Paraguay, a relatively small landlocked country with a population of 6.67 million is well positioned between two large South American economies, Argentina and Brazil. Many challenges lie ahead as one in three live below the poverty line, Paraguay is a lower income country within Latin America. Below is a snapshot summary of BankINTRO.com’s research for Paraguay and its national currency, the guarani.
POLITICS: fragile democracy. For further details on the political situation within Paraguay, please contact us.
ECONOMY: decades of dismal economic performance up until recently whereby year 2006 and year 2007 were relatively good years for Paraguay’s economy. From year 1998-2003, economic stagnation was the order of the day. In previous years, the economy was weak rooted in Paraguay’s lack of reform, political uncertainty, the nation’s weak domestic infrastructure and prevalent corruption. The Paraguayan economy is an open free market and deregulated economy with no restrictions on imports & exports, free movement of capital.
Fortunately since 2003, positive change has been taking place with a renewed reform platform to increase competitiveness, improvements in the business climate and overall sovereign debt reduction. In addition, higher commodity prices for agricultural commodities have been a big boost to Paraguay’s agricultural sector thus helping to lower the current account deficit. Agriculture is also a large employer (21 percent of workforce) for example in areas of cotton production.
A significant component of the Paraguayan economy is the shear size of the black market component estimated as high as 50 percent of official GDP. The government has accordingly implemented tax reforms in order to try and formalize the economy further.
Paraguay for the most part is a re-export economy of consumer goods to regional economies. Paraguay is also a significant provider of low-cost hydroelectric power as it is home to one of the world’s largest hydroelectric facilities, electricity exports came in at 43.8 billion KWh (2005).
Economic Statistics
Total GDP as measured by purchasing power parity stands at $31.2 billion USD (2006) and/or GDP/Capita at $4,800 USD. GDP at market prices is measured at $7.75 billion USD (2006). GDP growth 2006 at 4.1 percent, year 2007 at 5.5 percent, year 2008 estimated at 4 percent. Annual CPI inflation quotes include January 2006 at 10.1 percent, 2007 at 7.6 percent, 2008 forecasted at 4 percent, historical inflation quote includes year 2000 at 12.1 percent. Fiscal account is in balance/surplus. Current account deficit came in at $180 million USD (2006) with the trade component in heavy shortfall at $933 million USD equivalent. Unemployment stands at 9.4 percent (2005). Public debt at 27.8 percent of GDP (2006), external debt at $3.36 billion USD (2006). Imports: China, Brazil, Argentina
POSITIVES: high literacy rate, low wage structure, increased revenue tax collection from business. CONCERN: history of political instability & corruption, importer of oil, major producer of marijuana at approximately 15,000 tonnes per year (third largest producer in world), arms trading, weak anti-money laundering laws & enforcement, drug transshipment centre.
BANKING SYSTEM: stronger, profitable and more stable compared to ten years ago now with credible regulation. Foreign exchange reserves including gold at $2 billion USD equivalent (June 2007). Please contact us here at BankINTRO.com for further details with regard to our currency consulting services.
KNOWLEDGE: Mercosur, South America, Brazil, Argentina
Mercosur ‘Southern Cone Common Market’ members include Paraguay, Uruguay, Brazil and Argentina of which the entity is in place to provide for access to an expanded market. There have been suggestions for the Mercosur countries to adopt a single currency leading to a monetary union in the medium term. South America as a region is moving towards the left politically as a backlash of the free market policies of the 1990’s is widely held. Paraguay is located strategically next to Brazil’s huge $1.65 trillion USD economy. Argentina has had a strong economic rebound since their currency collapse in 2000-01. Uruguay & Brazil are presently Paraguay’s two largest export markets.
CURRENCY: ISO Symbol ‘PYG’, Paraguayan guarani. At time of currency review on January 11, 2008, the guarani had an exchange value of 4670 PYG to the USD and/or 6852.29 PYG to the Euroland euro (EUR). Since early 1998, a managed floating exchange rate regime is in place. The guarani has since stabilized since year 2003 in exchange valuation in recognition of greater political stability.
CURRENCY HISTORY: currency inception for the guarani came about in 1944. Historical valuations for the guarani include: year 2006 average at 5,672 PYG to the USD, year 2005 at 6,178, year 2004 at 5,975, year 2003 at 6,424, January 2002 at 4,783, year 2001 average at 4,106, year 2000 at 3,486, 1998 at 2,726, 1997 at 2,177 and year 1995 at 1,970. During 1960-82, the guarani followed a fixed exchange rate peg to the USD at a rate of 126 PYG to 1 USD. From 1990-98, a crawling peg exchange rate regime tied to the USD was in place for the PYG in order to help bring down inflation. Accordingly, inflation fell from 40 percent annually in 1990 to single digits by the end of the decade.
CURRENCY FORECAST: the guarani remains subject to further domestic political risk, national elections are scheduled for April 2008. At present, there is a movement to the left politically within many regions of Latin America. A political shift to the left awaits Paraguay?
A major plus to Paraguay is the relatively light debt burden which will help insulate against external shocks. A more prosperous Paraguay will help to ensure equitable income redistribution in order to alleviate widespread poverty that remains.
In the long term, the global move towards regional currency blocs may be created for the Mercosur members and for the associate Mercosur members of Chile, Colombia, Ecuador and Peru (Venezuela & Bolivia are on their way to attaining full Mercosur membership). A new South American currency zone in 20 or 30 years is a strong reality representing the Mecosur zone countries in similar concept to the Euroland euro.
Although currency performance for the guarani has been better then expected, Paraguay is young democracy, the PYG warrants a higher risk ranking category.
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UPDATED: January 11, 2008
