Recession-hit Paraguay plans public works budget cut

Paraguay has plunged into a technical recession, impacted by low rainfall, a drop in investment and trade headwinds.

Against this backdrop, the government wants to lop 12% off the 2020 budget of the public works ministry, shrinking the spending pot to 5.2tn guaraníes (US$925mn).

For this year the ministry has a budget of 5.9tn guaraníes.

The landlocked nation’s central bank said GDP contracted 3.0% year-in-year in the second quarter after sliding 2.1% in Q1, revised down from an initial estimate of 2.0%.

Paraguay has, for many years, been a shining economic star in the region. Growth was 3.7% in 2018 and 5.0% in 2017. 

The IMF has urged Paraguay – a major commodity exporter – to adopt policies that boost investment and productivity. 

In a May report, the multilateral, which will likely revise down its 2019 growth forecast of 3.5% for the country, said: “External risks include weaker-than-expected growth in Argentina and Brazil, and adverse price movements in the agricultural commodity markets. Domestic risks include weather-related shocks and delays in the execution of public investment.”

While Paraguay is less exposed than Chile to weaker Chinese demand for commodities, the country is among the most vulnerable in the region to fallout from a wider global trade slowdown, rating agency Moody’s said in a report.

Paraguay’s main export markets are Brazil and Argentina – and the economies of both nations are underperforming. 

Its important agricultural industry has been impacted by dry weather conditions. Most sectors of the economy – including farming, which contracted 11.4% – saw a slowdown in activity in Q2. 

Consumption increased 1.2%, driven by the government sector, while gross fixed capital formation was down 16.4%, a trend that started in 4Q18. Exports contracted 4.5%.

Imports were down 9.0% year-on-year, with all segments contracting except chemicals and machinery/motors.

Shipments of key export soybeans totaled 1.64Mt in 2Q19, down from 2.064Mt a year earlier, as low rainfall hit crop yields. Exports of soybean oil and soybean flour were also down, as were shipments of beef. 

In terms of electric power, exports were down 17.7% year-on-year to 8.13GWh. The main export destinations are Argentina and Brazil with which Paraguay shares hydroelectric plants. The central bank said output had dropped, citing as a factor reduced flow of the Paraná river.