Paraguay's growth masks structural flaws Fitch won't ignore

The guaraní became Latin America's best-performing currency this week, appreciating against the dollar on the back of a sustained inflow of foreign exchange from the export sector, while the Ministry of Economy and Finance disbursed $83 million to suppliers and placed 230.527 billion guaraníes in Treasury Bonds. The convergence of these three events —currency strength, state compliance on commercial obligations, and market appetite for local debt— precisely encapsulates the central paradox of the Paraguayan economy at this moment: short-term figures that look solid, underpinned by fundamentals that several analysts and the rating agency Fitch itself consider insufficient to make the leap the Santiago Peña administration most desires: investment grade.

Economic activity accumulated growth of 5.6% through the end of July according to the Banco Central del Paraguay, and the World Bank projects growth of 4.7% for 2026, above the regional average. The IMF points in the same direction. The agricultural sector, propelled by a solid soy harvest, continues to serve as the anchor of this dynamism. However, economist Manuel Ferreira warned that GDP shows signs of deceleration in the second quarter, with investment and services losing momentum. This nuance matters: Paraguay is growing, but the pace is moderating precisely when the government needs to show fiscal muscle to convince the rating agencies.

Fitch postponed the rating upgrade, and the explanation emerging from this week's public debate is multidimensional. Former Finance Minister Benigno López was blunt: rating agencies look not only at macroeconomic aggregates but at institutional quality. His successor as a technical voice in the debate, also former minister Carlos Borda, raised the stakes by explicitly citing debt, deficit and corruption as the three structural brakes. The Unión Industrial Paraguaya added its own list of pending reforms, while President Peña responded with a phrase that reveals both optimism and a certain strategic indifference: "The rating agencies take their time." The MEF, for its part, projects that the budget will not be back on track until 2028, after accumulated debts are paid off, a signal that will not have gone unnoticed in sovereign risk analysis offices. Wages, pensions and debt service absorb nearly 70% of public financing, a rigidity that compresses the space for investment and which CAF and the IDB, as they noted when announcing the Cavialpa forum, identified as the most powerful argument in favor of investment grade: achieving it would allow infrastructure financing through private savings, easing that pressure.

The picture gets more complicated on the energy front. Itaipú supplied 17.5% more energy to ANDE compared with the prior period, but remitted $23 million less to the State under Annex C, a gap that illustrates the fragility of fiscal revenues tied to the binational entities. Tariff negotiations with Brazil remain frozen: President Peña stated that there is no news and that he is waiting for the Brazilian election results to resume talks, a posture that leaves Paraguay hostage to its neighbor's political calendar. The equation becomes more complex when considering that the British firm Atome formally notified the termination of its contract with ANDE, yet keeps its international arbitration offensive against the Paraguayan State active, after Peña acknowledged that "the legal framework does not exist" for the tariff the company was demanding, without clarifying what prior commitments had been made. The Atome case is a costly reminder that incentives for green hydrogen investment informally promised find no legal footing, and that this vacuum carries a price tag.

Petropar concentrates several simultaneous lines of criticism this week. The state company holds 6.1 million hectares of concessions for oil exploration without having drilled a single well, and now announces the hiring of an international consultancy to "revive" the hydrocarbon search, while facing questions over the cost of its personnel outsourcing. Diesel registered its sixth consecutive price hike, reaching its historical peak, which pressures transportation and logistics costs across the entire production chain. The question circulating among sector analysts is how long Petropar can sustain the implicit subsidy scheme before the situation becomes fiscally unsustainable.

In the financial system, a secret report by the Banco Central del Paraguay on Ueno Bank revealed operational excesses and failures that triggered an internal political reaction, according to ABC Color. The episode underscores that the soundness of the banking system, generally cited as one of the country's strengths, is not immune to specific vulnerabilities that, if amplified, could complicate the message of institutional stability Paraguay needs to project to international markets.

Paraguay ranks 109th out of 139 countries in the global innovation index, with barely 21.1 points, and Asunción sits in 461st place in urban economic competitiveness, well below Mexico City (93) and Buenos Aires (179). These metrics, read alongside the diagnosis that the Paraguayan economy operates "with 21st-century tools but a 19th-century structure," as abc.com.py headlined, delimit the real horizon of potential growth. The MIC minister announced "deep reforms" for industry and the merger of his portfolio with Senatur, while the BCP promotes tax digitalization through DNIT. What is missing is the sequence: without investment grade, without a resolution of the Itaipú renegotiation and without concrete progress on institutional governance, the narrative of economic dynamism runs the risk of exhausting itself before structural reforms can underpin it.

Over the coming weeks, three variables merit close monitoring: the electoral outcome in Brazil and its impact on the restart of Itaipú tariff negotiations, the evolution of oil prices and their pass-through to local fuels via Petropar, and any formal signal from Fitch or Moody's on Paraguay's sovereign rating trajectory, in a context where the MEF has just confirmed that fiscal balance will be postponed at least until 2028.