, represents one of the most significant moves of the three-year term. Law 7599/2025, whose interpretation is in dispute, nominally opens the door to competition in the electricity market, though analysts note that without a robust regulator the outcome could simply be to entrench ANDE's de facto monopoly in another form. The urgency is real: electricity consumption grew 18.2%, a figure that exposes the need to accelerate investment in transmission and generation infrastructure. Paraguay, which exports massive volumes of hydroelectric power via Itaipú and Yacyretá, faces the paradox of domestic demand that threatens to outstrip its installed distribution capacity.

The external agenda adds another pressure front. The Unión Gremial de Productores (UGP) has warned that new European Union regulations — particularly the deforestation regulation — could become de facto non-tariff barriers for Paraguayan exports, especially soy, whose complex injected $3.513 billion into the economy in the first seven months of the year. Exports of manufactured goods, by contrast, grew a striking 35% over the same period, a genuine sign of diversification that the government cites often. Taiwan's foreign ministry, the country's only formal diplomatic ally in the region, publicly discussed its efforts to increase imports of Paraguayan soy, a move with both commercial and geopolitical dimensions. Paraguay is also negotiating quotas within the EU-Mercosur agreement, demanding conditions of equality that reflect the vulnerability of a small economy inside the bloc.

On the financial front, Treasury bonds in the local market total $1.2 billion, and the stock market aims to double its weight in the economy by 2030 through a modernization agenda. Remittances from abroad — $732 million annually — sustain consumption and feed a real estate market that is expanding in the main cities. Optimism among economic agents remains intact: most estimate GDP growth close to 5% by year-end, with favorable projections for 2026 as well. The World Bank, for its part, approved a $300 million loan to strengthen the country's economic resilience.

The most striking alarms, however, came from the private financial sector. ABC Color reported that fintech Ueno recorded software investment triple the combined total of nine local banks, and that its stake in "other companies" surged 8,000% according to its financial statements. The same balance sheet shows $353 million booked in a trust, a figure equivalent to nearly 100% of its equity. These accounting anomalies, under scrutiny by the Banco Central del Paraguay, raise questions about oversight of the fintech sector in a market that is growing rapidly but whose regulatory framework is still maturing.

What remains to be seen in the coming weeks is whether the MEF can articulate a credible reform of the Fiscal Responsibility Law that does not erode the confidence of international markets, whether the electricity regulator project survives the legislative process with enough teeth to create real competition, and whether the BCP will take concrete measures regarding the reported irregularities in Ueno's balance sheet. The public pension reform, which according to Chamber of Deputies President Hugo Velázquez Alliana would be enacted with modifications this week, adds another variable that will determine the fiscal space available for future budgets.

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**Ueno (not publicly traded)** — The Paraguayan fintech recorded software investment three times greater than the combined total of nine local banks, and its stake in "other companies" surged 8,000% according to its financial statements reported by ABC Color. The balance sheet also reflects $353 million in a trust equivalent to nearly 100% of its equity, irregularities that the Banco Central del Paraguay is reviewing in the context of still-developing oversight of the fintech sector.