Paraguay's Strong Currency Masks Fiscal Rigidity and Investment-Grade Gridlock

The guaraní became this week the best-performing currency in Latin America, a data point that, read alongside the rest of the Paraguayan economic landscape, reveals a structural tension that Santiago Peña's government has yet to resolve: the country is growing solidly, its currency is appreciating, yet the obstacles that separate it from investment grade remain intact and, according to Fitch Ratings, continue to be political as much as fiscal in nature.

The guaraní's appreciation, driven according to ABC Color by export flows, reflects the strength of the external sector and the continuity of a favorable agricultural harvest. The Banco Central del Paraguay reported an economic activity expansion of 5.6% as of the end of July, and the World Bank projects that Paraguay will grow 4.7% in 2026, remaining above the regional average. These are numbers that, in any other Latin American context, would have been enough to attract institutional capital flows and catalyze an upgrade in the sovereign rating. But Paraguay remains stuck at BB+, with positive outlook but without the definitive leap to investment grade that the government has been promising for years.

The reason is well known and was articulated this week with unusual candor by several actors simultaneously. The former Finance Minister, according to ABC Color, identified corruption, the fiscal deficit and institutional weakness as the main brakes. The Unión Industrial Paraguaya pointed out in similar terms which concrete reforms must be executed before the rating agencies take the step. Fitch, for its part, warned that the reform of the Caja Fiscal —the public sector pension system— was not enough, a signal that structural spending adjustment remains incomplete. President Peña's response was revealing in its informality: "The rating agencies take their time," he said, a phrase that underscores the distance between the government's narrative and the external technical assessment.

The fiscal picture that emerges from the parliamentary debate around the 2027 General Budget does little to dispel the doubts. Salaries, pensions and debt service already represent close to 70% of public financing, according to data cited by ABC Color, leaving a meager margin for productive investment. Public debt increased by USD 2.593 billion over the last year, according to the Ministry of Economy and Finance, and the MEF placed this week guaraníes 230.527 billion in Treasury Bonds to finance the current deficit. Specialists consulted by ABC Color warn that the 2027 PGN perpetuates the logic of rigid spending, with budget increases for universities and the health sector that are not accompanied by execution improvements —Health, for example, will receive more resources despite limited execution in 2026.

The energy front adds another layer of complexity. Itaipú supplied 17.5% more energy to ANDE in the period analyzed, but remitted USD 23 million less to the State through the Annex C mechanism, an operational paradox that illustrates the distortions of the bilateral tariff framework with Brazil. Regarding the renegotiation of Annex C —the centerpiece of the Itaipú agreement that expires in 2023 and whose revision will determine Paraguayan energy revenues for decades— President Peña stated that there is no news and that his eyes are on the Brazilian elections, confirming that Brasilia's political timing continues to dictate the pace of a negotiation crucial for Asunción's public finances. In parallel, experts warn that the electro-intensive model —companies attracted by cheap energy as an industrialization anchor— could generate a supply crisis by 2030 if Paraguay does not require self-generation as a condition of installation.

In this context, the decision by British firm Atome to notify the termination of its contract with ANDE, while keeping open an international arbitration process against the Paraguayan State, constitutes a warning signal for investors in energy infrastructure. The company, which had projected producing green hydrogen using Paraguayan energy, threatens according to ABC Color to "empty the country" in terms of credibility as a destination for high value-added investment. The episode is no small matter: it arrives at the moment when Paraguay is attempting to position itself as a clean manufacturing platform ahead of the EU-Mercosur agreement, whose ratification opens a window of opportunity that the Cámara Nacional de Comercio y Servicios del Paraguay warns must be seized with a concrete internal agenda of reforms, infrastructure and regulatory improvement.

On the customs dimension, revenue fell 9.1% year-to-date, a figure that curbs the dynamism of the Dirección Nacional de Ingresos Tributarios —the new entity that merged the SET and Aduanas— and calls into question Óscar Orué's projections of raising the tax burden from 10 to 12% of GDP. The fifth consecutive hike in fuel prices —driven by international pressure and the financial fragility of Petropar— adds inflationary pressure in a context where September CPI was just 0.1%, a figure that the BCP describes as moderate despite increases in fuels and meats.

What the coming months will put to the test is whether the government can translate macroeconomic strength —solid growth, an appreciated guaraní, controlled inflation— into institutional reforms that convince Fitch and the markets that Paraguay has crossed the qualitative threshold that separates dynamic emerging economies from those aspiring to fully integrate into global capital flows. The EU-Mercosur agreement, the Itaipú renegotiation and the 2027 budget debate are the three vectors that will determine whether that promise materializes or is deferred another year.