Paraguay's rapid growth masks fiscal crisis that threatens investment grade.

The 2027 budget, unveiled this week by the Ministry of Economy and Finance, has become the sharpest mirror of the central contradiction facing Santiago Peña's government three years into his term: an economy expanding with remarkable vigor —the Central Bank reported growth of 5.8% in the first quarter and 5.9% in the first half, positioning the country as the second-fastest-growing economy in the region— yet one accumulating fiscal imbalances that are beginning to erode the credibility of its own roadmap.

The 2027 General Budget bill contemplates roughly $2 billion in borrowing to finance the deficit, a figure that has raised alarms among economists and former officials. The document projects GDP growth of 4.2% and pegs the exchange rate at 6,458 guaraníes per dollar for the coming fiscal year, numbers some analysts already deem optimistic given that the guaraní has gone through a stretch of appreciation that, according to an analysis published by ABC Color, appears decoupled from macroeconomic fundamentals. By September, the fiscal deficit had already reached $436 million, and public debt interest payments grew 12.9% year-on-year — signals a former deputy economy minister labeled the "worst fiscal management since 2003," casting doubt on the 1.5% of GDP deficit target for 2028 that the Ministry still defends publicly.

The new Minister of Economy and Finance, Óscar Lovera —who took office after the departure of Carlos Fernández Valdovinos and the resignation of Deputy Minister Iván Haas, immediately replaced by a new appointee— has sought to calm markets by ruling out new taxes, while confirming a thorough review of existing tax exemptions. That stance places the government on politically uncomfortable terrain: the Unión Industrial Paraguaya, the Cámara de Anunciantes del Paraguay, and a chorus of private-sector economists reject any tax hike, arguing the core problem is not insufficient revenue but inefficient public spending. The tension is real. The MEF transferred $334 million to provincial and municipal governments through July and disbursed another $121 million to state suppliers and creditors, while the Ministry of Health has accumulated a debt of still-disputed origin that Lovera himself had to explain publicly. The Executive also authorized budget modifications worth 281 billion guaraníes, a move former Minister Ferreira described as financial "window dressing."

Compounding the picture is the sheer scale of the informal economy, which recent data put at 47.1% of GDP and roughly $23.595 billion in activity — a mass of economic movement over which tax authorities have no effective grip. The merger of the Undersecretariat of Taxation with the Directorate of Customs into the new Dirección Nacional de Ingresos Tributarios —the emblematic reform of the Peña era— promised to raise the tax burden from 10% to 12% of GDP and bring in an additional $400 million annually, but results so far have yet to justify the initial optimism, and the Central Bank has declined to comment publicly on the prudential criteria it applies to the financial system as a whole, feeding unease about the soundness of the regulatory framework.

On the external front, fundamentals remain favorable but fragile. The soy complex injected $3.513 billion into the economy through July, beef exports continued growing through October, and remittances —$732 million annually, mainly from Spain, Argentina, and the United States— are sustaining private consumption and driving the real estate market. The IMF highlighted the country's economic strength but flagged risks and called for a return to the limits of the Fiscal Responsibility Law, whose amendments the MEF is currently reviewing. Moody's kept the sovereign rating unchanged, a credibility anchor the government guards jealously, and the World Bank backed the country with $300 million aimed at bolstering economic resilience.

In the energy sector, the engineers' guild warned that the State alone will be unable to finance the new infrastructure required, at a moment when cryptocurrency operators and artificial-intelligence data centers are lobbying to extend their preferential electricity tariffs for another ten years. The Ministry of Public Works, for its part, admitted its debt is "manageable" despite the budgetary constraints the government has branded with the euphemism "war economy." The local stock market, with Treasury bonds now totaling $1.2 billion outstanding, has modernization plans aimed at doubling its weight in the economy by 2030, while CAF has announced the expansion of its private financing arm in the country.

What markets and investors will need to watch closely in the coming weeks is the budget negotiation in Congress, where the proposal from certain factions to raise the permitted deficit to 6% of GDP and to alter benchmark monetary indicators constitutes a structural warning signal. Minister Lovera's visit to international organizations in France, and the reception the CAP extended to him this week, suggest the government is simultaneously seeking external backing and domestic business consensus for an adjustment that, one way or another, will prove unavoidable if Paraguay wants to preserve the investment grade rating it has worked so hard to earn.