Strong guaraní squeezes exporters as interest rates fuel currency rally

The guaraní has become Latin America's best-performing currency, and that FX strength — celebrated in the markets — is generating one of the sharpest tensions facing the Paraguayan economy so far under Santiago Peña's government: the interest rate differential that attracts capital and strengthens the local currency is, at the same time, compressing exporter margins and threatening to cool an expansion that the Banco Central del Paraguay reported at 5.7% cumulative through August.

The Unión de Gremios de la Producción has raised the volume of its complaint to the economic team, denouncing that the dollar is falling "without a parachute" against the guaraní. The phenomenon is no accident: interest rates in guaraníes comfortably exceed those prevailing in the region, which incentivizes short-term capital inflows and pushes the exchange rate higher in local currency terms. For agricultural exporters — the historic engine of foreign exchange — the result is a direct erosion of guaraní-denominated margins on every ton of soy, beef, or wheat sold. ABC Color notes that economists warn this mechanism, if prolonged, can discourage productive investment at precisely the moment the country needs to diversify its export base beyond agricultural commodities.

The fiscal backdrop adds another layer of complexity. The Ministerio de Economía y Finanzas reported that the annualized fiscal deficit reached 3% of GDP in September, equivalent to nearly USD 2 billion — a figure that sits at the legal fiscal responsibility limit and puts pressure on public debt. Interest payments on that debt grew 12.9% year-on-year, while the central government's wage bill advanced 9.9%. The snapshot is telling: salaries, pensions, and debt service account for nearly 70% of public financing, leaving a narrow margin for infrastructure investment or services. Finance Minister Óscar Lovera has acknowledged that the budget will not be back on track until 2028, once the weight of inherited debts has been absorbed.

The 2027 budget debate reflects exactly that tension. While the Ministerio de Defensa is projected to receive USD 488 million, of which 81% will go to the wage bill, the Universidad Nacional is requesting an additional USD 61 million, and the Ministerio de Salud will receive more resources despite the limited execution recorded in 2026. In Congress, legislators questioned the Ministerio de Obras Públicas about subsidies, public-private partnership contracts, and the status of works in progress. The Dirección Nacional de Ingresos Tributarios, which absorbs the functions of the merged Subsecretaría de Tributación and Dirección de Aduanas, is seeking approval of its budget as submitted by the MEF, without the modifications Parliament typically introduces. Óscar Orué, who heads the DNIT, pledged to raise the tax burden from 10% to 12% of GDP and increase revenue collection by USD 400 million per year — an ambitious target in a country where the shadow economy hovers around 47% of GDP according to recent estimates by Última Hora, fueled by smuggling and chronic informality.

On the external front, the IMF highlighted the country's economic strength during the annual meetings attended by Minister Lovera and the president of the Banco Central, while projecting that Paraguay will grow nearly twice as fast as the global average despite the worldwide slowdown. The Fund, however, warns of risks — particularly the fragility of institutional security, which local economists say is already reducing the flow of large foreign investments. Spain, for its part, highlighted the country's potential to attract European capital in the context of the Mercosur-European Union agreement, whose ratification would open sizable commercial channels for Paraguayan exports.

In the markets, the Bolsa de Valores de Asunción is on track to surpass the historical record of USD 8 billion in annual trading, a sign of deepening in the local capital market. The MEF placed PYG 230.527 billion in Treasury Bonds, and the stock of these instruments in the local market already reaches approximately USD 1.2 billion. The investment portfolio of the Instituto de Previsión Social grew 10.5% to reach PYG 21 trillion in August, an expansion that reflects the dynamism of the pension system but also its greater exposure to local sovereign risk.

Among positive sectoral signals, a historic export of Paraguayan tomato to Uruguay stands out, marking a milestone for domestic horticulture and anticipating an incipient diversification of the export basket. The maquila sector continues to expand, and large industrial energy consumers are demanding clear rules on tariffs and supply through 2037 in order to plan long-term investments. On the energy front, ABC Color reports that Paraguay could be forced to buy electricity from Brazil and Argentina starting in 2030 — a prospect that contrasts with the country's image as a net exporter of hydroelectric energy and puts on the table the need to define a regulatory framework that guarantees supply to large industrial consumers.

The crisis surrounding Banco Ueno continues to generate uncertainty. The head of the Unión Industrial Paraguaya fears that the deterioration of confidence in that entity could spread to the financial system as a whole, with effects on employment and economic activity. An economist consulted by ABC Color urged the Banco Central to adopt swift corrective measures to preserve public confidence — a sign that the margin for inaction is narrowing. The fact that Ueno's stake in "other companies" has surged 8,000%, according to data released by the same outlet, adds opacity to a case that the regulator will need to resolve quickly if it wants to avoid contaminating the stability narrative that the Peña government has painstakingly built.

What to watch closely in the coming weeks: the legislative resolution of the 2027 budget, which will determine whether Congress accepts the MEF's fiscal discipline or dilutes it with sector expansions; the evolution of the exchange rate and the BCP's response to exporter pressure; the outcome of the Ueno case and its impact on confidence in the banking system; and the signals emerging from the IMF and World Bank meetings regarding the medium-term sustainability of the fiscal deficit.