Finance Minister's Exit Exposes Paraguay's Dollar Trap Paradox

Carlos Fernández Valdovinos's resignation from the Ministry of Economy and Finance, which took place amid a fiscal liquidity crisis the government itself has dubbed a "war economy," is the most significant development of this news cycle and the one that best captures the underlying contradictions running through Paraguay at this moment.

The replacement of Fernández Valdovinos by Óscar Lovera —appointed as the "second-half" minister of Santiago Peña's administration— comes at a moment of extreme pressure on public accounts. The MEF openly acknowledged that the currency mismatch is costing the Treasury nearly USD 600 million, a figure that largely explains why the institution itself, through its outgoing head, conceded that "the economy is fine, the Treasury is not." That phrase captures the central paradox with precision: the Central Bank reports cumulative GDP expansion of 5.7% through August, ECLAC raised its growth forecast to 4.5%, the IMF estimates Paraguay will grow at nearly twice the global average, and international reserves exceed USD 11 billion following year-on-year growth of 13.1%. And yet the State has no money to pay its suppliers, and the Executive is ordering its ministers to "tighten their belts."

Lovera, who from day one tried to dial down the alarmism by ruling out any "war economy" and pointing to improving revenue signals, faces a very short-term agenda that leaves little room for rhetorical optimism. Public debt rose by USD 1.498 billion in just six months. Business associations are demanding reactivation and criticizing the austerity rhetoric. The MSME sector, according to ABC Color's reporting following Fernández Valdovinos's exit, describes an economy that is "totally stalled." And former minister Ferreira is warning of financial "window dressing" in the 2027 General Budget bill, whose bicameral committee has just begun deliberations without having received complete reports from the MEF.

The fiscal knot has a structural cause the government can no longer disguise: the fall of the dollar. The guaraní led currency appreciations in Latin America, driven by the trade surplus —the soybean sector generated USD 2.492 billion in exports through May, and foreign trade reversed its deficit to close the third quarter with a positive balance of USD 712 million— but that very strength of the local currency erodes nominal revenue, since guaraní-denominated income from export activity valued in dollars shrinks when the exchange rate falls. DNIT, the unified tax authority born from the merger of SET and Customs during the Peña era, projects a 14.3% increase in collections but is warning of this same currency risk. Legislators pressed the MEF during budget hearings on how it plans to finance public spending in this environment.

The MEF, meanwhile, has opened the door to not returning to the 1.5% of GDP fiscal ceiling scheduled for 2028 if "risk scenarios" materialize. Economists themselves, in a recent debate carried by ABC Color, acknowledged that in ten years it will be difficult to return to the deficit limit. Dionisio Borda, former minister and one of the country's most respected analysts, declared that "investment grade went to the economic leadership's head," referring to how obtaining investment grade in 2015 relaxed the fiscal discipline that had characterized post-convertibility Paraguay. Three years into Peña's government, the economists' verdict is that the economy is growing but not enough for citizens to feel it, and that the imbalances accumulated in the State's accounts are the heaviest inheritance the incoming team will have to manage.

In parallel, the financial system is going through its own moment of stress. Ueno Bank's bonds posted a slump that was picked up by Bloomberg, and unions are demanding that the Social Security Institute withdraw its funds deposited at that entity. The Ueno Bank situation adds institutional uncertainty to an already complicated environment, although IDB Invest this week highlighted the overall soundness of the Paraguayan banking system.

On the energy front, the bet on becoming an artificial intelligence hub is advancing with official confirmation that U.S. companies Araico and Crusoe will use Itaipú power for a data center. ANDE created by resolution a special tariff for AI centers of between USD 48.91 and USD 56.39 per MWh, and estimates revenues of up to USD 10 million per month once the operation is at full capacity. The utility's engineers, however, are demanding that the process be carried out through a public tender and calculate that the sector could generate an additional USD 98 million per year for the entity. Tariff availability is for now limited, and the question remains of what would happen if a water crisis in the Paraná River compromised supply from the binationals, a scenario that the El Niño phenomenon makes more plausible for the Itapúa region.

What to watch in the coming weeks: the concrete direction Lovera gives to the 2027 budget in the bicameral deliberations, the evolution of the exchange rate and possible BCP intervention in a market that cattle ranchers and exporters are already calling to be stabilized through specific financial instruments, and the resolution of the Ueno Bank case, which could strain the relationship between the IPS and the private banking system at a time when public funds deposited in banks have expanded by nearly USD 1 billion.