Paraguay's fiscal crisis deepens as hidden debts dwarf official deficit targets.

As Santiago Peña marks three years in the presidency, Paraguay's economic conversation has coalesced around a single uncomfortable question: can an economy expanding at 6.6% annually — the second-fastest in the region according to official Banco Central del Paraguay data — simultaneously sustain a fiscal deterioration alarming enough to worry the government's own former ministers? The tension between those two realities defines the country's economic moment with a clarity that outstrips any optimistic reading of the recent cycle.

The Ministry of Economy and Finance, created three years ago as Peña's first institutional move and heir to the functions of the former Finance Ministry and the Technical Planning Secretariat, now faces a fiscal credibility crisis that clashes with the stability narrative the administration itself has projected to international bodies. Public debt grew by USD 1.498 billion in just six months, and what compounds the situation is the disclosure by outgoing minister César Barreto that USD 280 million in debt was not recorded on MEF's books. For a former deputy economy minister cited by ABC Color, this represents the "worst fiscal management since 2003," and casts doubt on the official target of returning to a deficit of 1.5% of GDP only by 2028. Economists consulted by the same outlet warn that "yellow lights are flashing" and that credibility with markets will be the determining factor in the months ahead.

The BCP, for its part, held its benchmark rate at 5.50% at its latest monetary policy meeting, amid what it described as "new external pressures." The decision to stand pat reflects a delicate balance: the guaraní has faced appreciation pressures the central bank has tried to contain through reserve purchases, but a premature rate cut could unanchor inflation expectations at a time when consultancy Dende is already projecting greater price pressure and a slowdown in growth toward 4% this year. The World Bank, meanwhile, highlights the country's post-pandemic recovery, while acknowledging the structural scars it left behind.

The rigidity of public spending sharply narrows the government's room to maneuver. Salaries, retirement benefits, pensions and debt service account for roughly 70% of the budget, according to figures compiled by ABC Color, turning any adjustment into a politically costly exercise. MEF has ruled out new taxes and instead announced a review of existing tax exemptions — a signal that, combined with the reduction from September in interest rates for installment tax payments implemented by the Dirección Nacional de Ingresos Tributarios, suggests a strategy of broadening the tax base without politically confronting the most organized sectors. Óscar Orué, head of DNIT — the agency born from the merger of SET and Customs, planned in the final days of the Abdo administration but conceived by Peña's team — has pledged to raise the tax burden from 10% to 12% of GDP, generating an additional USD 400 million in annual revenue.

The Health Ministry's debt to pharmaceutical suppliers, which the MEF head had to explain publicly and which triggered an announced payment of USD 80 million to drugmakers, illustrates the scale of the hidden liabilities that have accumulated. The local banking system has shown willingness to help structure a securitization plan for those supplier debts, which could provide short-term relief, though former ministers warn the problem is structural. Transfers for salaries and Caja Fiscal grew by up to 11.5% according to Última Hora, while the fiscal responsibility rules have been complied with in only three years since the law took effect.

Against this fiscal backdrop, the real economy shows a vitality international markets have already acknowledged. The soybean complex injected USD 3.513 billion into the economy through July alone, consolidating agriculture as the model's central pillar. Foreign direct investment is diversifying, with interest from Spain and other markets beyond the regional neighborhood. On the energy front, Atome's proposal to supply solar power to ANDE at a tiered tariff of up to USD 37 per megawatt-hour from a plant in Villeta stands out, while the Corpus Christi hydroelectric project — a binational dam with Argentina valued at USD 5 billion — advances in parallel, and the binational entities Itaipú and Yacyretá continue to be described as pillars of the internal "war economy."

Remittances from Spain, Argentina and the United States sustain inflows into the country and support household consumption, though Paraguayan household indebtedness is trending upward, a dynamic the government is trying to address through financial education initiatives. The underground economy, now estimated at between 40% and 47% of GDP — with flows of between USD 15 billion and USD 23.595 billion depending on the measure — remains the model's structural Achilles' heel: it represents both the escape valve of a low-tax economy and the main obstacle to sustaining the investment grade Paraguay holds with Moody's and Fitch.

What bears watching in the coming weeks is the drafting of the 2027 General Budget, for which MEF has announced a full review of state programs prioritizing the Health sector, and the composition of the new economic team following the resignation of deputy minister Iván Haas and his replacement by Felipe María González. The Paraguayan sovereign bond market — with close to USD 5.4 billion issued during the Peña era, and whose low returns are already raising concern among analysts — will be the most precise thermometer of whether fiscal credibility survives the transition.

**Petropar (state-owned, no international listing)** — The state oil company announced its entry into the aviation fuel market, with plans to install five plants across the country, but a multimillion-dollar tender tied to that expansion is raising doubts about the identity and solidity of its private partner, whose subsequent disclosure did not dispel the concerns raised by ABC Color. The transaction exposes the company to regulatory scrutiny in a sector where Petropar already faces questions for keeping pump prices elevated despite the drop in international crude.

**Atome Energy (LSE: ATOM)** — The British clean-energy specialist submitted a proposal to ANDE for a tiered tariff of up to USD 37 per megawatt-hour to supply solar power from a planned plant in Villeta, Paraguay. The initiative represents a concrete step in Atome's strategy to monetize green hydrogen and renewable energy projects in emerging South American markets.