Guaraní Surges While Paraguay's Fiscal Weaknesses Deepen

The guaraní became Latin America's best-performing currency this week, lifted by a steady inflow of hard currency from the agricultural export sector, as the dollar once again gave ground in local markets following a week of declines. The timing is striking: it comes precisely as Fitch Ratings keeps Paraguay at BB+ with a positive outlook but once again defers the upgrade to investment grade, and as customs revenue registers a cumulative 9.1% drop year-to-date, braking the growth of DNIT collections. The convergence of these three signals lays bare the structural tension that defines Paraguay's economy right now: macroeconomic solidity on the surface, institutional and fiscal fragilities underneath.

Fitch's decision to maintain the positive outlook without taking the leap to investment grade has triggered an uncomfortable conversation in Asunción. Former central bank president Benigno López put it precisely: rating agencies do not evaluate only macroeconomic fundamentals, but the quality and reliability of institutions. Former Finance Minister Manuel Borda was even more direct, pointing to debt, deficit, and corruption as the three factors holding back the upgrade. President Santiago Peña responded with an almost unconcerned equanimity — "rating agencies take their time" — but that posture contrasts with the urgency conveyed by industrialists. The Unión Industrial Paraguaya (UIP) flagged specific pending reforms, and the Cámara Nacional de Comercio y Servicios del Paraguay (CNCSP) warned that the EU-Mercosur agreement, which continues to advance diplomatically, will only translate into real investment if Paraguay develops a domestic competitiveness agenda that today does not exist.

The fiscal picture carries its own disquieting logic. The 2027 General Budget, currently under parliamentary scrutiny, is accumulating warning signs: specialists point to a widening deficit, expanding public debt, and a reduction in productive investment in favor of current spending. MITIC plans to raise its budget by 153% for 2027, with the rationale for that figure not entirely clear. IPS has yet to approve the aguinaldo payment to retirees and pensioners. The MEF, by contrast, placed PYG 230.527 billion in Treasury Bonds this week, an operation that reflects a domestic market still willing to finance the State, albeit at rates the Central Bank has already begun to adjust upward through a recent hike in its monetary policy rate.

September inflation came in at just 0.1% according to the BCP, a strikingly low number given that the month registered price increases in fuels and meat. That inflationary benignity is consistent with the guaraní's appreciation, but it complicates the analysis of export competitiveness. Agricultural prices rose 13% in international terms, which benefits the sector's gross revenue, though production costs climbed in parallel, compressing margins. Soy remains the main engine, though the BCP has highlighted a more diversified expansion than in previous cycles. Economic activity accumulated 5.6% growth through the end of July, though the second quarter showed a deceleration relative to the pace set at the start of the year.

On the energy front, two developments of opposite signs have piled up. On one side, Paraguay and Brazil advanced talks on energy interconnection during a diplomatic visit, a topic that gains strategic relevance as President Peña monitors the Brazilian electoral process before reopening negotiations over the Itaipú tariff — where he declared there is "no news." On the other side, UK-based Atome notified termination of its contract with ANDE for a green hydrogen project, though it is keeping its international arbitration claim against the Paraguayan State active, adding a contingent liability to the sovereign balance sheet. In parallel, experts warned that Paraguay does not require self-generation from electro-intensive companies and that the country could face energy shortages by 2030 if that policy is not corrected.

Petropar concentrates two stories that mutually reinforce one another in negative fashion. The state-owned company will contract an international consultancy to relaunch oil exploration in the country, an exercise that has repeatedly failed in past decades. Simultaneously, it was revealed that it will allocate what has been described as a "millionaire" sum to personnel outsourcing, a decision that collides head-on with any narrative of fiscal austerity. DNIT, for its part, is making progress on tax digitalization — with a growing number of electronic invoicers — and is preparing a bill to eliminate the tax exemption on electric and hybrid vehicles, a move that will spark debate over coherence in green industrial policy.

The BCP confirmed it is preparing a report on Ueno Bank and other financial entities requested by Congress, in a context where the so-called "Rivarola report" is already circulating and the institution has publicly responded to parliamentary requests. The situation does not, for the moment, imply any sign of systemic alert, but it adds regulatory noise to a banking sector that last week participated in a meeting with President Peña and BCP authorities whose content participants disclosed only in general terms.

On the political-economic front, the Peña administration marks two years in office with an agenda of institutional reforms whose most visible hallmark is the creation of the Ministry of Economy and Finance — which absorbed the Ministry of Finance, the Technical Secretariat for Planning, and part of the public service — and the merger of the Tax Undersecretariat with Customs to create DNIT. The head of the new entity pledged to raise the tax burden from 10% to 12% of GDP and add some USD 400 million annually in revenue. The 9.1% drop in customs income suggests that goal is already facing headwinds from the outset. The president also announced the merger of the Ministry of Industry and Commerce with the National Tourism Secretariat, another reorganization whose actual impact remains to be seen.

In the coming weeks, the elements to watch are several and interconnected: the evolution of the Itaipú negotiation in light of the post-electoral scenario in Brazil, the 2027 budget debate in Congress — where the spending and debt profile will be the real thermometer of fiscal discipline — the guaraní's position in the face of a possible correction in soy prices, and any additional signal from Fitch or Moody's on Paraguay's credit trajectory. The dynamic growth narrative remains intact, but the conditions for it to translate into a ratings upgrade — and into quality foreign investment — require institutional advances that the political calendar is making increasingly difficult to postpone.