Paraguay's strong peso threatens fiscal coalition as spending pressures mount

The guaraní has unexpectedly emerged as Latin America's best-performing currency, and that appreciation is now fracturing the coalition underpinning the economic optimism of Santiago Peña's government.

According to ABC Color, the guaraní led regional currencies on the back of sustained export flows, while the Ministry of Economy and Finance (MEF) reported that the dollar reached just G. 5,800 after a slight uptick — levels that, paradoxically, generate more alarm than relief in productive sectors. Ten business associations formally requested an urgent meeting with the MEF to warn about the impact of the lower exchange rate on export competitiveness, and the Unión de Gremios de la Producción (UGP) called for direct intervention by the economic team to moderate fluctuations. The newly appointed minister Óscar Lovera, recently named to replace Carlos Fernández Valdovinos, responded cautiously: the economic team is monitoring the exchange rate and detects no signs of speculation, but for now will wait before intervening.

This currency tension arrives at a moment when Paraguay's macro indicators are, on the surface, solid. The Banco Central del Paraguay (BCP) reported a cumulative expansion of 5.7% through August, and the economy has grown 6.6% so far in 2025 according to the BCP's own data, in what the government has branded a "war economy" — a political signal of fiscal austerity rather than a technical description. The IMF acknowledged the strength of the Paraguayan economy in its meetings with Minister Lovera and the BCP president, held on the sidelines of the Fund and World Bank assemblies, although it listed eleven pending tasks ranging from deficit reduction to combating money laundering. Moody's reaffirmed its rating, and ECLAC projects 19% growth in Paraguayan exports for 2026, partly favored by a tariff reduction the United States applied in its latest adjustment, according to data cited by La Nación.

But beneath that regional-leadership narrative, an uncomfortable fiscal picture is emerging. The annualized fiscal deficit reached 3% of GDP as of September, nearly USD 2 billion, according to the MEF. Public sector wages rose 9.9% and interest payments on public debt grew 12.9%, while wages, pensions, and debt service already account for nearly 70% of public financing. The MEF acknowledged that it lacks resources for a salary adjustment for health personnel in the 2027 General Budget, while the Tribunal Superior de Justicia Electoral is requesting nearly double the resources for political parties and the Ministry of Defense is seeking a 14% increase for the Armed Forces. The Caja Fiscal, the pension system for public employees, has accumulated a deficit reaching 43% of its budget — a situation Fitch has already warned was not corrected by the implemented reform.

Against this backdrop, the Dirección Nacional de Ingresos Tributarios (DNIT) — the new entity merging the Subsecretaría de Tributación and the Dirección de Aduanas, created under the Peña administration — projects a 14.3% increase in revenue for 2027, but explicitly warns about the negative effect of the weaker dollar on that target. The DNIT also proposes applying VAT to hybrid and electric vehicles and insists on regulating corporate retained earnings, two measures generating resistance in the private sector. Its director, Óscar Orué, is defending before the bicameral committee that the budget be approved as submitted by the MEF.

On the energy front, Paraguay's reliance on its hydroelectric plants is being challenged with disconcerting data. According to the Instituto de Política y Planeamiento Estratégico (IPPSE), the USD 18 billion invested in the country's four binational dams would cover barely four or five years of future energy demand. Large industrial consumers are calling for clear rules through 2037, while the former technical chief of Yacyretá claims the Peña government "executed" ANDE and lost the political backing needed to reform the electricity sector. In parallel, ABC Color reports that Paraguay could be forced to buy energy from Brazil and Argentina starting in 2030, which would represent a historic reversal of the scheme that turned the country into one of the world's largest electricity exporters. The Bioceanic Bridge, financed with USD 103 million from Itaipú, is advancing to its final stage and represents a connectivity bet toward the Pacific Ocean that could reshape Southern Cone trade flows.

On the multilateral trade front, the Ministry of Industry and Commerce signaled that Paraguay will not accept a quota distribution in the Mercosur-European Union agreement that would hinder its development, adopting a more assertive stance within a bloc whose external negotiations continue to be a source of internal friction.

What to watch in the coming weeks: whether the BCP decides to intervene in the FX market before the guaraní's appreciation erodes DNIT's revenue projection and complicates the year-end fiscal close; whether Conacom, whose deadline to decide the case involving seven meatpackers now expires, issues a ruling that alters the structure of the beef market; and whether the 2027 budget process will escalate into open political conflict between the MEF, which preaches austerity, and the institutions demanding greater resources.